When purchasing E&O for your agency, you need to pay just as much attention to policy provisions, claims handling and carrier longevity as the quoted premium.
All E&O policy forms are not created equal.
When purchasing E&O protection for your agency, you need to pay just as much attention to policy provisions, claims handling and carrier longevity as the quoted premium.
When reviewing your E&O options, here are four specific issues to keep top of mind:
Claims-made vs. claims made and reported: Agents E&O policies are generally written on a claims-made basis. Review claims reporting provisions to determine if it is truly a claims-made form or if it is “claims made and reported.” The difference between the two can be significant, especially if you are looking to switch carriers.
A claims-made policy provides coverage for a claim that is first made during the policy period. Typically, the claim must be reported to the carrier “promptly” or “as soon as practical,” but not necessarily during the policy period. The “claims made and reported” policy form requires that the insured not only makes claims during the policy period, but also reports claims to the carrier during the same policy period in which they made the claim. That means the “claims made and reported” policy form is more limiting, requiring agents to make sure they pay close attention when changing carriers. This potential restriction of coverage scope may allow a carrier on a “claims made and reported” form to offer a cheaper price.
First-dollar defense: The two common deductible options when structuring your E&O policy are first-dollar defense—commonly referred to as a “loss only deductible”—and loss and expense. Not every carrier may offer the first-dollar deductible and not every agency will be eligible for it, but the benefits are significant: Policyholders only pay their deductible if there is an indemnity payment. Considering that about one-third of every dollar in total claims comes from legal defense expenses, E&O carriers can rack up significant defense costs without you absorbing the cost of your deductible.
With a loss and expense deductible, the agent must pay their deductible when they incur the first dollar of defense expense. When comparing E&O premium quotes, keep in mind that paying your deductible can easily exceed the premiums savings on a policy that offers a loss and expense deductible.
Defense outside the limits: When evaluating your limits options, make sure the quotes clearly identify how the policy addresses defense costs. Defense inside and outside the policy limits are common terms for defining options. Defense outside the limits is preferable—about one-third of total claims costs are for defense expenses, so keep in mind that you will need $3 million of defense inside the limits to equal a quote of $2 million with defense outside the limits.
True cost of a claim: As with all insurance, what you purchased becomes real when you face a claim. Between responding to the subpoena, producing documents, depositions and negotiations and preparing for trial, an E&O claim is stressful, time consuming and disruptive for agency staff. Your agency will need to grapple with both direct costs, such as deductibles and potential E&O premium increases, and indirect costs, such as staff time and potential reputation degradation. Agents cannot afford to have mediocre claims personnel or inexperienced panel counsel handling their claim. The E&O marketplace includes many carriers, but before you bind your E&O coverage with a carrier that has little experience find out more about what to expect in the event of a claim.
Join thousands of independent agencies that already purchase their agency’s E&O protection from the Big ‘I’ Professional Liability Program by contacting your Big ‘I’ state association office for a quote.
David Hulcher is assistant vice president of agency professional liability risk management for Big I Advantage®.