When buying E&O, limits should be the primary focus

Imagine the scenario, your agency has just been advised that you are being sued in an E&O matter. Would you rather have $1,000,000 limit of liability and a $1,000 deductible or a $2,000,000 limit and a $5,000 deductible? I would trust that most would prefer the higher limits but with the higher deductible. This is very sound thinking. Unfortunately, this is not always the case. In fact, if this issue were to be surveyed, I would imagine a significant percentage of respondents would choose the lower deductible as opposed to a higher limit when securing their E&O.

The advantage of focusing on the E&O limit is that this is the “unknown”. When an agency is sued, the potential dollars at stake are an unknown, more so if the underlying coverage involves liability coverage of some type. One of the more significant trends that E&O carriers are experiencing is an increase in severity which is a measure of the final settlement of the claim. Overall, Agents E&O claims are being settled for bigger dollars than in the past.

In looking at the deductible side of the equation, if one were to take a $5,000 deductible as opposed to the $1,000 (in my scenario above), the potential impact to the agency is “known”. Essentially it is a $4,000 difference. Most agencies can absorb a $4,000 difference as opposed to a $250,000 difference when they find out they did not have enough E&O limits.

A common scenario is to buy a higher deductible and “invest” the savings by securing a higher E&O limit. This issue is one that should get a lot of attention when securing your initial coverage or at renewal time. Do not hesitate to ask the underwriter / broker / association (whoever you are dealing with in the securing of coverage) for options. Look at a couple of higher limit options with some corresponding higher deductible options. This will enable you to make an educated decision.

A word of advice, especially for smaller agencies: One of the deductible options may involve going from a loss only deductible (where the agency only pays their deductible if a judgment has been made against them) to a combined deductible where the agency will now have an obligation to incur part of the defense costs. The suggested approach, once again for small to medium size agencies is to stick with the loss only deductible. You might pay a couple of dollars more but it is the more conservative approach.

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