Is agency E&O heading toward a hard market?

Various factors point to a move from a soft to a hard market

By Phil Zinkewicz

Even the most dedicated insurance agents and brokers can find themselves having to defend against an errors and omissions lawsuit for one reason or another. Some reasons for an E&O lawsuit include: failure to place coverage or failure to place adequate coverage, placement of coverage with a carrier experiencing financial difficulties, and failure to notify the insured of policy expiration or cancellation.

Following Hurricane Katrina, there was a spate of E&O lawsuits against agents and brokers because insureds alleged they were not informed that their homeowners insurance didn’t cover damage by floods. In today’s troubled economy, E&O lawsuits are on the rise and at least one expert believes it may not be too long before the current soft E&O market turns hard.

Mark Lann of Modern Insurance Consultants, a hybrid of retail and wholesale accounts whose primary book of business is in the agents and brokers E&O area, says that the market has been soft because there have not been enough premium dollars to support the business. “I don’t think the business has been properly underwritten,” he says. “It has been underwritten just to chase after dollars. The E&O market was really soft last year. However, I think that the market will harden this year. There are already signs. Lexington Insurance Co. has instituted a rate hike of about 7% in E&O.”

Crump Commercial Insurance Services, the nation’s largest wholesale broker, maintains a large and growing book of agents & brokers E&O business. Among the markets it uses for this line are Great American, Darwin and Excel.

Ben Gibb, senior vice president for Crump’s San Francisco financial services team, says, “For the brokers that are among the 100 largest in the U.S., the majority of accounts over the last few months have been renewed at lower prices with broader protection. On some smaller agency accounts there has been some firming of E&O prices.”

Garrett Koehn, executive vice president of Crump San Francisco, points to three options that retail agents and brokers have for covering their own E&O exposures. “They can place their own E&O insurance directly with the carriers they already represent; they can go to another retailer with whom they have a friendly competitive relationship; or they can use a wholesale specialist, such as Crump, to place the business.”

Gibb and Koehn point to a number of reasons why the last alternative can be preferable.

“In dealing with another retail agent, there is potentially sensitive information to be shared,” says Koehn. “We treat that information with complete confidentiality. We also bring a lot of risk management strength to the E&O line, including our expertise in some of the same E&O exposures that we handle for other professionals—in technology, financial services and legal services.”

Gibb says as a wholesaler they can provide a comfortable distance between the agency and its regular carriers in some situations—such as when the agent decides to move its own E&O business away from one of its regular carriers.

Crump provides in-house E&O seminars where agents can obtain CE credits, in addition to any such seminars its carriers may provide for agents.

Michelle Duffett, executive vice president of Insight Insurance Services, Inc., a program administrator specializing in the professional liability field, points out that CNA has dropped out of the agents and brokers E&O market. “No one knows the reason but, then again, CNA, while having a large presence in other professional liability lines, really had only a small presence in E&O. Nevertheless, a price war has erupted for the business that CNA has turned away,” she says.

Asked what is having the greatest impact on the agents and brokers E&O market today, Duffett says that, without a doubt, it’s the economy. “E&O insurance sales are lower. E&O premiums are down because the economy is down. People are losing their jobs, so workers compensation sales are lower. There is a trend towards buying lower limits of coverage. When premiums are down, commissions are down.”

Duffett says that lowering limits of coverage is a dangerous thing. “We at our agency would certainly not recommend it. But when money coming into the business is diminishing, sometimes you have no choice.”

The risk management side

On the risk management side, Duffett says that she has noticed a definite trend towards producers looking at the stock market more than before. “In addition to monitoring Best’s ratings, they are monitoring insurance company stock prices. After all, AIG’s Best’s ratings were still high when its stock was falling. Now, agents and brokers are looking at what financial analysts look at,” she says.

Mark Wolf and David Hulcher, program leader and director of Agency E&O, respectively, for the Independent Insurance Agents & Brokers of America (IIABA), say that today’s market is still very soft. “The only direct indication of a possible change is CNA’s withdrawal from the market,” they say. “Also, we’re watching the reinsurance environment carefully. Reinsurers are raising their rates in general because they’re not making money. When that happens, primary companies have to raise their rates as well.”

Add to that the general economy, say Wolf and Hulcher. “There are not many people still working in the insurance industry today who have seen this type of economy,” Wolf points out. “I think it will only be a matter of time until the E&O market hardens, probably in 2010.”

Glenn Clark, of Rockwood Programs, also believes that the E&O market is in for a hardening. “Although still very active in the agents E&O, AIG, given its current situation, could curtail writings and that would result in some displacement. As for the CNA situation, there has been a lot of displacement there. Lawsuits are not yet on the rise in any significant way, but there are things that are brewing that may pop up later,” he says.

The claims side

On the claims side, most experts say that claims frequency in the E&O arena has gone up. Wolf and Hulcher of the IIABA say that, in this economy, agents are hard put as to how to advise clients. “People are looking for ways to reduce the cost of insurance in this economy,” says Hulcher. “After Katrina, there was a tremendous increase in E&O claims. Agents have learned that they have to improve the way they run their businesses. Agents have to document their files for defense against an E&O lawsuit. This is true of agency principals as well as CSRs. Agents have to do a risk analysis of a client’s exposures and document them. We have created a Big “I” Web site to help agents identify exposures that exist and the coverages that apply to help them do risk analyses.”

Curtis Pearsall, senior vice president of Errors and Omissions for Utica National Insurance Group, says that, in contrast to industry performance, his company has actually seen a reduction in frequency of E&O claims. “We are very active with loss control,” he says. “We publish articles on loss control and do speaking engagements on the subject. We cover such things as what agents can do today to avoid E&O claims tomorrow, and what they can learn from past claims to restructure their agencies. We have conducted 150 to 200 seminars on the subject of loss control for agencies.”

Pearsall says that the economy is bringing about many changes. “There are great many commercial building vacancies. Agency clients are dropping umbrella coverage limits from $5 million to $1 million. Agents should get every change in writing from the client. Documentation is of tremendous importance when it comes to E&O.”

Utica National has been in the agents and brokers E&O market since 1966, and has been a stable carrier through hard markets and soft markets, says Pearsall. “We look for good quality business, established agencies and start-up operations as well.”