Agents’ E&O Under Pressure
The agency errors and omissions liability market has enjoyed stable market conditions for years. But that could be changing as agents and their insureds attempt to balance emerging risks in a changing insurance market.
The year 2020 has seen changes in terms, pricing, capacity, carrier exits and even pandemic-related exclusions to the agency E&O market.
“We have seen some changes to deductible structures or increased deductible amounts. We have seen some carriers who have increased premium in what we would call exit pricing. We have seen new business moratoriums and new exclusions,” according to Elizabeth Whitney, head of the U.S. Agents team at Swiss Re Corporate Solutions. “We’ve even had one carrier announce that they were leaving the market.”
While the mantra of agency E&O risk management is “document, document, document,” for 2020 it could be “COVID, COVID, COVID,” she said. “It has really created a lot of uncertainty and disruption in the agency E&O markets.”
Mark R. Angelucci, resident senior vice president and E&O segment leader for Utica National Insurance Group, describes today’s agency E&O market as “nuanced.” It’s a tale of two markets, he said.
So far, more established agency E&O markets have remained consistent in renewal terms and conditions, according to Angelucci. Utica, which began insuring agency E&O in 1966, is the longest-standing insurance agency E&O program in the country, he said. “But among less established markets, we’re seeing certain markets take hard lines in terms of the limits they’re willing to put out. We’ve seen some rate increases, and even some communicable disease exclusions on policies.”
The communicable disease exclusion on an agency E&O policy is new and in Angelucci’s view likely not necessary. “While some professional liability policies cover obviously BI and PD, this one doesn’t,” he said. “I think what they’re trying to do is say, ‘Well, if there is a lawsuit brought against an insurance agent for lack of professional services, or performance, that emanates from a communicable disease, the policy is not covering it,” he said. “But at that point, you’ve got to ask yourself, what are you covering?” he asked. “It’s like excluding fire from a commercial property form,” he said. “I’m scratching my head a little bit over that, but I think what manifests is, a reluctance to provide the coverage.”
At this point, the agency E&O market is facing more carrier exits than entrances, Angelucci said. That’s a significant change from just two and a half years ago, where the market saw more carrier entrances than exits, he noted.
For the nation’s most populous state, agency E&O market is ever-changing, according to Alan Smith, president and CEO of WIAA Group, based in Rancho Cordova, Calif. WIAA Group is comprised of four organizations, including the Western Insurance Agents Association, a trade association for independent insurance agencies.
“Historically in California, there haven’t been a lot of long-term agency E&O players,” Smith said. “Right now, Safeco is probably the longest-term player.” In the past 15 years, WIAA’s E&O program, which includes about 700 agencies, has moved from Reliance to Fireman’s Fund to Munich Re, and now to Arch, Smith said.
Hardening Insurance Market Heightens E&O Risk
Among the biggest challenges in the agency E&O market is the stress the current property/casualty market is putting on agents.
“Agencies are in a vice with the hardening market on one side and the disruptions caused by the pandemic on the other,” said Brent Winans, vice president of Clear Advantage Risk Management in Delray Beach, Fla., who has served as an expert witness on over 100 agent errors and omissions (E&O) cases across the country.
“Because of the hard market, many policies are being non-renewed or renewed with higher premiums and less coverage. Policies which were with standard carriers are now being forced into the surplus lines market. Agents are scrambling to get quotes on their renewals,” Winan said. That has placed an enormous new workload on agents. “They are doing all of this while their own operations are dealing with the pandemic,” he said. “It is easy to see how agency mistakes can multiply in this pressure cooker.”
One of the big dangers for agency E&O is failure to meet the “mirror test,” Winans said.
“That means, is the new policy at least as good as the old one? While laws vary from state to state, if an agent replaces an old policy with a new one, generally the insured is entitled to assume that the new policy is as broad as the old one. If the new policy isn’t, the agent is generally required to tell the insured of the new restrictions,” he said.
Winan said that agents sometimes do not read all of the exclusions and limitations in the policies they sell. “The mirror test is especially important when dealing with E&S markets where the nonstandard exclusions in the policy may take real expertise to understand,” he added. “It’s an enormous danger to the agent who’s getting quotes at the last minute,” he said.
“The E&S broker may send the quotation with a list of forms and exclusions, but not the actual forms,” he said. “And the agent doesn’t request copies, and only talks to the insured about the limits and the premium and gets a binder. The next day there’s a claim and it’s not covered but would have been covered under the old policy … that could be a problem,” he said.
“Whenever you put more stress on the system, there’s more possibility for mistakes in the system. Agencies want to do all they can to lean against that so they protect both their insureds and their agencies.”
As “boring as it sounds” failure to procure coverage is always the number one claim in agency E&O, Angelucci, said. “In turbulent times like these, where carriers are attaching communicable disease exclusions to both admitted coverage placements, as well as excess and surplus lines. Where certain capacity levels are restricted. Rate increases, terms and conditions are being adjusted,” he said. “It’s important for agents to really, carefully, look at renewal policies, particularly terms and conditions, and be very complete in their communication to their policyholders, as to what may have changed.”
Be on the lookout for changes, Angelucci advised. “Agents need to be very vigilant about making sure the terms and conditions are either what was requested by the policyholder, or that they are consistent with the expiring terms and conditions.” If they are forced to move a policy due to pricing or non-renewal, look carefully at the new policy. “We do see a lot of E&O claims coming from moving a policy from one carrier to another, and something was overlooked, usually a sub-limited coverage.”
For example, in homeowners policies that can be something like jewelry coverage. “One carrier will offer jewelry coverage up to $25,000 without a schedule but the next carrier will only offer it up to $10,000 and they need any values over $10,000 scheduled. The agent doesn’t catch it, doesn’t produce the schedule, and then there’s a loss.”
Angelucci says agents need to be “very thoughtful and very methodical” in policy checking processes and communication to the policyholder.
What to Look for in E&O
If shopping in today’s market, Steven Pettersen, WIAA Group’s senior vice president, who oversees the organization’s E&O department, recommends that agents first look at differences in admitted versus non-admitted agency E&O policies.
“Non-admitted is where we’re seeing the most change right now,” he said. “The exclusion and endorsements we’re seeing for COVID are being added to the non-admitted policies, not the admitted.”
Second, he recommends taking a close look at the agency E&O coverage available on various forms. “Look at the first dollar defense, defense outside the limits. Those are huge factors that a lot of agents may or may not look at when they’re comparing E&O policies and first dollar defense is a huge asset to have when comparing policies.”
Also, he recommends taking a look at deductible options. “We’ve been seeing deductibles as low as $500, but we’ve also been seeing that some carriers are increasing their minimum deductibles to $5,000, even $10,000 to create a smaller premium for the policy. But an agent is going to have to fork over $10,000 if a claim occurs, especially if they don’t have first dollar defense.”
Also, compare optional coverages, he said.
WIAA’s Smith added that risk management advice is critical to consider as well. “I would be very fearful of buying agency E&O insurance from a source that can’t give any risk management advice.”
Jason Rogers, senior vice president for specialty insurance at Gallagher Affinity, agrees. “As the overall cycle continues to harden and change, we always advise our clients that it’s important that you’re partnering with an advisor, a broker who’s weathered the storm before,” Rogers said. “Those brokers that have the technology capabilities or more importantly, the market relationships that you need to really navigate what is a complex marketplace and a complex landscape.”
Like agents do for their clients, due diligence and homework on their own agency E&O advisor and carrier is critical, he advised. “Make sure they have the capabilities that meet your needs.” Another important thing to consider is the agent’s relationship with their E&O carrier. “As the market changes we always advise it’s important to keep long-term carrier relationships.”
Pandemic Claims
It’s too early to say how the pandemic will impact the agency E&O market, says Angelucci, but it’s a topic everyone wants to discuss. “We’ve seen some claim activity from COVID-19, no question,” he said.
“However, our claim frequency is pretty consistent this year, with what we thought this year would look like, before the pandemic.”
From wildfires, hurricanes and tornados, to civil disobedience and COVID, there’s a lot going on in 2020, Angelucci said. But any impact to agency E&O will come after the dust settles.
“When a hurricane hits, the hurricane is over in six, 12, 18 hours. As a carrier, you assess the damages and you start to tally up your losses,” he said. But the pandemic is still going on.
“We’re in the middle of the pandemic, whether we’re closer to the beginning, or closer to the end, I don’t know,” he said. “But it’s still early and agency E&O is a line that takes a long time for claims to really manifest.”
One risk management tactic that agents have implemented is a COVID disclaimer, according to Christopher Boggs, executive director, risk management and education for the Big I. In his opinion, that’s not a good idea. “It’s a bad idea because when you disclaim a specific exposure, you’ve ignored every other exposure out there,” Boggs said.
“You’ve decided for the client what’s important,” he said. In an attempt to protect the agency from COVID-related E&O risk, agents have opened themselves up to other E&O risk situations. A COVID disclaimer is too narrow, he said. “That’s problematic from an E&O perspective because you have decided for the insured what’s important to them without mention of the fact that you’ve got these other 57 exclusions or limitations in the policy,” he said. If something happens that’s not COVID related but the agency failed to mention other exclusions because of their focus on COVID, problems could arise, according to Boggs.
He recommends that agencies use very broad disclosures to better protect against agency E&O risks. “A disclaimer saying every policy has exclusions and limitations and the agency has done its best to find coverage,” he said. “Also, agents need to make sure they disclaim only the markets they know about, their own markets,” he said.
“Theoretically, you can buy any type of coverage if you’re willing to pay for it. But the only markets as an agent that I can go to are the ones that I am appointed to go to, and those with which I have a relationship, so I can’t tell about the whole insurance market and that’s part of the disclaimer language. As an agent, you have to explain to clients that the only places you’ve checked are the agency’s companies.”
Remote Work and the Risks
One newer agency E&O exposure is remote work.
“I know many agencies are back full-time in their offices, but I also know many are back split time; maybe half the staff comes in a couple days a week, the other half of the staff comes in another couple days of the week, just to promote physical distancing,” said Angelucci. As a result, he says underwriters are asking more questions.
“Some of the things that we’re asking agents to make sure they’re paying close attention to is validating the productivity of their remote work staff,” he said. “Are people falling behind on endorsement requests, renewal information, checking policies, things of that nature?”
How are procedures being followed? “When everybody is in the office, you can walk up to Sam the CSR and check, and make sure that they’re making all of the appropriate notations in the agency management system, that their workload is current,” he said. “That can be a little more challenging in a remote environment.”
Also, given a harder insurance market, it is important that agencies keep up with any change to their carriers’ underwriting guidelines.
“Now that you’re working remotely, do you have a staff meeting where you’re covering changes in carrier underwriting guidelines, or appetite so that you’re effectively communicating those to all staff members,” he said. “Those are some of the loss control tips we’re putting out and some of the conversations we’re having with agents on renewals.”