By Sheri Pontolillo
Until tort reform becomes a reality, it is a sad fact that our liability insurance system has become, in some cases, an environment that feels akin to legalized extortion. There is no shortage of plaintiff attorneys who will take cases on a contingency basis and try to shake a settlement out of the insurance tree for clients who know full well their agent or advisor did nothing wrong. Desperate people do desperate things and when a client suffers a loss that is not covered by insurance, they will often turn to their agent or advisor because “somebody’s gonna pay.”
In my twenty four years in the E&O business, I cannot count the times that my insured clients (agents and advisors) found themselves in this very position- having to defend themselves when they did little to nothing wrong. Often, these are very big cases involving high-risk perils. In short, their client took a big risk, they lost, and they are now looking to their agent’s or advisor’s E&O insurance for a settlement.
So, when don’t you want E&O coverage? Sometimes, it is in this situation. Remember the days when psychologists were being sued for sexual harassment? No witnesses, no defenses? When the E&O insurers began to exclude claims alleging sexual harassment, the frivolous lawsuits stopped. About a decade ago, real estate agents were being targeted by plaintiff’s attorneys with the “mold is gold” mantra (they were making a fortune on mold cases). Basic leaky pipe water intrusion claims were brought as expensive mold cases with allegations of severe bodily injury due to mold infestation also requiring expensive mold abatement. Soon, the real estate agents’ E&O policies contained mold exclusions and the unwarranted mold claims ceased.
As an E&O broker, I would love to see my clients fully insured for everything. However, that is not reality because it is also true these same high-risk perils are the least attractive to the E&O insurers. You may have to choose between no coverage or some coverage. IF your E&O broker can find coverage for claims against you involving high-risk perils, the coverage will often involve a sublimit (a limit that is lower for the high-risk peril claims than other covered claims) or a higher deductible. The good news is I have seen this reduction in coverage work to the benefit of my clients.
When a case is brought for a potential big pay-day case by a contingency-basis attorney, can you guess what the typical demand is? You guessed it! The demand is magically the agent’s or advisor’s limit of liability on his or her E&O insurance. If he or she carries $1million, the demand is usually $1million. If he or she carries $250,000, the demand is usually $250,000. The typical plaintiff’s attorney that takes cases on a contingency basis is going to take the path of least resistance. They are rarely seeking “justice” but rather a quick settlement. They have no intention of going all the way to trial for the alleged amount of “damages” because that would be too much work and expense. I have seen a case brought seeking $2million + lowered to $500,000 once they learned there was a sublimit on the insurance. Often these sublimits force the plaintiff attorney to “get real” with their clients and negotiate a much smaller settlement with your defense counsel.
Here are some facts:
1. Claims are frequently settled for cents on the dollar (alleged damages versus agreed settlement).
2. Your future rates are calculated on your loss ratio (premiums in versus losses paid out). Better to have a large claim settled within the available sublimit than some much larger amount.
3. Very few E&O claims go to trial. Most are settled prior to trial or in an alternative dispute resolution setting (arbitration or mediation).
Having a sublimit for a high-risk peril is not the most comfortable place to be when that claim comes. Be encouraged, however, because it often creates a dynamic for the most favorable outcome – one where your E&O insurer has contained their exposure and retained you as an insured, and your client (the “injured” party) has received some compensation for their alleged damages.
Sheri Pontolillo is CEO of E&O Pros (E&O Professional Risk Management & Insurance Services LLC), a national brokerage in Laguna Hills, CA that sells and administers group and individual E&O programs. She has specialized in E&O insurance for 23 years, including life insurance and P&C insurance agents, and is the author of numerous industry articles, seminars and continuing education programs.
Meet The Experts
Review articles and blog posts by our list of insurance experts!
Click Here For Participating Firms
VIEW RATINGS FOR INSURERS
Enter name of Insurance Company and press GO button.