You are less likely to be hit with an E&O Claim in 2008
compared to 2007 - True or False?

By: Curtis M. Pearsall, VP – Utica Errors and Omissions

First, I am pleased to advise you that the E&O claims frequency for the Utica E&O program dropped in 2007 to under 7.0%. That means less than 7 claims for every 100 agencies that Utica is honored to protect. Not sure if this is an all time low in the 41 year history of the Utica E&O program but certainly the lowest that frequency has been in the last 20 years. We obviously are very proud of this and are working hard to find ways to continue this positive result. I am not sure if all E&O carriers are reporting a reduction in frequency – my sense if that they are not. In recent conversations with loss control instructors that Utica works with, they are noting in their seminar material that E&O frequency is on the rise.

Ironically, we projected that E&O claims frequency would drop. Why? Let’s look at some of the reasons behind it.

First, there is no doubt that agencies are much more focused on E&O prevention today than in years past. In my early days at the agency side of the business as a CSR (handling S-Z for personal, commercial and claims), the topic of E&O prevention was not often mentioned. Sure, the importance of documentation was discussed but not much more. It was never mentioned at staff meetings and Exposure Analysis Checklists – I am sure that they were invented but the agency that I was at was certainly not using them. And I would have to believe that we were like most agencies.

Today, things are different as there is much more focus among agencies on finding ways to prevent claims. Whether the issue is education of the staff, newsletters to customers, checklists to make sure that your clients are properly protected, getting insureds signatures, checking policies before they are mailed to catch carrier mistakes, more attendance at E&O loss control seminars, these are just some of the things that are different today than in the late 70’s.

Partly due to the above and also partly due to some other issues, Utica is projecting that E&O claims frequency will be dropping in 2008 as well. Why? It is called the soft market. When we chart our frequency over the various insurance cycles, typically claims frequency will rise in the hard market and fall in the soft market.  Why does the state of the market have such an impact on E&O claims frequency?

There are certain characteristics of the soft market that benefit the agents.

• A significant one is that carriers are looking for production. This means that they are expanding their products adding various coverages that might be window dressing but also may have some significant value to their coverage. The broader the coverage, the more likely that a claim that your client has will be covered. We are also seeing a number of carriers expanding their BOP guidelines. This makes more accounts eligible to be written on a BOP, which typically has more coverage automatically included as opposed to that same account written on a package policy.
  
  
• In a soft market, carriers will stand behind their agents more often if there is a dispute, the old agency accommodation. Now while I think that this will continue, there is no doubt that it will be to a lesser extent than during the last soft market.
  
  
• Non-renewal activity is less. This means that you are not forced to find a new home for many of your clients.
  
  
• Prices are falling – what does that mean – I trust that you would agree that your clients are happier in a soft market than they are in a hard market.

Now before you think that you have nothing to worry about, there is one facet of the soft market that always concerns me. The word is churning. There probably is more marketing within an agency in a soft market as opposed to a hard one. When this happens and your staff finds the need to move coverage to a new carrier for whatever reason, be certain that the necessary due diligence is made to ensure that the client is not losing any coverages. If they are, and you have explained this to them and they have signed off acknowledging this, then okay. Whether the coverage is a BOP or an Umbrella or some other line of business, don’t assume that when you move coverage from Company A to Company B the coverage is the same. This is especially true when you are dealing with Directors and Officers Liability or Professional Liability where in actuality; no two policy forms are the same. Be certain to analyze the forms. Oftentimes, there are resources available to you and your staff to do this (actually your carriers may be able to advise you why their form is better than the competition). Use these resources.

It would probably be a good idea to discuss this issue at your next agency staff meeting. In the fast paced world that we all work in, helping your staff deal with this is important. The last thing you want is for your staff to tell the client that the coverage with the company that you just moved their coverage to is better than the prior company unless you are positive than this is the case.

The soft market can be your friend from an E&O standpoint if you manage it properly. So, if you answered “True” to the overall question of this article, you are probably correct. But please understand, E&O claims still occur in the soft market – just not as often. So don’t assume that they won’t happen to you. Good luck.