The State of Insurance Agents E&O

By Curtis M. Pearsall, CPCU, AIAF, CPIA, Executive Director of the AOA Learning Center 

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Most E&O historians will comment that the concept of Agents E&O in the United States has been around since the mid 1960’s. This is when the two major agents association entered into relationships with specific carriers to underwrite this class of business. It is not easy to find historians that can comment on claims frequency / severity going back roughly 50 years but if one were to guess, it is doubtful that there was much claims activity to speak of. The legal climate back in the mid 1960’s definitely looked much different than it does today. So when reviewing any types of statistics and looking to make comparisons to today, it would probably be appropriate to somewhat discount those early years of Agents E&O.
 
One thing that was evident back then that is still a key issue that no two E&O policies are the same and this certainly adds to the complexity of this line of business. It appears that virtually every aspect of an agents E&O policy differs from one carrier to another. Thus for agents “shopping” their coverage, it would be prudent to always secure a specimen policy before making the key decision as to what carrier you will trust for protection of your agency. Also, don’t just secure the specimen policy – read it from front to back. In many ways, it really is one of the most important decisions you will make regarding the protection of your agency.
 
 

Frequency and severity

 

Interestingly, despite our living in an increasingly litigious society, E&O claims against insurance agencies are at an extremely low level compared to the past. In the early 1990s, E&O claims frequency was in the 12%-14% range; that is, 12 to 14 claims per 100 E&O policies. This translates into 1 claim for every 7-8 agencies around the country. Today, 20 years later, frequency is in the 6% – 7% range. How did this happen?
 
Bottom line, good results like this don’t “just happen,”. I am totally convinced that the commitment of insurance agencies to quality E&O practices is as strong today as it has ever been. When new procedures are considered today, there always seems to be a “is this a good or bad procedure from an E&O standpoint” discussion. Having been in the business since 75 (I was a CSR handling S-Z for personal, commercial, claims), E&O seminars were nowhere to be found and there was no real information available on the various “best practices”. Today, E&O loss prevention is a solid focus for most agencies.
 
Most agencies and their staff are to be congratulated on their hard work and progress. Unfortunately, E&O claims still happen and personally, my goal is do my part to cause E&O frequency to drop even further. Some may consider this an idealistic goal, especially in light of the challenges facing agencies. The heavy workloads faced by agency staff coupled with Mother Nature are not going away any time soon.
 
One encouraging statistic is that of the E&O carriers that aggressively defend their E&O customers, they are able to close out 60%-70% for no loss payment. There are still a fair amount of “frivolous” claims made against agencies as many customers seem to feel that if they sustain an uninsured loss, it must be the agent’s fault. Agencies holding their customers accountable for their buying decisions should be a key agency objective starting now.
 
The average-size E&O claim is in the $50,000 range, but agents should be careful not to factor this number into the decision when choosing the size of their E&O limit. Why? It is only an average and E&O claim settlements in the millions do occur. E&O claims involving personal lines are typically smaller, while heavy commercial lines agencies tend to generate fairly large E&O claims due to the nature of the business they write.
 
 

Who generates claims

 

Producers seem to be most culpable, typically generating over 50% of all E&O claims. Customer service representatives are next in line. Actually, it is critical that agencies realize that virtually every person in their agency, including the claims staff and the receptionist, has an E&O exposure and has the potential to generate E&O claims.
 

 

 

Types of claims

 

For at least the last two decades, the # 1 cause of E&O claims has been failure to provide the proper coverage. Consequently, when an agency customer suffers a loss and does not receive the settlement he or she was expecting, there is significant potential for the customer to try to find fault with the agency.
 
Mother Nature has not been kind to agents E&O either, with catastrophes such as Superstorm Sandy generating a significant number of E&O claims in recent times. More agencies today are proactive in communication and education on the coverages available before such loss-generating events occur. This includes the providing (or at least the offer) of an annual account review as this has shown to be a great way to make a customer more accountable for his or her insurance program.
 
 

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