Is $1,000,000 E&O limit sufficient?

This was a question from the floor during a recent Agents E&O panel that I was honored to be part of. While some may contend that there are numerous answers to this question, I am not among that group. One position I have heard over the years on this topic involves “the more E&O limits you have, the more that you can be sued for”. In other words, if the plaintiff’s attorney discovers that you only have a $1,000,000 E&O limit, they will limit the amount of the suit against your agency to only $1,000,000. Bottom line, I don’t buy it.

Over the years, I have seen many E&O claims where the amount of the suit was more than the limit on the Agents E&O policy. While I cannot recollect whether all of the claims were settled within the E&O limit or not, for the owners of those agencies, this still had to be a very scaring experience. Not only did they have to secure their own attorney for the “excess demand” aspect of the litigation but they also were potentially facing the loss of their agency if their E&O limits were not sufficient.

Why would an agent only buy $1,000,000 limit? Possibly they thought that this limit would be sufficient considering the size of their agency or the type of business they wrote. Do smaller size agencies only have smaller size E&O claims? Not the last time I looked. Actually, I recollect one claim where the agency (4 staff – $1.3 mil volume) was facing an E&O claim well over $3mil on a contracting risk they insured. The agency only had a $1,000,000 limit. Fortunately, the E&O carrier aggressively defended the agency and was able to get the matter settled for within the agency’s E&O limits and keep the agency in business.

One other issue on the matter of E&O limits. Actually with E&O policies, there are two limits; the first is the “per claim” limit; the second is the “aggregate” limit. If an agency has limits of $1mil / $3mil, they have a max of $1mil of coverage for an individual claim and a max of $3mil for all claims made against them during that policy period. What if the limits
were $1mil / $1mil, in other words, the “per claim” and the “aggregate” were both $1mil? The downside of this is that if the agency gets hit with an E&O judgment of $1mil, they don’t have any limits left to pay other potential E&O claims that they may develop. ALWAYS look to have the “aggregate” limit be a multiple of the “per claim” limit. The additional premium is much less than you may think.

Also, have more than a $1,000,000 E&O limit because $1,000,000 is not enough!

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