E&O Insights: How Important Is Your E&O Policy?

Errors and omissions (E&O) coverage: It’s one of the most important coverages you can secure. After all, your agency’s protection depends heavily on your E&O policy and how it works. Despite this, it is debatable how many agency owners truly know the intricacies of the coverage’s different elements. Without this knowledge, how confident can an agency owner be that when a problem arises, the agency will be well-protected and not financially devastated?

Some agencies buy E&O only because their agency agreement requires it. Hopefully, the number of agencies that look at their E&O in this manner is minimal. They apparently don’t realize that buying the “wrong E&O coverage” has the potential to “bring the agency to its knees” at the time of an E&O claim.

Understand What Is and Isn’t Covered

Every E&O policy includes a list of professional services and activities that are covered. It is critical for an agent to review this list to see if there are activities he or she is performing, but for which the agent has no insurance. Activities can vary greatly, so don’t assume all policies are the same. In addition, every policy contains exclusions, so review those, too, to determine to what degree those exclusions are of concern for your agency.

If, after reviewing the list of covered activities or exclusions, you are not completely clear what is and isn’t covered, ask your E&O carrier or the agent through whom you purchased the coverage for an explanation.

Unfortunately, over the years, there have been many situations where the agent found out, after being presented with an E&O claim, that he or she didn’t have the coverage the agent thought.

Know Your Limits and How They Work

This is a crucial aspect of your coverage. Typically, agents only have one time a year to modify their limits: at renewal time. Request various limit options to consider and devote sufficient time to review those options. There is no magical formula to determine the “right” limit for your agency. Understand that the size of the agency is not a determinant of the potential size of an E&O claim. Big claims can and do happen even with small agencies. While E&O claims arising from personal lines tend to be smaller, big E&O claims can happen even with these types of agencies.

E&O limits are provided on a per-claim/aggregate basis, so don’t hesitate to ask the underwriter for options. The bottom line is that a $1 million limit is insufficient. When purchasing E&O coverage, look to have the aggregate limit be a multiple of the per-claim limit. This way, you can feel comfortable that should that “big loss” hit your agency, you will still have coverage for future claims.

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? While there is a premium savings if you want to handle some of the defense costs, serious consideration should be given to ensure you have the funds available if the E&O carrier requests payment for the deductible. Don’t wait for an E&O claim to occur to find out how your policy works.

Use Your E&O Carrier’s Resources and Expertise

Your E&O is more than just a policy. Most E&O carriers provide their agent-customers with resources to help those agents manage their E&O exposure. In most cases, this involves the usual articles and tips. However, the staff of many E&O carriers, typically the claims and underwriting folks, is readily available to answer questions on procedures or a multitude of other E&O matters. If a potential E&O issue surfaces, agents should not hesitate to contact the claims staff for its perspective. These professionals will help guide you on your future actions.

Report Any Claim, Error or Concern Promptly

The earlier an agent advises the E&O carrier of an issue, the quicker the carrier can begin its discovery to determine what happened. Don’t assume the matter will simply “go away.” They rarely do.

Be Aware of These ‘Don’ts’

Don’t admit liability or commit to a payment. An E&O policy is based on the concept of legal liability. In other words, just because the agent made a mistake, legal liability would need to proven before the policy will pay. There are many defenses E&O carriers can apply that could eliminate or reduce the degree of their legal liability. It might be natural for an agent to want to admit he or she made a mistake and advise a client that the E&O policy will pay. An admission of liability could impair the ability of your E&O carrier to settle the claim at the best possible terms. In some situations, it could actually jeopardize your E&O coverage.

Don’t provide any recorded or written statements concerning the alleged error or omission.

Don’t alter or make changes to any records pertinent to the claim.

Don’t discuss the matter with anyone other than your own personal counsel or E&O carrier representative.

Don’t allow the inspection, copying or removal of any records without discussing it with your E&O carrier.

Your E&O Is Serious Business

In many respects, the decisions you make regarding your errors and omissions – your carrier, covered activities, limit, deductible, etc. – are among the most important decisions you will make during the year. These decisions can only be made before the claim. The other set of decisions, made after you have been presented with a claim, are equally important. Work with your E&O carrier to ensure you understand your coverage and how it works. This should help you sleep better at night.