In a hard market, E&O claims have a tendency to rise in both frequency and severity due to increased workloads, reduced coverages, and other factors. This document by Bill Wilson focuses on some special E&O considerations that merit attention in a hard market.
Although the focus in a hard market is often on retaining a book of business, it’s just as important to focus on book profitability. Although you don’t want to lose a single account, let’s face it: there are some accounts you’re better off leaving to competitors. It’s critical to underwrite and price business appropriately. The hard market offers an opportunity to weed out undesirable business (and blame it on pricing). But you still have to do loss control on the remaining business.
In a hard market, producers and others sometimes do crazy things to keep an account. Be sure to focus on areas that might increase the frequency and/or severity of E&O claims during the hard market. Here are some of the issues you might want to address:
COVERAGE REDUCTIONS AND CARRIER CHANGES
Coverage reductions required by carriers. Often, to keep a premium at competitive levels or (more likely) to limit loss exposures, an insurer might suggest coverage or limit reductions. Be wary of such new exclusions as terrorism and mold. It’s critical to advise your insured of any coverage reductions before renewal. The same holds true if the carrier will only renew at lower limits and/or increased deductible amounts. Recently, an agent quoted a $90,000 premium for a $5 million Commercial Umbrella policy. The expiring Umbrella’s limit was $25 million at a premium of $69,000 — 80% less coverage for 50% more premium.
Coverage changes requested by insureds. Be wary of requests to eliminate or reduce such coverages as Uninsured Motorist or Umbrellas. The agent above had an insured who’d recently dropped his Products Liability coverage because he said he just couldn’t afford it. Agents will need to work with insureds to find a way to keep critical coverages in place and/or explore alternative risk management techniques. If you must reduce coverage, particularly at your insured’s request, document everything — with the insured’s signature.
Carrier changes. If you need to move an account to a new insurer, watch for coverage reductions, especially when moving from one proprietary company package to another. Since these moves are often done at the last minute, make sure that nothing slips through the cracks by having more than one person review such accounts for errors or omissions.
USING E&S, RESIDUAL, AND OTHER MARKETS
In recent years, the E&S marketplace grew at a rate twice that of the standard market. Expect this rate to increase significantly during a hard market. Devote ample attention to E&S, residual, and nontraditional markets.
Follow applicable laws when using E&S markets. In some states, agents must demonstrate a diligent search for admitted markets before using an E&S carrier. Although not admitted, E&S carriers might have to be 'approved' by your Department of Insurance. Some risks might not be placed in an E&S market. Make sure you advise the insured that the carrier is not highly regulated (if at all), that there’s no guaranty fund protection (except NJ), and that the account might not be subject to such statutory protections as cancellation notices.
It’s absolutely essential that you require any E&S insured — without exception — to sign an E&S Waiver or similar hold-harmless agreement.
When using residual markets (Auto, Workers Comp, F.A.I.R. Plan, etc.), follow all plan procedures, particularly the lack of binding authority. Communicate any issues to your insureds.
Monitor the financial stability of your carriers. Given market conditions and the aftershock of September 11, this is critical.
Be particularly wary of certificates of authority. Your clients might ask for assurances that their policies cover such risks as terrorism or mold, and you might not be able to provide that assurance. In addition, given the potential difficulty in securing replacement coverage, the certificate holder might insist on lengthy advance notice of cancellation. Never imply that coverages exist where they don’t. Never modify a certificate without the express consent of the insuring carrier. Always use ACORD forms unmodified.
IMPLEMENTING MANAGEMENT CONTROLS
The hard market will increase workloads. You’ll do more comparative quoting. Your producers might have to make multiple proposals and work accounts more vigorously to keep them. CSRs will face increased transactions and negotiations with underwriters. Any time work increases with no change in time or personnel, opportunities for errors and omissions increase. You’ll need sound personnel management and training skills.
Management will have to take a more active role. An agency procedures manual will become more important than ever. You might need to introduce or focus on 'hard market' related procedures.
In an effort to lower premiums and retain accounts, you might think of using a lower rated code that doesn’t accurately reflect the true exposure of a risk. In most states, this is a violation of insurance law and the agent/agency could lose their license. In addition, it almost certainly violates the agency-company agreement. Management should prohibit such shenanigans. In fact, this approach can backfire when the soft market returns, particularly in the area of experience rating.
THE E&O TRINITY
Communication. Adequate and accurate communication among staff members, carriers, and clients is even more important in a volatile market.
Documentation. When there are coverage reductions, lower limits, and higher deductibles, expect E&O claims and suits to increase. Proper documentation provides the key to a successful E&O defense, especially in a hard market.
Consistency. Follow the Invariable Practice Rule: 'One way, all the time, by everyone.'