This is one of the most common questions that I am asked in my E&O seminars. Unfortunately, it is not an easy question to answer. In fact, in some respects, it is an impossible question to answer.
First, it is important to understand how your limits work.
With E&O, there are typically two sets of limits. Using the example of a “$1 mil/3 mil limit”, the first number is the limit available for any one claim made against the agency. While this is definitely the more important number of the two, the second number “$3mil” is called the aggregate and represents the limit available for all claims made against the agency during that policy year. You do not want to discount the importance of the aggregate.
Some things to look at:
Look at the type of business you write
In regards to the per claim limit, while there is no formula for determining the “right” limit, a good starting point is for an agency to look at the type of business they write. For example, E&O claim arising from personal lines are typically smaller than those arising from commercial lines. However, million dollar plus E&O claims can occur from the sale and service of personal lines.
In most cases, since an E&O claim is generated due to an uninsured loss, looking at the size of the limits you write is not an advisable approach. E&O claims involving commercial lines tend to be larger and some have been known to be over the $5million level. For those agencies writing predominately commercial, look at the types of commercial lines accounts you write and assess the potential severity of an uninsured claim. Accounts involving large commercial property or auto exposures or significant products liability have significant severity potential.
In regards to the aggregate, look for the aggregate to be a multiple of the per claim. This should ensure that your E&O continues if you get him with a sizeable E&O claim.
The size of your agency
It is interesting that when inquiring about the right E&O limit, many agency owners will start off with “we are not a big agency”. Actually the size of your agency is not a good indicator when determining your E&O limit. While big agencies can have big claims, so can smaller agencies. Once again, it is typically what you didn’t insure that is going to be the cause of an E&O claim.
Is defense included in the limit or “in addition to”?
If defense is included within the limit, there is significant potential for the defense costs to impair the limits available to pay an E&O claim. If you are not sure how your policy responds, check with the underwriter. Having the defense costs “in addition to” is the better option.
Choosing your E&O limit is an important decision and one that you really only have one time of year to make; the anniversary of your policy. Don’t hesitate to ask your underwriter for pricing at various limit options. Give serious consideration to increasing the deductible and using the savings to secure a higher E&O limit.