E&O: FACTS TO KNOW
Considerations regarding errors and omissions in relation to mergers and acquisitions
By Mark Angelucci, CPCU, ARM, AIDA
Insurance-agency-reported mergers and acquisitions (M&A) have set records each year since 2013. Based on publicly reported M&A activity, 15% of the agencies that existed in 2012 have been acquired.
While the publicly traded brokers and private equity aggregators get the headlines, privately held agencies are also active in acquisition activity. This means that members of your insurance agency network are being acquired and are acquiring agencies.
One of the items that is overlooked or left to the last minute is how best to address errors and omission (E&O) insurance. You and your network members should consider the following scenarios to address this issue.
If your network member is selling their agency:
1. Remember that the option to purchase Extended Reporting Period Coverage or a “tail” is offered only once and should be given strong consideration. In most cases, the buyer’s E&O coverage will not pick up the prior acts of the seller. The buyer’s E&O policy cannot be relied upon to pick up the seller’s prior acts exposure. The purchase of tail coverage may be your only option to cover this exposure.
2. Obtain premium indications for all tail options available by your E&O carrier-for example, one year, three years, five years, seven years and 10 years. A longer tail period provides longer protection of your assets. Payment in full is required for tail coverage to be in effect and must be mailed to your carrier with a written request noting the desired tail option. As noted above, a tail is offered only once, so you have limited time to purchase one.
3. Explore options for endorsements such as employment practices liability or cyber liability, which will likely have separate tails.
Based on publicly reported M&A activity,
I5% of the agencies that existed in 20I2 have been acquired.
If a network member is buying an agency:
1. Consult your policy for how long newly acquired entities are covered. Some policies provide up to 90 days. Contacting your E&O carrier for information can assist you in under-standing automatic coverage length and coverage options.
2. Consider performing an E&O audit of their files and records to determine how their processes and documentation vary from your best practices. This can help your staff be aware of the work necessary to bring those accounts and records in alignment with your own E&O loss control and risk management practices.
3. Require the selling agency to purchase Extended Reporting Coverage to avoid picking up errors made prior to the purchase. The longer the duration purchased, the more protection provided to your E&O loss experience.
If a network member is merging with another agency:
1. Contact all common and new carriers represented as a result of the merger to confirm you have binding authority and proper sub-codes.
2. Determine which E&O policy will “survive” the merger, obtain a copy of the non-surviving policy-including all endorsements-and make certain those coverages are included in the surviving policy.
3. Consider purchasing Extended Reporting Coverage for the non-surviving policy. Prior acts might be picked up under the surviving policy; however, that determination is at the discretion of the carrier.
In the rush to finish valuations or to consult with attorney and accountants, addressing the critical issues of insurance agents’ E&O coverage often gets left until the end of the transaction.
Referencing the items above can help to get some of the main issues addressed promptly when a member is buying, selling or merging with an agency.
Mark Angelucci serves as senior vice president and insurance agents’ Errors & Omissions segment officer at Utica National Insurance Group. He also oversees mono-line liquor legal business through its Founders Insurance subsidiary.
He joined Utica National in 2013 and previously served as vice president and senior underwriting officer. He brings extensive and diverse insurance experience to his position, with a background in underwriting, business development, and marketing/sales. He is a graduate of St. Bonaventure University in St. Bonaventure, New York, and holds the Chartered Property Casualty Underwriter (CPCU), Associate in Risk Management (ARM) and Associate in Data Analytics (AIDA) professional designations.
This information is provided solely as an insurance risk management tool. Utica Mutual Insurance Company and the other member insurance companies of the Utica National Insurance Group (“Utica National”) are not providing legal advice or any other professional services. Utica National shall have no liability to any person or entity with respect to any loss or damages alleged to have been caused, directly or indirectly, by the use of the information provided. You are encouraged to consult an attorney or other professional for advice on these issues. Utica Mutual Insurance Company, its affiliates and subsidiaries, New Hartford, NY 13413