Out on a limb: market conditions are making it more difficult for agents to obtain E&O coverage.
Their frustration levels run high with this market's availability and pricing problems, but agents also know a professional-liability policy is a must in a nation where litigation is commonplace and courts have begun holding insurance agents to the same level of professional standards as attorneys, accountants and others.
"The courts have started to say that agents have a level of service they need to provide and if they don't do it--if they are negligent in their business practices--then they can be sued," said David Hulcher, director of E&O operations for the Independent Insurance Agents & Brokers of America.
At the same time, the agents' E&O market has seen significant change in the number of insurers offering this product. Five years ago there were 15 carriers competing in the agency E&O marketplace. Now it's down to five or six main competitors, Hulcher said. "People have been getting out of this line of business, which traditionally has not necessarily been too profitable for carriers," he said.
While some companies have pulled out, others have changed their underwriting appetite for the type of risk that they want to put on their books, said Sabrena Sally, second vice president, underwriting manager, for GE Commercial Insurance. GE Group's Westport Insurance Corp. provides E&O to members of the Independent Insurance Agents & Brokers of America.
"Carriers writing this class of business are the same carriers that, in many cases, are writing all types of commercial lines, and they're experiencing some of the underwriting profitability challenges that the whole market is experiencing," she said. "So we have seen that it's tougher now for agents who want very high limits to obtain those--especially on one policy--and we've seen some tightening of terms and higher pricing as well."
As a result, smaller agencies are "just getting clobbered," said James A. Masiello, chairman of the Strategic Independent Agents Alliance, which said it is the largest partnering independent insurance agency network in the United States. Masiello said he knows of some independent agents who have decided to forgo this coverage. "They don't go naked in a defiant way and they're not irresponsible," he said. "But if they don't go naked, they're not going to be in business because they can't afford E&O."
But going without this coverage is risky, Sally said. Even if there's no liability for the agent, the mere cost of defending a lawsuit can be substantial, she added.
And during a hard market, which most of the industry is still experiencing, there's a greater probability that an agent will be brought into a claim, because the carriers that agents represent are probably restricting coverage, increasing premiums and, in some cases, denying more claims than they would have in the past, Hulcher said. "So whenever a claim is denied by a carrier that the insured thought was covered, the insured starts asking questions," he said.
Hard market conditions also mean consumers and small-business owners pay more for their coverages, which could lead them to have higher expectations, Sally said. "When something is not paid at the level they expect, they're going to look for some remedy and that may be through their agent," she said. "We have seen some increased numbers from those kinds of suits."
In commercial lines during hard market cycles, agents often must look for new homes for their policyholders because carriers have withdrawn or changed their risk appetite, Sally said. "And that actually has been an exposure that's new for an agent in the last few years--just that activity of having to move business creates an opportunity for an error," she said.
Problems also can surface when agents, who have to turn to wholesalers and intermediaries they don't really know in order to secure coverage for their clients, fail to do good due diligence on these other parties. "It's the people in the middle between the retailer and these markets that are the cause of most of our losses, at least lately, and I think that's a phenomenon of producers and others just desperate to find coverage in the hard market," said Tom Harvey, president of Assurex Global and Par Ltd., an agent E&O insurer. It's not frequency, but severity of E&O claims that is a major concern now, he noted.
Agents can find themselves facing lawsuits when it develops that a policyholder has not received the coverage he or she needed or expected to get, or if a problem arises because the agent failed to do something, said Jay Levin, a member of the law firm Cozen O'Connor in its insurance coverage practice group.
"The former is the much larger group," he said. "That involves situations such as policy limits which aren't enough, the exclusion of a specific loss, or when the carrier says it didn't agree to something. And usually someone tries to blame the agent." For example, it the problem is a failure to procure sufficient policy limits, the policyholder might claim that the agent failed to inform him or her that more limits were needed, failed to recognize the scope of the policyholder's business, or actually told the policyholder that the limits were adequate, Levin said.
Most recently, as more and more insurance companies have experienced financial problems, policyholders have accused agents of not knowing that the companies with which they had placed the coverage were on the brink of insolvency, said Kevin Mattessich, also a member of Cozen O'Connor's insurance coverage practice group. "Agents have got to know who they are placing the coverage with and keep abreast of the financial condition of those companies," he said.
Levin described a recent case in which an agent was found liable to an insurance company because of the way the agent had described the type of risk to the underwriter. The agent had called the structure an office building when it was really part office, part warehouse, Levin said. "The insurance company would not have written the risk had it known what it was," he said. "As a result, the insurance company paid a multimillion dollar loss and was able to recover a significant portion from the agent, who ended up paying more than his E&O limits."
In another instance, an agent sought insurance for mobile equipment, but obtained the wrong policy form and did not get business interruption coverage. The result: a three-party lawsuit among the policyholder, the agent and the insurer, which ended with the agent and the insurer each being held partly responsible for paying the loss, Levin said.
Another incident involved an agent who knew that a home would be a secondary-use home but nevertheless placed it with an insurer that covers only primary residences, Mattessich said. The house's pipes froze in the winter, but the effects weren't discovered until the homeowners returned in the summer. "They discovered substantial damage due to water damage and mold," he said.
Agents involved in this kind of litigation can lose significant amounts of money and stature. Levin pointed out that an agency with insufficient E&O coverage that faces a judgment in excess of the coverage can go bankrupt. Also, the firm can lose client relationships "because clients don't want to work with a broker who makes major mistakes, and companies will not work with agents with whom they have a lot of problems," he said.
Many carriers no longer support agents who write business for them when the agents run into trouble, Harvey said. "In the old days, when an insurance agent made an oversight or omission, many carriers generally would cover it for the purpose of good will and relations," he said. "That seldom happens anymore. The companies have got to watch every dime of surplus--they can't be covering agents' mistakes. They have much tighter financial management."
Sometimes, insurers may go farther, bringing agents into litigation as third-party defendants, or instituting separate suits if the carriers are hit with judgments against policyholders, Mattessich said.
According to Levin, the breadth and amount of E&O coverage an agent needs depend on what line of business is being written. The agent who deals primarily with homeowners insurance will have smaller claims on average than the agent insuring Fortune 500 companies, hospitals or large medical practices, he said.
Agents who sell more complicated coverage such as professional liability or high risk lines of insurance such as aviation find it harder to obtain E&O insurance, Hulcher said. "And the likelihood is if you do get it, you're going to be paying more premium than anyone else" because E&O carriers will build what an agent is selling into their pricing guidelines, he said.
IIABA, through its national program with Westport Insurance Corp., is the largest writer of insurance agency E&O in the nation, Hulcher said. This coverage, which is designed for property/casualty agents, also applies to their life and health activities. "We write over $100 million--about one-third of the E&O marketplace," Hulcher said. "And we're able to maintain our rate stability by smoothing out rates across the country."
The organization's 51 state associations serve as the agent for the independent insurance agents who belong to IIABA, and function much like a field underwriting office for Westport. About 60% of the IIABA's 300,O00-plus members are in this program, Hulcher said.
In 1987, during the last hard market, Assurex Global, a corporation owned by independent agencies, and the Council of Insurance Agents and Brokers launched Par Ltd. to meet the need for agency E&O. At that time, all that was available for agents and brokers was high priced with restrictive coverage typically offered by the London market, Harvey said.
"So the agents and brokers decided we needed to create our own facility that, unlike our carrier brethren, would not be fickle, providing us the best possible coverages we could get through the hard and soft markets," he said. They also wanted to benefit from their good experience by creating a structure whereby they were owners of a reinsurance facility that took the first layer of risk, Harvey said.
Par includes an E&O loss control program for large, diverse agents and brokers, and is underwritten by Fireman's Fund. Through this program, an agency has the opportunity to participate as a shareholder and be eligible for dividends from future profits.
Par's program features a financial dynamic that's atypical of traditional E&O insurance, Harvey said. Par, itself, sustains the first $1 million for each loss. So if agents operate effectively and properly, they can get a return on their money through dividends, he said.
Some members of the SIAA, which counts more than 1,300 agencies in 48 states and Canada on its roster, have encountered problems in obtaining their E&O coverage, Masiello said. "If you're a newer agency--what we call a scratch agency--and you haven't been in the business for at least three years, you're not getting E&O--period. It just is not available," he said.
But he thinks some relief is coming from the excess and surplus markets poised to offer E&O, but at higher prices. Actual coverages seem to be changing, too, he noted. "You're going to see higher retention by the agent, a larger deductible, and when you see larger deductibles, you're probably going to see lower limits--those things already are taking place," he said.
Like doctors facing rising medical-malpractice premiums, Masiello puts much of the blame for agents' angst over E&O on attorneys who file frivolous lawsuits. "There are trial lawyers who are very professional at what they do and then there are ambulance chasers," he said. "Until we get tort reform across the board, we're just one of the industries that's being so adversely affected because of outlandish jury awards where the attorneys keep 33%. This is what's hurting the market right now."
These days, a policy exclusion can quickly become the basis for an E&O claim, he noted. It's reached the point where an agent's reporting of an E&O occurrence--without any claim being filed--is enough to trigger a 30% to 50% increase in premium, Masiello said. "That's because the insurance companies have a hard time actuarially in figuring out where this thing is going and how they can get their arms around it," he said.
When clients experience an unpaid loss, many have convenient memory lapses, Harvey said. All they have to do is find a friendly lawyer and "boom, boom, the agent's in court and fortunately or unfortunately. insurance carriers are fairly quick to settle," he said. "So it can be comparable to blackmail."
David Smith, chief executive officer of Smith, Gatta, Gelok, a New" Jersey insurance agency, acknowledged having more concern these days about potential lawsuits. "There is a certain amount of trepidation that you have when you have the number of people we have," said Smith, whose agency has offices in Neptune and Westfield, N.J. "Inevitably, mistakes are made from time to time. Fortunately for us, so far they have all been minor."
Smith said his agency's growth plan included the implementation of safeguards and procedures to reduce the likelihood of mistakes occurring in the future. Many of these measures were instituted as a result of attending E&O seminars offered by a professional trade association, he added. "With a small agency, you might be able to function with a more lax atmosphere and fewer rules," Smith said. "But as you grow, you definitely have to have some guidelines."
While some smaller agencies might be able to do without E&O, it isn't an option for Smith, Gatta, Gelok, Smith said. "With everything we have at stake, we couldn't go without it," he said. Furthermore, the agency is required to have this policy to satisfy certain contractual relationships, he added. Still he noted that his agency's E&O premiums have risen substantially in recent years--to a percentage number that exceeds the firm's growth number. Smith, Gatta, Gelok has grown by more than 20%, a year in each of the past three years, Smith said.
Nicholas Argeros, president of all Mass Group Inc. and owner of Argeros Insurance Inc., Reading, Mass., also recognizes that this insurance provides vital protection for agents. But he chafes at the rates he has had to pay since 1988 when he went from being an Allstate captive agent who didn't need E&O to an independent agent who did.
"Years and years have gone by, and every year we have a huge E&O premium and significant renewal procedures even though there are no changes, "Argeros said. "I always go for the high limits--$1 million each loss, $3 million aggregate--and I always take a big deductible to lower the premium. But of course, year after year, that big premium remains."
Argeros characterized his agency as small to medium in size. For 2003, his E&O premium was $1,200--close to the $1,300 he was paying in 1998 before he switched carriers. That change bumped his premiums down to $719 in 1999. When his former carrier vowed to match that, Argeros came back, but by 2000, his annual premium was inching up to $799; by 2001, it was $865; and in 2002, more than $1,000.
These premiums are not in line with the exposures, he argued. His personal and commercial umbrellas each give him $1 million in coverage, but their premiums run only from about $200 to $500. "Why shouldn't E&O be the same?" he asked. "It's professional liability. If I'm getting professional liability for my insureds--whether it's computer, real estate, engineering or mortgage brokers' E&O--they're not paying the same kind of premiums that we're paying as insurance agents."
He rejected the explanation that rising premiums are at least partly related to hefty court settlements in recent years. "That's what they would like you to believe, but I think it's because we're a captive audience," he said.
Argeros would like to see carriers lower their agents E&O premiums through group sales. For example, pitching coverage to an organization like allMass, the largest network of independent insurance agencies in Massachusetts with 23 member companies, could lower premiums dramatically, he said. Also, insurers could institute a kind of no-loss credit so that an agent like Argeros, who has never had a claim or claim-like issue, could have his annual premium reduced. "It could be a pool type of thing for the preferred insurance carrier," Argeros said. "If an agent goes 10 years with no instances of claims, no occurrences, no near claims, no nothing, and has a great payment record, he'd go into a preferred group and obviously have some kind of adjustment on his premium."
Masiello said tort reform is the answer. Until that comes, he said, rates will continue to climb, and increasing numbers of agents will be at risk because they will not be able to afford the coverages.
"You can't adjust your commission because the rates are high, so ff you're an agency and you're doing $3 million to $4 million a year in premium, your rates could triple," he said.
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|Title Annotation:||Errors & Omissions|
|Comment:||Out on a limb: market conditions are making it more difficult for agents to obtain E&O coverage.(Errors & Omissions)|
|Date:||Jan 1, 2004|
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