In other words, is it fair to say that smaller agencies only have the potential to generate a smaller E&O claim? While I understand why some agency owners would think that way, in actuality, smaller agencies are just as likely to have a big E&O claim as a bigger agency.
Why? Essentially the issue boils down to the premise that oftentimes, it is not what you wrote that will generate the E&O claim, it is what you didn’t write. Said another way, what is not covered is more likely to cause an E&O claim as opposed to what you did write. For example, you write the auto and the homeowners but no umbrella. Your customer suffers a significant claim that is not adequately covered by the underlying insurance. Your customer then files an E&O claim against your agency for failure to provide an umbrella.
Your agency had assumed that because you only wrote the auto and the homeowners that an E&O limit of $1,000,000 would be sufficient. Unfortunately, because the underlying loss suffered by your customer is well over the limit of your E&O coverage, your agency now potentially faces E&O litigation that could cause you some significant E&O hardship, even potentially putting you out of business.
So what are some of the issues that you should be looking at when determining your E&O limit?
– Typically personal lines claims are smaller than commercial lines claims. The average for Personal Auto is around $25,000 and Homeowners is slightly higher, around $30,000. But once again, these are averages and as the example discussed above shows, $1,000,000 (or higher) E&O claims can occur for personal lines shops.
– Commercial lines tends to generate higher E&O claims. However, further dissection of the types of commercial lines is necessary. If your agency is writing accounts of higher severity (manufacturing, education institutions, surety, municipalities, aviation, trucking, professional liability, major construction risks, major property exposures, etc.), these certainly have the potential to generate significant E&O claims. Main street BOP type exposures are probably not going to generate a significant uninsured underlying claim but do you want to take the chance?
– What is the value of your agency? You have spent considerable effort (and blood, sweat and tears) to build your agency, do you want to risk it all by not carrying sufficient E&O limits? I didn’t think so.
Bottom line, agencies don’t make mistakes, people do. Thus a large agency could actually have less likelihood of generating a significant E&O claim than an agency half their size.
When your E&O account comes up for renewal, don’t hesitate to ask the underwriter for a variety of limit options. You may just find out that the additional premium to increase your limit is less than you think. Your E&O coverage and the limit you select are some of the most important decisions you will make as the owner.
Make sure you protect your agency as well as you protect your customers.