Understanding Errors and Omissions Insurance: A Guide for Agents and Producers

Errors and Omissions, commonly referred to as E&O, is a topic that often leads to confusion and concern among agents and producers. Many think, “It won’t happen to me,” while grappling with seemingly endless premiums. This mindset needs to change.

E&O insurance, as the name suggests, covers professionals for mistakes or lack of judgment that can harm clients. It typically includes a duty to defend claims and work towards either defeating or settling them without going to trial. However, if your E&O coverage lapses, you could be held personally liable for any negligence that occurs. To better understand E&O, let’s break down some key terms.

Key Terms to Understand

Two primary types of E&O policies exist: Claims-Made and Occurrence.

• A Claims-Made policy covers claims made during the policy period. It usually starts with a lower premium but can increase as liability grows. If a policyholder wants to report a claim after the policy expires, they must purchase “tail coverage” or an “extended reporting period.”

  
  

• In contrast, Occurrence coverage is lifetime coverage policy. As long as you are insured at the time of the incident, it will protect you even if the claim arises years later. The premium remains consistent each year, secured with specific limits (e.g., $1 million or $3 million).

  
  

Understanding Retroactive Dates

One crucial aspect every agent should grasp is the retroactive date. This parameter defines how far back your policy covers claims. If an incident occurs before this date, your E&O policy will not apply. Understanding this concept is vital to ensure continuous coverage. Dropping your professional liability insurance, even for a short time, can lead to significant issues in the future. If a claim arises during this gap, the financial burden will fall entirely on you.

Defense Outside the Limit

Another important consideration is Defense Outside the Limit. Understanding this option is essential because it affects your E&O policy coverage. Defense Outside the Limit—or Claims Expenses Outside the Limit—provides much more protection than Defense Within the Limit.

Under a Defense Outside the Limit option, your legal defense costs do not chip away at the liability coverage available for damages. In contrast, under Defense Within the Limit, the costs will diminish the available amount to pay damages. Knowing the nuances of these options can make a significant difference in protecting your assets.

Common Scenarios: Good and Bad

Consider a scenario where an agent finds himself in trouble with a client. The agent tried to obtain coverage for the client's home but failed to inform them that coverage wasn’t available. After a hurricane damages the roof, the client submits a claim. Upon learning that no coverage was bound, the client suits the agent. Fortunately, the agent had the foresight to purchase a tail on his Claims-Made policy. This decision protected him from personal liability.

Conversely, another case illustrates the consequences of a lapsed E&O policy. An agent inadvertently let their coverage lapse during the renewal process. As a result, they faced personal liability should a claim arise. Such lapses are not uncommon. Agents must be vigilant and ensure their coverage remains uninterrupted.

Events That Can Trigger a Claim

For a plaintiff to succeed in a claim against an E&O policy, they typically need to demonstrate negligence on the agent's part. Negligence, a legal term, requires individuals to act according to a specific standard of care. Failing to meet this standard can lead to liability for damages. Sometimes, merely omitting an act can result in a negligence claim.

Agent's Duties and Responsibilities

As an insurance agent, your primary duty is to exercise reasonable care, diligence, and judgment when selling insurance policies. If you claim to be a “specialist,” you may be held to a higher standard of care. Your unique relationship with your clients requires that you provide appropriate coverage for their needs. Keep in mind that individual states have different laws concerning the responsibilities of insurance agents.

Here are some potential pitfalls that may arise in your practice:

• Failing to enroll a client in requested coverage

• Not notifying a client of a claim

• Ignoring a client’s policy cancellation due to non-payment

• Withholding information about an insurer’s financial problems

• Omitting underwriting details of a risk

• Misrepresenting coverage options

• Forgetting to add required coverage

• Incorrectly identifying insureds or loss payees

  
  

Best Practices for Protecting Yourself

If your E&O coverage lapses, the risk of lawsuits increases significantly. This is especially true in plaintiff-friendly jurisdictions like Georgia, known for high verdicts. Statistics show that one in twelve agencies report an E&O claim. Thus, to avoid becoming another statistic, adopt best practices.

Here are some practices to consider:

• Develop a uniform practices and procedures manual.

• Train all employees on these procedures.

• Regularly review and update policies.

• Conduct periodic audits for adherence.

• Offer ongoing training for agents.

• Maintain accurate documentation and log notes.

• Record client calls, respecting state laws.

• Hire qualified personnel.

• Foster a culture that encourages professionalism.

  
  

Building Protective Structures

The importance of having the right E&O coverage cannot be overstated. Alongside that, staying aware of the potential land mines is essential. Adopting uniform practices and procedures that everyone in your agency should follow will prevent lapses in coverage.

Always monitor your E&O coverage to avoid potential risks. The peace of mind it brings significantly outweighs any immediate savings you might think you gain from cutting corners.

In conclusion, if you have questions about your own E&O coverage, reach out to a qualified insurance professional or your E&O provider. Members of Pacific Crest Services benefit from numerous services aimed at helping agencies function smoothly, with compliance support included.

To explore the opportunities of joining an independent agent alliance—or if you're a licensed insurance agent with 12 to 18 months of experience—visit Pacific Crest Services to arrange a confidential discussion, or call us now at 888-938-4197 to speak with our sales team.