Your E&O limit – some things you need to know

Traditionally, January 1 has been a common anniversary date for many P&C accounts. Actually for many insurance agencies, this is a very common anniversary date for their E&O insurance. However, whether this is your anniversary date or not, there are a number of key issues that agency ownership and management should realize when their E&O comes up for renewal.

– Typically, E&O limits are expressed in a set of 2 numbers. The first is the “per claim” limit and the second is the “aggregate” limit. The aggregate limit is the total limit for all claims made against the agency during the policy period.

– It is important to realize that once these limits are chosen, they essentially remain in effect for the duration of the policy period. While there may be some circumstances where E&O carriers will allow a change in these limits, these options are extremely limited and should not be assumed. As a result, TREMENDOUS attention should be given to the agency’s E&O limit. Significant E&O losses (including a number that were over $5mil) do occur. Without sufficient E&O limits, an agency is potentially putting their future at risk should they face an E&O claim without the proper limit. The best advice for an agency is to ask the underwriter for a variety of E&O limit options when securing their new / renewal proposal. An agency may find that the additional premium to increase their coverage is less than they thought.

– If your agency was facing an E&O claim where the suit was for more dollars than your limit, your E&O carrier would send you an “excess demand” letter advising you that you should retain your own attorney for those limits not covered by your E&O policy. This is going to be an additional expense that you probably didn’t budget for.

– Know how the defense provision of your policy works. The best provision is to have your E&O policy provide defense protection “in addition to the limit of liability”. If your policy provides defense “within the  limit of liability”, this means that the defense costs could impair the limit ultimately available for any judgment against your agency. There have been a number of E&O claims where the defense costs were significant (over $500,000).

Pay specific attention to the aggregate limit. Since this is the total limit available for all claims during the policy period, it should be carefully chosen. This limit can be the same as the “per claim” limit although this is not recommended (one claim could exhaust both the per claim and aggregate limit). The best approach is to have the “aggregate” be a multiple of the “per claim” limit. An example would be a $2mil / $4mil set of limits.

– The best use of your buying dollars is on your limits. Consider increasing your deductible and using the savings to buy a higher limit.

Your E&O coverage is one of the most important decisions you will make over the next year. Without the proper attention, it certainly has the potential to cause your agency some significant “damage” in a number of areas. One of those key decisions involves your limits. Don’t hesitate to ask your underwriter for options to consider – this will help you make an educated decision.

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