by Curtis M. Pearsall, CPIA, CPCU, AIAF, ARM, AU, AIAF Vice President
Let me ask you a question. Would you agree that buying the E&O to protect your agency is one of the most important business decisions you will make this year? To really answer that question requires that you think about the ramifications of the other decisions that you will be making. There is no doubt that you, as the agency principle, will make a multitude of major decisions in 2006 that will impact your agency not only today but for tomorrow as well. However, making the wrong decision on your E&O could mean that your agency will not have a tomorrow.
Make sure that your policy covers what you do. It is important to realize that no two E&O policies are the same. The differences are numerous from the coverage trigger (what constitutes a claim) to the activities that are covered to who is even covered under the policy. So when purchasing this vital coverage for your agency, make sure that you review the policy. If you are switching coverage from one carrier to another, demand a specimen policy so that you can sure to know what coverage the policy provides. Would it rather know right up front what is and what is not covered or would you rather find out at the time of the loss.
If you are involved in selling Life and A&H coverages, make sure that the policy handles this. What about Mutual Funds, Stocks and Bonds? Is there coverage for those activities?
Choosing the right policy limit is critical. Many agency owners may contend that their $2million limit is sufficient but is it really? There is no real magic formula to determine the right limit but there are some things to consider when making this decision. An old wives tale used to state that you should buy a limit equal to the maximum limit of any of the policies you provide. There is a tremendous fallacy to this, which essentially factors in the types of claims that an agent can be exposed to. For my 18 years with Utica, the # 1 cause of claims is "failure to provide the proper coverage." So in essence, it is what you are not providing that is not going to get you into the trouble most of the time. You write the auto with a $500,000 limit and the homeowners with a $300,000 limit and fail to recommend a $1,000,000 personal umbrella. A tragic accident occurs. It is the failure to recommend the personal umbrella that you run the risk of getting sued for.
Before you think that $1,000,000 is not sufficient, I could fill up a book with claim stories involving uninsured underlying losses over $1,000,000 and in fact, there are a lot of uninsured underlying losses over $10,000,000. If memories serves me correctly, one of the biggest that Utica faced involved a claim with a $38,000,000 uninsured exposure! To avoid getting dramatic, let's say that you were sued by one of your customers for $5,000,000. You turn the claim into your E&O carrier and think that everything is fine. You then find out that you have a policy limit of $2,000,000, which means that if a judgment is rendered against your agency for $5,000,000, you are going to be short by $3,000,000. Assuming that you don't have this type of cash lying around, you may be forced to sell your agency. Everything you worked so hard for is now gone. Don't let that happen. Buy sufficient limits to protect your agency. Insure that your assets are protected.
Buy a deductible that you can afford and that makes good business sense. As with the limit, there is no magic formula for the right deductible. A general rule of thumb in the industry is to take your premium volume and multiply it by .001. So a $10,000,000 agency should have a $10,000 deductible. Once again, nothing scientific but generally it accomplishes what many E&O carriers like - for agencies to have some "skin in the game." There area different types of deductibles - a combined deductible means that claims expenses are part of your responsibility whether you did anything wrong or not while a loss only deductible means that you only have to pay your deductible if you are found negligent. Make sure that you know what you have. Ask your E&O carrier for options so that you can see what the premium difference will be. This will enable you to make an educated decision.
There are additional issues such as "what happens if you have a claim the first year that you are with your new carrier" Many carriers that have not been writing this coverage may non renew you. Now you have a new claim on your record, which is not going to make you very attractive to another carrier. Utica has been writing this class of business for 40 years and there is certainly no way that we would be a market leader if we non-renewed every agency the first year they were with us.
So take the purchase of your E&O seriously - it is one of the most important business decisions you will make.