2020 was packed with the kind of events that spark claim lawsuits, including the COVID-19 pandemic and subsequent lockdowns that depressed the economy, stressed healthcare systems, and drained both personal and business funds. Last year also saw an increase in cyberattacks, multiple hurricanes, and other disasters that have helped to solidify a hard insurance market for many lines.
All of these events have the potential to generate severe claims, which test the limits, terms and conditions of policies - sometimes revealing insufficient coverage, or none at all.1 Catastrophes also often uncover knowledge-based issues and operational problems at the agency level, which can generate a wave of E&O claims.3,1
Typically, agency E&O claims are a lagging indicator because plaintiffs usually only sue agents after exhausting legal action against carriers and coming up short. So far, 2020’s E&O claims haven’t hit in large numbers, but past experience suggests that a surge is coming. For example, in the first 4 months following Hurricane Katrina, 55 agency E&O claims were filed against Louisiana agents, but over the next 8 months, another 745 claims rolled in.1 Unfortunately, the COVID-19 pandemic is much larger in scope and severity, making it unclear what the full effect of claims will be.1
WHAT DOES THE MARKET LOOK LIKE?
In light of recent events, the Agency E&O market is feeling more stress than at any other point over the last 5 years. It’s not hardening in the same way many executive lines have over the last year, but the number of competitors is shrinking, terms are changing, and coronavirus exclusions are more prevalent as carriers seek to protect capital. The moratorium on writing new business was lifted late in the third quarter of 2020, and insurers are now looking for minor rate increases and employing more stringent underwriting.
The difficulties of a hardening agency E&O market are compounded by the fact that many other markets are offering coverage inconsistently. Agents are receiving wildly different terms for new business than for renewals, even when both accounts present the same kind of risk and level of exposure. Narrower renewal terms tend to result in more claim denials, which drives a subsequent increase in E&O claims. With D&O, cyber, and healthcare business, agents are seeing major market changes and a greater potential for E&O exposure because business isn’t always being marketed well. Retail agents that aren’t marketing every year, are more likely to be involved in E&O lawsuits because they’re opening themselves up to the accusation that they could have gotten more or better coverage elsewhere in the market.
WHERE ARE AGENCY E&O CLAIMS COMING FROM?
The most common E&O allegations leveled against agents include failure to recommend, obtain or duplicate coverage, failure to appropriately identify exposures or promptly handle claims, and negligent misrepresentation.3 It’s expected that agency E&O claims stemming from the COVID-19 pandemic will allege failure to recommend pandemic coverage or coverage without a virus exclusion, failure to submit claims promptly, and failure to recommend cancelation and event coverage.3
Currently, most of the reaction in the marketplace is being driven by big headlines related to COVID-19 Business Interruption (BI) lawsuits filed across the country. To date, none of the BI lawsuits have evolved into a watershed court decision. The courts are still sluggish, but at this point they’ve dismissed more than four times as many BI lawsuits as they’ve allowed.2 It remains unclear if there’s any veracity to the BI arguments being made, but in several states, including California, Texas, and Louisiana, plaintiff’s bars are being more creative in who they litigate against. In some instances, COVID-19 lawsuits are leaving carriers out altogether and attacking agencies directly.
WHAT RED FLAGS SHOULD AGENTS WATCH FOR?
Agency E&O claims can also be generated by “too good to be true” scenarios. Most agents and brokers know who the big captive management operators are and what they can realistically accomplish. When agents come across a smaller captive manager advertising the ability to place difficult casualty accounts, trucking, excavation, or mining operations, it should be a warning to tread carefully. For example, if the standard market premium is $1M for $10M in limits, and the captive manager is offering $200K in premium, warning bells should sound.
A harder market can certainly make some products more difficult to place, leaving room for fraudulent players to enter the market and offer alternative risk financing mechanisms or investment platforms that never fail to drive claims. For example, the 2008 financial crisis ultimately revealed extensive Ponzi schemes when financing dried up. Similarly, fraud is expected to drive the majority of large loss scenarios related to the coronavirus pandemic. The industry is already starting to see an increased number of captive managers and consultants behind E&O claims. Unfortunately, agents are discovering that some partners haven’t placed products as they were represented to all parties, resulting in big claims being filed now, when claims normally wouldn’t be expected for another 6-12 months.
The agency E&O line is also seeing claims come out of situations where agents failed to offer cyber coverage. Such claims are very difficult to defend because in most cases the liability is clear. In today’s digitally connected world, agents should always ensure that clients have adequate cyber coverage, especially when it comes to ransomware and social engineering.
WHAT ROLE DO INDUSTRY PARTNERSHIPS PLAY IN E&O RISK?
Over the last several years, the number of insurance firms has contracted even as client expectations around agent service have grown. Many retail agents are now taking on contractual responsibilities or expanding services offered, including making referrals or assisting with enrollment because it creates the opportunity for additional revenue. However, it simultaneously increases risk around the partnerships required to provide those extra services.
Ensuring high quality partnerships is important across all areas, but especially in the wholesale arena. Retail clients would be wise to stick to the 80/20 rule when choosing a wholesaler. Partnering with the same wholesaler 80% of the time builds strong relationships that can help see agents through difficult times. When markets harden, retailers often try to make placements on their own through big package policies, failing to pay attention to changes in exclusions and additional insuring agreements which results in claim denials. Successful agents that want to protect themselves as well as their clients, should consider turning to a trusted wholesaler for help navigating the hard market or meeting complex insurance needs.
Agents don’t have to be careful only when it comes to wholesale partners. Over the last 3-5 years, carriers have begun fighting losses using Reservation of Rights (ROR) letters and flirting with the line of bad faith, resulting in agency E&O claims across all lines. Many insurers are taking the litigation path if they think it can ultimately expand the bottom line. Carrier relationships should be carefully chosen and evaluated based on present behavior rather than past claims handling because insurers aren’t as reasonable as in past years, which further amplifies market issues.
WHAT ARE SOME BEST PRACTICES AGENTS CAN EMPLOY TO REDUCE E&O EXPOSURE?
The importance of due diligence can’t be overstated when it comes to reducing the risk of an agency E&O claim. It should be a constant focus and continuing conversation to ensure vendors, captive managers, and 3rd parties are explaining exactly where the client’s money is spent. At the beginning of any relationship, agents should thoroughly investigate the partners involved by obtaining and checking references and reviewing vendors handling claims, legal issues, or actuarial work. It’s also essential to confirm the professional liability or other relevant insurance limits each partner has in place, keeping in mind that partnering with large, publicly traded firms will lessen the need for a deep dive. When considering a partnership with a new or smaller firm, retailers will need to dig deeper. It’s recommended that once a relationship is established agents continue with a due diligence review on each account, every 12 months. It’s also important that agents fully understand their duties and the standard of care required by the state. In more difficult states like California, New Jersey, Louisiana, Texas, and Washington there may be wider opportunity for E&O exposure.
In the hardening market, it’s also vital that agents and brokers proactively communicate new exclusions and other policy differences to clients, and then document those conversations clearly.1 When working through changes in terms and conditions, agents should also document interactions with underwriting.3 If coverage, additional endorsements, or increased limits are offered but declined by the client, agents should make note, continue to assemble a full proposal, and then require the client to confirm the declination in writing. Finally, as a best practice, even if a carrier advises that certain claims aren’t going to be covered, agents shouldn’t discourage policyholders from submitting claims. Because the contract exists between the carrier and the insured, agents should not appear to handle coverage decisions.3
Unfortunately, the frequency of large-scale disasters and economic events is rising, and it’s not a risk that’s going away.1 The current hard market will see more claims being contested or denied, which will ultimately generate an increase in agency E&O claims. Agents should make every effort to perform solid due diligence when seeking out partners and engage in more communication and documentation around the coverage process to limit E&O exposure.1 CRC Group is a well-known, national wholesaler with the market reach and reliable partnerships agents need to address client needs. It’s also home to a wide variety of Professional Practice Groups that collaboratively monitor industry trends and market changes to provide best-in-class expertise and service to agents all across the country. Agents should contact their CRC Group producer to discuss how we can help them navigate the changes in today’s insurance landscape.
- Rommel Mayuga is a Senior Vice President and Broker with CRC Group’s Chicago office where he specializes in Financial Institution, Professional, and Management Liability coverage.
- 2020 Could Make 2021 the Year of Insurance Agency E&O Lawsuits, Insurance Journal, January 21, 2021. https://www.insurancejournal.com/news/national/2021/01/21/598096.htm
- Insurers Winning Most, But Not All, COVID-19 Business Interruption Lawsuits, Insurance Journal, November 20, 2020. https://www.insurancejournal.com/news/national/2020/11/30/592047.htm
- Will Agency E&O Claims Be The 'Next Wave' of COVID-19?, MyNewMarkets, August 26, 2020. https://www.mynewmarkets.com/articles/183680/will-agency-eo-claims-be-the-next-wave-of-covid-19