Getting to know your agency’s E&O
Insurance agents’ errors and omissions policies are not created equal. An agent who purchases E&O based solely on price may experience a rude awakening when it’s time to report a claim. Here are just a few areas where coverage may be significantly different from one policy to another.
Covered persons
Some policies cover independent contractors only when they are specifically named on the policy or when they are working under a written contract with the agency, while others don’t cover independent contractors at all. Activities of independent contractors, as well as employees, that are not within the scope of their duties for the agency may preclude them from coverage as insureds under the policy. For example, if a producer sells life insurance or other products through his or her own company contracts and doesn’t share commissions with the agency, it may be difficult to support the idea that they are covered on the agency’s E&O policy, since the agency is not benefiting from these sales. In such cases, it may be necessary for the producer to be specifically named as an additional insured or purchase individual E&O coverage.
Covered services
The insuring agreement generally includes a broad statement that the policy covers wrongful acts committed by the insured in the conduct of the insured’s business of providing certain professional services. These services may be described in some broad statement of the insured’s business, such as “insurance agent and related services” or perhaps a long list of professional services usual to an insurance agent’s business. If the covered services are not otherwise defined in the policy, the policy may cover only those services inherent in the insurance agent’s license granted to the agency or individual — the selling and servicing of insurance products for compensation. Coverage for other agency services may be harder to find. The exclusions section may exclude certain services or miscellaneous products sold by the agency such as prepaid legal services, PEO services, motor vehicle title services, income tax services, extended auto warranties. These are not insurance products requiring an insurance license and they may not be covered.
Excluded insurers
Virtually all E&O policies include some type of insurer exclusion, either in the exclusions section of the basic form or by endorsement. E&O carriers have come to the conclusion that an agent’s selection of insurers is wholly within the agent’s control. If the agent places business with a company that has a poor financial rating or no rating at all, E&O carriers believe it is a risk that the agent has assumed. The exclusions vary significantly from one insurer to another.
Some policies exclude any E&O claim arising out of placement with a low-rated or unrated insurer, even if the insurer is solvent. Some very strong companies are not rated by A.M. Best.
Other policies exclude claims arising out of insolvency if the carrier doesn’t maintain a threshold Best rating. Some exclusions apply if the insurer is rated less than “B+” while others apply a higher threshold. Sometimes the exclusion applies even if the insurer had a favorable rating at the time of placement but later became insolvent. At least one policy — the IIAT-endorsed E&O policy with Westport — includes an exception for insurers protected by a state guaranty fund.
Exclusions
E&O policies contain exclusions that may look the same from one policy to the other, but the exclusions must be read carefully to determine the exact extent. One example is a provision that excludes claims arising out of dishonest acts. The provision may exclude all claims arising out of dishonest acts by any insured. Or it may be limited to claims against one insured for that insured’s dishonest acts, thus preserving coverage for so-called “innocent insureds.”
Another exclusion that differs from one policy to the other is the bodily injury exclusion. All E&O policies exclude claims arising out of bodily injury, because such claims are generally covered on the agency’s commercial general liability policy. But what about bodily injury claims that arise out of the agent’s professional acts? Without an exception for bodily injury claims arising out of the act of placing insurance, both the E&O and the CGL may exclude the claim.
Some agent E&O policies contain exclusions that may look relatively harmless — until it is understood, read them carefully and understand exactly what is being excluded.