Hard Market Generates New E&O Challenges for Insurance Agents

The soft market has made the job of insurance agents very difficult the last few years. Competition has been extremely fierce, and premiums so low that agents have had to fight for business and write more accounts just to maintain a living.

This has also kept agents from finding new business, says Daniel Carreras, part of the executive team at Indianapolis-based Protective Specialty, which expanded into specialty lines two years ago and launched a new insurance agents E&O product in March.

“Agents have been focusing all their efforts on retaining business and not growing their business,” he says.

These are just a couple of the reasons why the industry is rejoicing at signs of a harder market.

But as prices firm, insurance agents still have their work cut out for them. Explaining to clients why their premium has gone up is always difficult, but it is especially hard when many clients are trying to get back on their feet and don’t have extra resources to pay more for insurance.

A harder market could also make it next to impossible for agents to convince insureds to purchase more insurance, whether it is in the form of higher limits or additional products, like cyber liability, even if the insured may need it. Unfortunately, not offering the coverage, or even offering it and having an insured decline, opens agents up to E&O claims.

“Agents have a challenging job all the time,” says Carreras, “Everything they do is a potential E&O exposure.”

Carreras said they developed their new policy form without “for a fee” language because agents often do work for clients that they are not compensated for, but that could still fall under the definition of professional services. The coverage also provides limits of up to $5 million on each claim, with defense outside the limit available. Protective Specialty is focusing on firms with up to $50 million in revenue.

There is another obvious consequence of a hard market – less coverage available. Carriers will not be as generous with many risks as they have been during the soft market, which means big policy changes for insureds at renewal time.

“Agents need to pay particular attention to reductions in coverage and an increased use of exclusions when market conditions start to harden,” says David Hulcher, AVP for professional liability risk management at The Independent Insurance Agents & Brokers of America (Big “I”) in Alexandria, Va.

Carreras says communicating with insureds and preparing them for what is to come is the most effective way for agents to cover themselves.

“Producers need to do a better job of managing the clients’ expectations,” he says. “Agents that are dealing with small businesses or individuals and families need to let people know what the market is doing.”

Steve McCarty, chairman and co-founder of the National Ethics Association in San Diego, agrees.

“Communication – or a lack of communication – is the mother of most problems in financial services,” he says.

Risk management is a term that is thrown out to insureds, but it applies to insurance agents as well and Hulcher says it is oftentimes placed on the back burner because agents are so focused on the daily needs of their customers.

That’s why Swiss Re and the Big “I” updated its website with a new risk management focus. The site, called “E&O Happens”, was designed to help agencies avoid claims and improve overall agency operations. The content on the website has also been expanded to include E&O related information from the Big “I” Virtual University and the Agents Council for Technology. The website is free to Big “I” members who are also Swiss Re policyholders.

“Avoiding E&O claims and improving the profitability of the agency go hand-in-hand,” says Hulcher.

The NEA is also motivating insurance agents to manage their risks and reputation by sponsoring a discounted insurance agents E&O product for its agent members. The NEA focuses on building and managing the reputations of its 25,000 plus business professional members. Once a business professional becomes a member, they are given an online profile as well as the option to have a public background check available to consumers who are searching the site. The NEA also provides content on ethics and other resources that help business professionals maintain their commitment to moral business practices.

McCarty says insurance agents’ participation with the site gives them the ability to demonstrate their professional standards and take advantage of discounted E&O insurance offered through Everest National and administered by Marsh U.S. Consumer. The coverage is a standard insurance agents E&O policy with limits of $1 million/$1 million available. It is in all states except N.Y. NEA is also sponsoring a CNA life and health agent product that offers limits of $1 million/$2 million.

McCarty says the NEA wanted to sponsor these products because insurance agents make up a huge portion of its membership and many of the topics the Association covers relate to errors and omissions and how members can reduce their exposure.

“A lot of industries have been tainted in the past because of this economy and our members can show their customers and clients what they stand for,” says McCarty.

Emerging Agents E&O Exposures

Susan Dowdall, senior vice president of Corporate Solutions for Swiss Re America Holding Corp. in Chicago, says the typical “failure to place coverage that was otherwise expected” E&O claim is not the only thing for agents to worry about anymore. Increased use of the internet and online agency management systems is opening up a new world of potential problems.

“Agencies possess, store, transmit and dispose of customers’ personal information, creating exposure to first and third party liability from failure to adequately protect the confidentiality of customers’ personal information,” says Dowdall. “With the continued development of federal and state laws addressing data privacy, there is an increased need for agencies to be aware of and to take adequate risk management steps to protect against this exposure.”

Swiss Re launched a new policy form that includes first and third party data breach coverage, as well as a deductible reduction feature, which reduces the deductible by 50 percent (up to a maximum of $12,500) for claims alleging failure to secure coverage where the insured has maintained written documentation of a customer’s refusal to accept such coverage.

Protective Specialty’s Carreras says that he finds larger benefit agents are more aware of their cyber exposure than smaller ones, mainly because of HIPAA regulations.

The carrier itself is approaching the development of a cyber liability product cautiously.

“The cyber world is changing so dramatically and every carrier that has a policy covers the risk very differently,” says Carreras. “We can’t yet get our arms around where the market is going to be or what the market is going to be.”

Hulcher says social media also provides a platform for data privacy issues, as well as other issues like advertising exposure, defamation, and the offering of incorrect advice, so agencies would be wise to implement a social media policy.

“It is important that agency staff knows when to move a conversation started on a social media website into the normal workflows of the agency,” he says.