Mike Smith, President and CEO of Axis Insurance Services, LLC was a guest panelist at the annual summer Professional Liability Symposim sponsored by the Professional Liability Underwriting Society (PLUS) and the Insurance Brokers Association of New York (IBANY) . The topic of this panel was Diverifying Revenue Streams in a Soft Market.  This session covered risk areas facing insurance agents and brokers as they attempt to diversify their revenue in this challenging market place.  Several of the topics included, selling or closing your business, errors and omissions insurance issues, alternative markets that are unfamilar with the agent and multiple claims scenarios.  The session was well  attended. 

For further information on this or other E&O related issues, please feel free to contact Mike Smith directly at 201-847-9175

by Thomas Barrett, VP of Commercial Sales

Question: Can an E&O policy be of any use when allegations of fraud or dishonest acts are made against an Insured?

Answer: It depends on the fraud, who committed it and the type of E&O policy issued.

Most E&O policies have an outright exclusion relating to any fraudulent activities including simple allegations of fraud.  We believe this is unfair to parties that did not participate or were not aware of such an act.  A standard exclusion in an E&O policy would read as follows:

“This policy does not apply to any claim arising out of or relating to any actual or alleged dishonest, fraudulent or criminal activity by or on behalf of any Insured”

The wording that comes next is the most important.  Many carriers have an absolute fraud exclusion in their policies and will not modify their coverage.  However, we have found that many carriers will modify this exclusion to add back coverage for those innocent parties who did not participate, acquiesce or remain passive relating to the fraudulent act.  For carriers that will not do this, many will at least add back defense until final adjudication proves that there was a fraudulent act.

Why is this important?

Similar to defending the Insured against any covered claim, even if the claim is groundless or false, fraudulent claims can be very expensive and time consuming.  Defending allegations of fraud can be as expensive as any other claim and  could erode assets of the company that we feel should be protected.  Since the investors and shareholders of the insured are usually unaware of a fraudulent act by their employees until after the fact, we believe the other insureds under the policy should be protected and not be put at risk by the unscrupulous actions of one or more individuals.  This is a similar concept to Directors and Officers being protected when others commit a fraudulent action in a D&O policy.

What if the insured is not guilty of fraud?

In many claims that we see, an allegation of Fraud accompanies a negligence allegation. It may be that the negligence cannot be proven and the plaintiff continues with the allegation of fraud in the suit.  We have seen many carriers continue to defend such a suit until a final adjudication in the matter.  In the event a verdict is favorable to the insured, they have been protected from a groundless allegation.  In the event a ruling is favorable to Plaintiff, then coverage typically ceases.

What happens if the Plaintiff wins the allegation of Fraud?

Policy forms differ when there is a final adjudication of fraud. The typical options are as follows:

1. Some policy forms require the named insured or the guilty insured to pay back the defense costs incurred.

2. Some policy forms will just cease coverage at that point.

3. Some policy forms will continue to defend or indemnify innocent parties that are also insureds including the named insured.

Unfortunately, carriers are often locked in by their forms and reinsurance carriers as to which one of the above options are available.  Certainly, option 3 is preferred, but again, not all carriers offer that option.

We recommend that you review the fraud exclusions carefully in your policy and weigh the benefits of what is available in the various options presented.

by Mike W. Smith, President

What Is Errors And Omissions (E&O) Insurance?

Errors and Omissions Insurance is business liability insurance for professionals such as insurance agents, real estate agents and brokers, architects, third party administrators and other business professionals.  An error or omission,  a mistake, which causes financial harm to another, can occur on almost any transaction in any profession. This type of insurance (E&O) helps to protect a professional, an individual or a company, from bearing the full cost of defense for lawsuits relating to an error or omission while providing their Professional Services to others. This is a separate coverage from a standard general liability or property insurance policy.

Errors and Omissions Insurance may be referred as any of the following: E&O,  E&O Insurance,  Errors and Omissions or Professional Liability Insurance Malpractice (legal and medical professionals)

What Does Errors and Omissions Insurance Cover?

All E&O insurance policies are unique and therefore have different coverages and exclusions. However, in general E&O insurance is designed to help pay for defense costs and the damage awards associated with professional liability claims. Even the most diligent professional can be held liable for a professional error, omission or mistake. Defense costs are a significant portion of the cost of an errors and omissions insurance policy. It is not uncommon for a professional to spend thousands of dollars on defense costs for a matter that ultimately gets dismissed.

A Professional Liability claim must allege negligence in either the performance of or failure to perform Professional Services. Errors and omissions insurance policies have a specific limit of liability and usually include both legal costs and damage awards in a single limit. E&O insurance does not cover intentional, fraudulent or illegal activities or in most policies, punitive damages.

Remember all policies are unique, therefore not all claims may be covered in a policy and you should read your policy very carefully.

Why Should My Firm Purchase Errors and Omissions Insurance?

Lawsuits are not just about negligence; they are about allegations of negligence. We live in a litigious environment where any professional can be sued. Many innocent parties are brought into a suit simply because they are part of a transaction. In other words, the alleged error or omission does not have to be your error or omission. Defending the reputation of your business, whether the allegation is frivolous or not can still result in lost productivity and legal costs exceeding hundreds of thousands of dollars.

Errors and Omissions Insurance allows you plan ahead and transfer a portion of the risk of unpredictable legal expenditures to the insurance carrier, reducing the financial impact of an allegation against your business.

How Much Does E&O Cost?

Errors and omissions insurance premiums are based on several factors: Type of Professional Services Provided, State where Services are Provided, Size of Limits, Annual Revenues, Number of Professionals Providing Services, Loss / Claims History, and Type of Policy.

Do not be fooled by price alone. You could find yourself purchasing a cheaper policy that excludes all the Professional Services you provide. This of course would render the policy useless. Remember, defense costs are a significant portion of the cost of an errors and omissions insurance policy and a professional can easily spend thousands of dollars on defense costs for a matter that ultimately gets dismissed.

Each E&O insurance carrier has a different policy form and different exclusions. A properly structured E&O policy will offer your business proper protection with a competitive price for those coverages.

How Do I Find the Right Errors and Omissions Insurance Policy?

The first step to finding the right Errors and Omissions insurance policy is to find the right Professional Liability insurance agent. You would not use a tax attorney to defend a civil suit; likewise you should not use a workers’ compensation insurance agent to find the right E&O insurance policy for your company.

You should use an agent that specializes in E&O insurance to review your Professional Liability risk. Interview your agent and assess their qualifications and understanding of the industry. A Professional Liability agent or broker should have specific knowledge in dealing with your specific type of industry, have the requisite background and access to specialized insurance markets to assist you. Do not be afraid to ask for references.

When choosing the right E&O insurance policy you and your agent should work together to consider several factors, including:

1. What Professional Services do you provide? An E&O insurance policy should cover the specific Professional Services you provide. For example, are you a residential or commercial real estate agent, a life or property casualty insurance agent or even a structural or design engineer? It makes a difference in the policy you choose. Your errors and omissions insurance policy should spell out specifically the Professional Services you provide.
2. What is the legal structure of the business offering the Professional Service? Depending upon whether you are a Sole Proprietor, Corporation, Partnership, Limited Liability Company or other entity will determine who is covered under your errors and omissions insurance policy. For example, corporations have shareholders whereas LLCfs have members. Not all E&O policies address such issues correctly.
3. What Professionals are Performing Services on Behalf of our Company? Companies use a myriad of legal structures to fulfill their obligations. For example, companies can use employees, independent contractors, outside firms and other combination of professionals to fulfill a contract. Many policies do not cover services provided by independent contractors or others outside the corporate entity. Some policies will cover the services of independent contractors, but will not cover the independent contractor. In a real estate organization, for example, nearly all of the sales staff are likely to be independent contractors. An errors and omissions insurance policy that excludes coverage for independent contractors would leave the business at risk.
4. What Professional Services are provided by or to Related Parties? Some companies provide Professional Services to related parties. An example of a related party would be a real estate agency, where the real estate agency also manages a property owned by the broker. In an insurance agency, a related company might process claims. In both cases, with the wrong errors and omissions insurance policy, the insured would be left unprotected.

How do I get an errors and omissions insurance policy?

Determining if you can get an errors and omissions insurance policy is a relatively easy process. It starts with filling out an application for E&O insurance, which typically will ask for information such as name, address, type of business, annual revenues and something about your business. An application may also require financial statements or management bio’s depending upon the industry or company size. The underwriters need to understand what they are insuring.

by Mary Salerno, National Accounts Manager

Breach of Privacy and Breach of Security coverage provides protection for wrongful acts or claims resulting from unauthorized disclosure of personal and confidential information either as a result of your actions or the actions of another, such as a hacker. Most insurance agents and brokers E&O policies have not been updated to reflect the modern day exposures of conducting business electronically and fail to adequately cover such exposures.

Policy Form Exclusions

E&O policy forms often contain specific exclusions for claims “related to, arising from, or in any way attributable to a breach of privacy or a breach of security.” If your errors and omissions policy contains such exclusions, there is little doubt that a claim for Breach of Security or Breach of Privacy would be denied. Other E&O policy forms are entirely “silent” on this issue. That is, they lack a specific exclusion for such claims, but they also lack a specific coverage grant as well. In most cases it is our opinion that “silent” is subject to interpretation. When an insurance policy is “silent,” it is difficult to predict just how that policy would or would not respond. We recommend, when possible, that such coverage be specifically added to the policy language.

Breach of Privacy Risks

Insurance agencies collect, maintain and distribute confidential information from clients and others. Information such as tax ID, social security and driver’s license numbers, home addresses, financial and income information and even medical information protected by HIPAA. This information is entrusted to your care for use in procuring insurance. Typically this information is stored as an electronic file on a computer, laptop or a server. We see risks in several ways:

1. The unintentional disclosure through sending an email or through other electronic means such as a fax.
2. The unintentional disclosure through a lost or stolen laptop or disc.
3. The introduction of viruses/trojans that can disseminate confidential information to unintended parties.
4. The unintended consequences of a hacker.

These would each be considered a breach of privacy and/or a breach of security exposure and excluded under most E&O policies.

What can you do?

Review your own E&O policy or engage an expert to insure that you have adequate coverage. A thorough review of your policy will reveal whether you have sufficient coverage relating to this risk.

by Thomas Barrett, VP Commercial Sales

“Tail Coverage” for insurance agency E&O is simply the jargon for the Extended Reporting Coverage (ERP) feature usually found in a claims made policy.  It allows you to cover E&O risks, after the E&O policy has expired, for claims that may arise down the road.  It is not extending your policy period, but simply giving you more time to report an incident or claim to the carrier for professional services provided subsequent to the retroactive date listed in the policy and prior to the expiration date of the policy.  Many policies only give you the right to purchase such coverage in the event the insurance company cancels your policy.  Without this coverage, you are self insuring; the legal defense cost and damages are on your own dime.  Make sure that your policy has a bilateral tail; meaning that you can use this option whether you cancel or the carrier cancels your policy for reasons other than default.  If you retire, buy or sell an agency, or simply wind down your operation, this becomes an important policy feature.

Should you buy an agency from someone, you should insist that the seller buy tail coverage for at least a 3-year term; the seller typically bears that risk and cost.  If you sell your agency you should purchase tail coverage because you can still be brought into a suit about a past event.  If you wind down your operation to retire or simply dissolve the business, you should also obtain tail coverage to protect yourself from  an unexpected legal action  Suits concerning negligence are personal and having a live entity or dissolved entity may not protect your personal assets.

Here is an example of someone needing to purchase “Tail Coverage”:

An agency goes up for sale.  The purchaser of the agency requires a 3-5 year tail coverage endorsement.  The seller’s policy only allows for a 12-month endorsement.  Prior to selling his agency and his policy expiring, he finds he needs to locate a new carrier willing to extend terms for the additional coverage. This owner cannot sell his agency if he cannot find alternative coverage.

Our Firm has a solid understanding of this risk and has the markets to place such coverage.  Many agency owners are not aware that they can purchase additional coverage from an alternative carrier.  Often an alternative carrier can offer different pricing, terms and limits than the expiring carrier.  When we shop and negotiate tail coverage, we find that there are new carriers willing to quote lower premiums and differing limit options in contrast to the non-negotiable terms found in an Insured’s policy.  We have also been successful in identifying carriers willing to add tail coverage post policy expiration for Insureds who elected not to use their ERP option and later regretted that decision or for which their options have expired.  We have been approached by Insureds who purchase a 12 month tail, and when nearing expiration, decide to extend another 2-years or longer for their own peace of mind.  We have also been successful at placing this additional tail coverage with our carriers.

by Mary Salerno, National Accounts Manager

An insurance agent E&O claim that is becoming more common, relates to a an accounting error where the agent collected a deposit or premium and inadvertently failed to send it to the insurance carrier.  Most insurance agent’s E&O policies contain an exclusion for claims relating to such an error.  Exclusions may include remitting premiums, return premiums, commissions, brokerage fees or tax monies.  Accounting mistakes happen.  The wrong policy could leave you unprotected.

A common exclusion found in insurance agent’s E&O policy is as follows:

“This policy will not pay for any claims based upon, arising out of, attributable to, or directly or indirectly resulting from the failure to collect, pay or return premium.”

What can I do?

We believe that insurance agents should not be their own insurance agents.  Similar to plaintiffs should not be their own attorneys.  We have been very successful in enhancing our client’s policies to provide coverage for this type of exposure. Wording Not Recommended  One of our licensed professionals would be happy to review your policy and offer suggestions on how to improve your coverage.  We have a few pointers below:

Wording Not Recomended

Wording Recommended if claims relating to premium monies are excluded:

by Mary Salerno, National Accounts Manager

by Javier Gonzalez, Vice President of Sales

Given the recent trends in the financial market and the number of insurance carriers that are under financial review, now is a good time to look into the insolvency provisions within your E&O policy.  Most insurance agents E&O policies provide some level of coverage for claims relating to the insolvency of their client’s carriers.  However, the specific provisions, such as the carrier must be rated “A-” or “B+” or better by AM Best at the time of placement, may very.  Most agencies would welcome this type of enhancement, but be aware, there are also other provisions which may constrict the amount of insolvency coverage you really have.  Below are a few examples:

Some E&O carriers require you place business with a company with a minimum financial category rating of “X,” or “XII.”  Going further, some E&O carriers specifically state that the carrier you are placing business with must not have been downgraded for one year prior to placement of the client’s coverage even if it is an “A” rated carrier.  With the recent trend in the insurance industry, relative to the to financial stability of insurance carriers, there are several carriers under review and a few of them have already been downgraded.  This could leave you with uncovered insolvency claims.

Another example we have seen is an insolvency coverage enhancement within some policies but only for admitted carriers.  This would obviously not provide insolvency coverage for non-admitted carriers or risk retention groups (including captives, self funded plans, or other similar arrangements).  Many insolvency provisions found in an insurance agents and brokers E&O policy  do not allow for coverage for state guaranteed plans or funds as they may not be rated by AM Best, so naturally they do not fit the “A-” or “B+” or better provisions.  Many insurance agencies use several rating agencies such as Moody’s, S&P, or Demotech.  It is important to remember that most E&O carriers only recognize the ratings published by AM Best Company.  Be sure your agents are aware of this as they may be using these other rating agencies to determine a carriers financial credibility while ignoring a potential gap in their own coverage.

So the next time you are told you have “B+” or “A-” or better insolvency coverage in your E&O policy, ask if there are any special provisions that might affect your agency.  You may be surprised with the kind of insolvency coverage you really have.