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Surfing for The Next Agency E&O
Errors & omissions claims against agencies related to the COVID-19 pandemic have not materialized as feared a year ago. Overall, E&O claims against agencies actually dropped in 2020.
That’s basically good news for agency owners.
However, experts warn that agencies are not totally out of the woods regarding the pandemic. They also warn that the current environment of a continuing hard market and more shopping around and switching of carriers, along with heightened exposure of agencies to cyber risks amounts to fertile ground for sprouting of claims against agencies.
“Everything’s really calm,” said Elizabeth Whitney, head US Agents, senior vice president at Swiss Re Corporate Solutions, who manages the Big I’s Agency E&O Program. “We’re waiting to see how a couple of COVID cases play out in a couple states, but so far, it’s really calm.”
David Hulcher, executive director at Kansas Association of Insurance Agents, agreed. “The agents’ E&O book of business has not been, fortunately, impacted as much as what was anticipated,” he said. “That is very much playing out positively for the agencies in our marketplace.”
According to Swiss Re’s Whitney, E&O claims actually fell during 2020 by 5% and have continued to stay at the same level through 2021. But she doesn’t expect that claims trends will stay suppressed forever. “It’ll bounce back to normal,” she said.
That’s been a positive for agencies, Hulcher said. Having fewer claims has helped the agency E&O market to stabilize in price, Hulcher said. “Like many other marketplaces, agency E&O underwriters got more conservative [with deductibles and limits] not knowing what to expect with claims activity but I think that is starting to probably loosen up a little bit,” he said. But now, for the average insurance agent, the market is beginning to “loosen up as claims haven’t been as big of a factor as they could have been,” he said.
Steve Vallone, senior vice president and broker at AmWINS who specializes in agency E&O coverages, said there was a big fear and an expectation in the market that uncovered business income loss claims would lead to a rise in E&O claims against agents. E&O markets priced for the worst scenarios. But so far, the claims haven’t followed. “I still think there is a fear, but I don’t know if there’s an ‘expectation’ anymore,” he said.
Vallone still believes there’s uncertainty over how pandemic-related business income loss claims could bring trouble for agents in the future. “But so far, they haven’t made any waves and that expectation that agents did something wrong, seems to be lessening.”
Hard Market Concerns Continue
The hard insurance market presents an E&O challenge as agents and brokers implement policy changes for their clients. Hard market conditions have been a catalyst for carriers to raise premiums, avoid certain risks, reduce coverage limits, and increase exclusions.
Historically, hard market conditions have also increased claims litigation and coverage denials, leading to a higher number of E&O claims against brokers, Vallone said. He advises agents to pay close attention when moving coverages to a new carrier and be sure to explain in detail to their customers any changes to terms and conditions.
“Today’s combination of hard market conditions and COVID-19 is creating even more challenges as pandemic-related exclusions, limits and supplemental applications are being added to nearly every line of business — including E&O insurance,” Vallone wrote in an Insurance Journal blog in April.
Vallone views capacity in the agents and brokers E&O market as limited even while claims have trended down. “The fear of a COVID wave of claims against agency E&O has made the market less appealing to underwriters so there hasn’t been new carrier entrants,” he said. And carriers already active in agency E&O are raising rates, he added. “The lack of supply and the increased demand is causing that increase in price,” not claims, he added.
The Kansas association leader Hulcher advises agents to make sure that they’re reviewing policies carefully when they are placing business in the surplus lines market. “It becomes more important to be reading your customer’s policy, to make sure you understand the changes within that policy going forward, and to make sure that customers are aware that the non-admitted business is not subject to the guarantee fund in a lot of states.” These exposures are always a concern in a hard insurance market, he added.
“We’re also seeing a hardening in the marketplace, which consumers may be asking their agents to shop their accounts. And if that’s the case, anytime you are changing carriers, you need to make sure that you understand what the differences are and are thoroughly checking policies,” he said.
Whitney added that agencies should have tight processes in place when switching carriers. “As the market hardens across property and other casualty, having a very clear process in place for everyone on your staff to follow when you are moving coverage and having appropriate disclaimers, and making sure you’re communicating to your clients every time you switch a policy form,” she said.
“There’s the risk that some things may get interpreted differently so agencies really need to cover all bases.”
While policy comparison is critical for agents, so is communication with clients, she added. “Your clients have a duty to read the policy, too, but you want to make sure that they realize, ‘Hey, this sublimit is less,’ or whatever the differences are,” she said. In hard market times like these there could be an uptick in E&O claims because changes in coverage were not properly communicated to the client, she said.
Cyber and Other Exposures
While the hard market and the ongoing pandemic remain top concerns for agencies, cyber risk might be the most pressing issue right now, according to Hulcher.
“The two biggest exposures that an agency has are E&O exposures and their cyber exposure,” he said. Some agencies rely on minimal data breach coverage sometimes given in their E&O policy rather than purchasing a standalone cyber policy, he said. That’s concerning, according to Hulcher.
Swiss Re’s agents’ E&O policy includes a small sublimit for first party cyber coverage, but Whitney said the coverage does not address the cyber exposure seen most often today: ransomware.
Whitney has seen some agencies with ransomware claims, including a recent incident involving an agency that had failed to back up its files for more than a year. “Fortunately, they had cyber coverage so they are working through that.” Had the agency relied on its E&O policy sublimit there would be no coverage. “We’re not covering ransomware in an E&O policy,” she said. “Everyone should have a standalone cyber policy.”
Hulcher says that many of KAIA’s independent agencies are not buying standalone cyber policies to cover their risks.
“When I look at our membership, I would estimate that 60% of them do not have a standalone cyber policy,” he said. One cyber-related incident without cyber coverage could destroy their agency, he added. “Agencies need the E&O coverage to continue to operate as an insurance agent,” he said. But agents also need a standalone cyber policy as much as their E&O coverage. “They cannot rely on the little bit of coverage that they get in their agent’s E&O policy.”
Agency staff working from home has increased an agency’s cyber exposure as well, said Chris Burand, owner of Burand & Associates LLC in Pueblo, Colorado.
“I saw one recent case where a person working at home didn’t have the right technology in place and they had a breach as a result,” he said. While the claim was cyber related, it could have turned into an E&O allegation because the staff was not equipped with adequate technology, he added.
Remote work can also lead to procedural errors for an agency. “Maybe some people were sent home and they only have one screen [monitor]; and it was a small screen,” Burand said. That small monitor could be seen as an inadequate technology solution which could result in more procedural errors.
Another potential E&O exposure arises with the ongoing loss of expertise in the agency ranks, according to Hulcher.
“The transition of people that are retiring that have been in the business for 40 years, the expertise that is walking out the door, and then trying to get your new employees, who are less experienced, trained, that’s obviously a potential exposure,” he said.
Hulcher said newer hires are not as familiar with coverages and may not realize the importance of adhering to critical agency procedures. That’s why he encourages agencies to invest in new employees. “Get them up to speed from a coverage perspective, and make sure that your procedures are buttoned up, and that people understand why you have those procedures in place,” Hulcher said. “Because you want to have those invariable practices as a future defense, should an E&O claim come up.”
Burand says that while the next wave E&O claims may not have hit, yet, E&O exposures in agencies nationwide have increased throughout the pandemic. “I’ve definitely seen the exposures increase. Maybe everybody will just get lucky, and it won’t result in a claim.” But don’t count on it.
“I think that continued diligence on being consistent in your procedures and understanding that whatever it is that you promise you’re going to do in the event of any lawsuit, you better have done,” he said. All it takes is one plaintiff’s attorney to quickly look on the agency’s website and then map the website’s promises to their client’s situation. “They ask: ‘Did they do this? The website promises it, so did they do it?’ That’s the litmus test that a lot of plaintiff attorneys used to determine whether they’re going to go forth with a case.”
Swiss Re’s Whitney says more and more claims are being argued on the premise that the agency has created a special relationship, raising the agency’s duty of care, because of promises made on a website. “And when that happens, all our great defenses can go out the window,” she said.
“It’s one of those things that’s a struggle because if you are any business, you want to have what you do on your website. You want to make yourself look good so you to stand out from your competitors,” she said. “It’s natural that you’re going to say that you do all these great things. The problem is, if you say all those great things and you haven’t done all those great things, that can create exposure problems.”
Lastly, Hulcher reminds agents to look beyond price when it comes to insuring the agency. “You can’t only focus on the price; you have to make sure that you understand the underlying policy behind that price,” he said. Agencies tend to look to their carrier contracts, and purchase agency E&O limits based on those contractual requirements. “Just because it is an agency contract that says this is the minimum coverage you should continue to hold, doesn’t mean that is the right limit of liability for your agency,” he said.
“You have to look at your book of business, evaluate the underlying exposure, and purchase the amount of limits that you feel like you can afford,” he said. “Make sure that you have adequate limits in place,” he said. “Ask yourself, ‘if I have a $1 million E&O limit and I have a $2 million claim, could my business survive?’ The answer is probably not.” And don’t rely on an agency E&O policy for cyber coverage, he added. “Get a standalone cyber policy,” he said. “The reality is, there is no bigger exposure than E&O,” Hulcher added. “You need to look at your E&O policy as an investment in protecting your business, your largest asset, and that should be how you approach it.”