E&O Insights: How Well Do You Know Your Own E&O Policy?

As many agents know, there are various standards to which they will be held in the event of litigation. There are also standards to which customers will be held. One of those standards involves a duty the customer has to read his or her policy. Yet what if the agent is technically the customer? Does this mean that an insurance agent has a duty and responsibility to read his or her own policy? Yes!

When is the last time that you read your own Agents’ E&O policy?

Unfortunately, a common response may be “never.”

As an insurance agent, it is critical for you to understand your E&O policy – including what it does and doesn’t cover. It also includes key topics such as definitions and professional services covered, plus a host of other issues. If it has been a while since you read your policy, read it from front to back and everywhere in between. Do that today!

If you have recently moved your E&O coverage, are you confident that your “new” form is superior to the prior one? It is often stated that no two E&O policies are the same. Without reading the policy, how comfortable are you that your policy provides the coverage you think it does?

“Claims made” vs. “claims made and reported.” Not all Agents’ E&O policies are “claims made” forms. Some are “claims made and reported” forms. In a “claims made and reported” form, the agency must report a claim within the policy term or within a specified short period following the expiration date, usually 30 days or less. If an agent receives a claim and tries to report it during a subsequent policy term, he or she could find himself or herself without coverage.

Who and what is covered? Read and understand what your E&O policy covers and what is doesn’t. One key area to review is the professional services that are covered. Is everything that your agency does included on that list? If not, it would be appropriate to check with your carrier/broker/agents’ association, etc., to see about getting your “activity” covered.

In addition, every E&O policy has exclusions, so it is crucial to review them to determine to what degree those exclusions are of concern for your agency. Just because one policy has 20 exclusions and another only has five does not necessarily mean one policy is better than the other. In fact, many would prefer the policy with 20 exclusions because that carrier is making it very clear what it intends to cover.

It is also vital that agents understand any other issues or conditions contained in the policy. For example, are there any ramifications if a staff member “admits liability” to a customer? These are the types of issues agents need to understand so the staff can be counseled accordingly.

Know your limits and how they work. Typically, agents only have one time a year to modify their limits – and that’s at coverage renewal. What is the “right” limit for your agency? There is no magical formula. It is important, too, for agents to realize that the size of the agency is not a determinant of the potential size of an E&O claim. Big agencies can generate big E&O claims. Small agencies can generate big E&O claims.

Many E&O carriers have noted that heavy commercial lines agencies – those whose business is made up of 70 percent or greater commercial lines business – tend to have their share of big E&O claims.

In the world of E&O, limits are provided on a per-claim and aggregate basis, so don’t hesitate to ask the underwriter for options. The premium difference between a 2/2 set of limits and a 2/6 may be much less than you think. It is actually best to secure an aggregate limit that is a multiple of the per-claim limit.

Understand how the deductible works. Are you only required to pay the deductible if your agency is determined to be liable – or are you responsible for defense costs on claims even where your agency is absolved of any wrongdoing? Not sure? Contact your carrier to find out now. Don’t wait for an E&O claim to occur.

What if your policy is written with a self-insured retention (SIR)? Are you confident how this applies in the event of a claim? If not, ask.

Who is insured under your policy? Do you have some staff members that are not covered? Have you ever “hired” a temporary staff member to fill in while one of your regular staff members was out? What about high school or college kids you hire for the summer – are they covered? Is “spousal” coverage included? Read the definition of “who is an insured” to ensure that all present and former employees are covered.

What are the extended reporting period or “tail” options? What are the criteria to be eligible for this coverage? If you are looking to sell your agency or find yourself getting canceled or non-renewed, this provision in the E&O policy will take on an increased level of importance.

The extended reporting period (ERP), also known as a “tail,” provides an additional period after the expiration of the policy for which valid claims will continue to be accepted, provided the wrongful act occurred before the end of the policy period. While virtually all claims-made policies contain this provision, this does not mean there is consistency among carriers as to the available options. Some policies may only allow options of one, two or three years. Other carriers may provide up to 10 years or even an unlimited period. This is an issue commonly overlooked by agents.

E&O is serious business. In many respects, the decisions you make regarding your E&O – carrier, limit, deductible, etc. – are among the most important decisions you will make during the year. These decisions can only be made before the claim. Work with your agents’ association or E&O carrier to ensure you understand your coverage. What you find out may determine how well you sleep at night.