by Curtis M. Pearsall, CPCU, CPIA Let me ask you a question. Would you agree that buying the E&O to protect your agency is one of the most important business decisions you will make this year? To really answer that question requires you to think about the ramifications of the other decisions you will be making. There is no doubt that every year you, as the agency principle, make a multitude of major decisions that will impact your agency not only for today, but for tomorrow as well. However, making the wrong decision on your E&O could mean your agency will not have a tomorrow.
There are additional issues such as what happens if you have a claim the first year you are with your new carrier. Many carriers that have not been writing this coverage might non-renew you. Now you have a new claim on your record, which will not make you attractive to another carrier. Utica has been writing this class of business for some 45 years and there is no way we would be a market leader if we non-renewed every agency the first year they were with us. So take the purchase of
your E&O seriously – it is one of the most important
business decisions you will make in 2006. |
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Few Tips on Buying Your E&O…
Make
sure that your policy covers what you do. No two E&O policies are the same. The differences are numerous from the coverage trigger (what constitutes a claim), to the activities that are covered, to who is even covered under the policy. So when purchasing this vital coverage for your agency, make sure you review the policy. If you are switching coverage from one carrier to another, demand a specimen policy so you can be sure what coverage the policy provides. Would you rather know right up front what is and is not covered, or would you rather find out at the time of a loss? If you are involved in selling Life and A&H coverages, make sure the policy handles this. What about mutual funds, stocks and bonds? Is there coverage for those activities? 
Choosing
the right policy limit is critical. Many agency owners may contend their $2,000,000 limit is sufficient, but is it really? There is no real magic formula to determine the right limit, but there are some things to consider when making this decision. An old wives’ tale states you should buy a limit equal to the maximum limit of any of the policies you provide. There is a tremendous fallacy to this, which essentially factors in the types of claims an agent can be exposed to. For over 25 years , the # 1 cause of claims is “failure to provide the proper coverage.” So, in essence, it is what you are not providing that is going to get you into trouble most of the time. For example, you write the Auto with a $500,000 limit, the Homeowners with a $300,000 limit and fail to recommend a $1,000,000 Personal Umbrella. A tragic accident occurs. It is with the failure to recommend the Personal Umbrella that you run the risk of getting sued. 
Buy
a deductible that you can afford and that makes good
business sense.As with the limit, there is no magic formula for the right deductible. A general rule of thumb in the industry is to take your premium volume and multiply it by .001. So a $10,000,000 agency should have a $10,000 deductible. Once again, nothing scientific, but generally it accomplishes what many E&O carriers like – for agencies to have some “skin in the game.” There are different types of deductibles. A combined deductible means that claims expenses are part of your responsibility regardless of whether you did anything wrong. A loss only deductible means you only have to pay your deductible if you are found negligent. Make sure you know what you have. Ask your E&O carrier for options so you can see what the premium difference will be. This will enable you to make an educated decision.