Selecting the right E&O limit

Without a doubt, most agents would like to know the exact limit they should carry on their E&O policy. Some agents approach this by analyzing their book of business specifically looking to determine what is the maximum limit they provide for any one customer. So if that maximum limit is a $2mil umbrella, they conclude that $2mil must be the appropriate E&O limit.

In actuality, nothing could be farther from the truth. One of the primary reasons why it is so difficult to determine the “right” E&O limit is due to the fact that typically an E&O claim is generated by the insurance you failed to provide. Thus if that customer has a major loss and alleges that they asked the agent for higher limits, the agent could theoretically be sued for much more than $2mil.

Let’s look at some key issues, starting with how your limits work.

With E&O, there are typically two sets of limits. Using the example of a “$2 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. Agents should definitely not discount the importance of the aggregate.

The type of business you write. A good starting point towards “calculating” the appropriate limit 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, especially if you are writing some high net worth clients.

E&O claims involving commercial lines tend to be larger and some have been known to be over the $10 million level. I am aware of many E&O claims in excess of $10mil involving professional liability. So for 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, agents should secure an aggregate that is a multiple of the per claim. So if the agency has a $3mil per claim limit, consider an aggregate in the $6mil area. This should ensure that your E&O continues if you get hit with a sizeable E&O claim.

The size of your agency. It is interesting that many agency owners believe that because they are not a big agency that they cannot have a big E&O claim. This is not sound thinking as 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.

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.


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