The insurance producer trend toward specialization is creeping into nearly all facets of the industry, and with good reason. As the independent channel faces heightened scrutiny and producers’ own errors and omissions (E&O) exposure grows, expertise and value-added services beyond sourcing risk are paramount.
That is especially true of producers selling professional liability, or E&O insurance. As a 25-year industry veteran, former agency owner and vice president of marketing and sales for Landy Insurance Agency, John Torvi recognizes key situations in which E&O cover could be compromised by producers who aren’t familiar with the line.
While partnering with a knowledgeable wholesaler or carrier is the best approach to preventing these situations, here’s a look at three instances in which producers may be tripped up by coverage complications.
1. When a company first purchases E&O or changes carriers
When a producer takes on a new client and is working with a wholesaler or carrier to craft an appropriate E&O policy, Torvi notes that prior acts coverage is paramount.
Prior acts coverage provides retroactive insurance back to the date when the previous policy ended. Without that coverage, a business is exposed for all professional acts made during that period.
“The policy reacts when a claim is made—not when the professional act took place,” explained Torvi. “Agents don’t always understand that, or that there can be no gap in coverage even if you switch from company A to company B. Some agents don’t even know what that means.”
Retroactive dates are typically the date a business first buys insurance and has uninterrupted coverage, Torvi said. If prior acts coverage is not put in place, a company will lose its retroactive date.
2. After a claim event, or when assessing limits
Another important consideration when crafting E&O policies is deciding on claim expenses inside the limit or outside the limit. Claims inside the limit uses liability limits to pay the insurance company whatever it costs to defend the client. Claims outside the limit don’t touch liability limits.
This is paramount as defense costs continue to skyrocket.
“It can make a big difference, believe me,” Torvi said. “Especially on big claims that have to be heavily limited—it can really add up.”
While the best time to have this conversation is clearly before a claims event, a claims event after the policy is in place is a good time to reassess whether current coverage is adequate.
3. When companies merge, change their name or shut down
Something surprising to many producers is that a merger between two companies and a resulting name change demands revisiting of any E&O policies in place. Businesses still need to protect all of their prior work, meaning that exposure still exists under the previous company or previous company name.
“There are underwriting guidelines and rules on how to protect all that previous work, even when a company is shutting down or the owner retires,” Torvi explained. “It’s very specific and detailed and the agent needs to know how to hand it to make sure no prior coverage is lost.
“Just because I close a business doesn’t mean I can’t be sued for what I did previously.”
Getting it right
Producers who hope to specialize in E&O, or even work with clients on a general basis, need to make sure they understand these and other exposures to the T. E&O can be a “tricky, quirky” coverage, Torvi said, and should be handled accordingly.
“An agent thinking about this should become familiar with the ins and outs, know what terms are and what they mean before they go out there,” he said. “They could find themselves in a real E&O exposure if a client has claims expenses outside of the limits, if a firm merges with another firm or loses prior acts coverage because they didn’t know how to underwrite that.”