What Does My E&O Really Cost?
By: Robert Burns

Ralph Waldo Emerson said; “Can anybody remember when times were not hard and money not scarce?”  Everyone is watching their costs and expenses these days.

It is a serious responsibility for any business manager or owner to ensure that every dollar spent is a worthwhile investment in their business.  It is a duty they owe themselves, their stockholders and employees.

It is right and appropriate to look at serious competitive bids for every business cost.  Your agency errors and omissions insurance premium is one of those costs.  Most agencies do look; there are many ways to go about it.

Most go through a process of analysis.  The most common comparisons are limits, deductible and major coverage terms.  I would like with this article to address those and add some additional points of comparison.

The normal routine is to look at the limits and deductible first.  Then the major terms such as insolvency are compared.  But does this address cost differences in their entirety?  From my experience, the price variances in a single year are usually around seven to fifteen percent. In heated competition it can become a lot more.  And some real one-year savings can be had.

If you step back and look, you’ll see there’s more to this picture when you consider whether your agency is really saving anything over, say, a five-year period… or even a two-year period.

What if you save $5,000 and then find out that the new deductible applies to company expenses other than attorney fees and they hit you for $7,500 on a “no indemnity” claim that would not have applied on your old policy?  Your $5,000 savings just turned into a $2,500 loss.

There is a whole range of other variables that can have a huge impact on the cost of your E&O that you should consider.  The first goal is managing the overall, long-term cost of protecting your agency.  The one-year premium is only one part of that cost.

Agents’ Errors & Omissions insurance is a specialized line of business.  Many standard insurance company claims and underwriting practices don’t apply in E&O.  You only gain that insight with experience.

Take management of loss history from an underwriting perspective.  If the loss ratio becomes too high, non-renewal is an industry practice.  It is not desirable with E&O because of the nature of the tail coverage.  If a carrier gives you a significantly better deal on the first year but non-renews you for claims in an unfavorable part of the market cycle your costs can go up 100%.

Because we offer very broad extended reporting period options it is in our best interest to work with an agency as opposed to using non-renewal.  When looking at other carriers you may want to see how long they have been in the E&O line as a test of stability.

Another soft cost is claims expertise.  Better claims handling results in more efficient claims handling.  This can have major impact on your office operation, because knowledgeable E&O claims people are going to take up less of your time and mitigate the lost revenue, lost time and lost productivity your agency will spend dealing with a loss.  While it is difficult to quantify, look at it this way: An agency with $2 million in revenue over 250 days of operation makes $8,000 a day.  Or look at the revenue generated per person for a sense of what may be lost due to depositions and staff time pulling together information.  You want to make sure that your E&O carrier is not taking a second more than is needed in addressing your claim.  That can only be done with highly experienced claims professionals with a superb panel of attorneys.

 So it’s worth asking a prospective E&O carrier directly, “What is the experience of your claims staff and what attorneys do they use?”

Service can also be a major unseen cost factor.  Do you have direct access to decision makers?  If you have an immediate question such as a merger acquisition question, can you get an answer that day?  If you can’t, what is the potential cost in lost revenue while the details are put through channels?

This leads to the question of future needs.  We will occasionally hear an insured say that they don’t need broad coverage.  What is true today may not be true in the future, particularly as your agency grows.  An example is coverage for temporary workers and interns. Utica provides this coverage.  If an agency has an opportunity to purchase another agency, might the sudden increase in business make it necessary to hire temps? You would, of course, want coverage!

Limits are important.  Most agencies scale their limits with their worst case loss exposures.  Consider your future needs.  If you now have coverage for one million dollars and you sign to represent a new carrier in your office that demands five million in limits, can your E&O carrier meet the request?  If not, what is the potential lost revenue opportunity?

It is important to remember that the premium for your E&O  is just one part of the cost.  More than any other line that I can think of, the overall service is a package deal.  If you focus only on the premium amount you may shortchange yourself in the end.

The main things that I think you should look at are:

• Coverage:  How broad are the coverages?
• Experience:  Does the company have a successful track record?  Does it have the ability and motivation to hang on through tough times?
• Service:  Do you have access to decision makers in claims and underwriting?
• Cost:  Is the pricing aimed at being a long term overall value?