A Few Tips on Buying Your E&O...
by Curtis M. Pearsall, Vice President, Agents' Errors and
Omissions Department
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.
Tip #1
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?
Tip #2
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.
Tip #3
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.
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