Why You Shouldn't Move Your Errors & Omissions Coverage Just Because It Is "Cheap"
Why it is tempting to cut costs on E&O insurance for your agency
When you receive a quote for your E&O insurance that is well below your current policy form it is very tempting to only pay attention to the perceived cost savings and choose a cheaper option. However, there are many risks associated in cutting the cost of your E&O insurance. Before moving coverage for a lower cost, consideration should be given to the current levels of coverage compared to the levels of coverage that will be offered after the move.
Other considerations may include:
- Are all unique endorsements such as Additional Insured Endorsements and Additional Insured for Vicarious Liability endorsements being duplicated with your new carrier?
- How will your retroactive be handled?
- Will your new carrier require you to purchase an extended reported period endorsement (tail)?
- Will your new carrier convey forward your previous retro date?
Key risks in cutting costs on E&O insurance
Let's consider the term "cheap" as it relates to E&O insurance. Cost doesn't always correlate to the quality of coverage being provided. For an insurance company to pay its claims, the insurance company's products must be priced adequately. It is not uncommon for an insurance carrier to become insolvent, leaving it unable to pay claims. More often than not, the reason that a carrier goes insolvent is because it was not pricing its risks adequately (prices were set too low).
Additionally, beyond claims, an insurance carrier is also responsible for costs associated with legal services required to defend a claim. Litigation costs today can amount to significant figures that most businesses and consumers would be unable to pay without the financial backing of an insurance carrier. If an insurance carrier becomes insolvent, then it can no longer meet its policy obligations to pay loss costs or defense costs on behalf of its insureds.
Even if an insurance carrier isn't insolvent, it can still be financially impaired, which could impact its ability to pay claims. While the guaranty fund is in place for insurance carriers that have gone insolvent (not those that are only financially impaired), it may not cover certain types of claims and typically has a cap of $300,000. It is not uncommon for an insurance agent's E&O claim to exceed that amount, leaving them responsible for the excess amount.
Reviewing an insurance company's financial rating should be part of your assessment in determining where to place your E&O coverage. If you place your coverage with an unrated or low-rated carrier, then you are potentially exposing your agency to a significant financial loss should that carrier become insolvent or impaired.
Top ways to cut costs on E&O insurance without sacrificing coverage or going “cheap"
There are several ways to cut costs on your E&O coverage without going "cheap" that can be effective without sacrificing coverage. First, many carriers will offer a premium credit if a certain number of staff within an agency complete an approved risk management course. Not only is completing a risk management course beneficial for the cost of your E&O insurance, but it can also reduce your risk of a loss. Second, you can explore increasing your deductible. Typically, as you increase your deductible threshold, your premium goes down. Additionally, office procedures are closely reviewed by an E&O underwriter and are commonly linked to E&O claims. As a result, assuring that your agency has solid office procedures in place will often lead to more favorable pricing.
Lastly, groups of insurance agencies (known as aggregators or clusters) are forming rapidly to assist independent insurance agencies with many of their needs. Among the benefits of these groups is the ability to participate in group E&O programs. By virtue of membership in these groups, the agencies may have access to E&O policies which are less expensive than what could be purchased individually in the marketplace. Economy of scale allows the premiums for the groups to be more competitive. If you are participating in an aggregator or cluster you should explore whether your membership allows access to a group policy typically with discounted rates without compromising coverage.
Why you should consider securing your agency E&O insurance with the Big “I" Professional Liability program
For more than 35 years, the Big "I" Professional Liability Program underwritten by Westport Insurance Corporation, a member of Swiss Re Corporate Solutions (rated A+ Superior by AM Best), has been the premiere choice of IIABA member agents for insurance agents and brokers E&O insurance.
The Big “I" Professional Liability Program offers not just a policy, but a comprehensive program for insurance agents. With the participation of Big “I" members from 50 states and the District of Columbia, we've grown into the largest and most stable insurance agents E&O program in the nation.
Find your state association to learn more or receive a proposal.
What are the benefits of a Big “I" membership?
- Research and surveys of successful independent insurance agencies: Big “I" studies classify top-performing agencies in six revenue categories, from small to large. These surveys help new and upcoming independent agencies tailor their operations and strategies for success.
- Access to Independent Agent magazine: Big “I" members receive a monthly copy of this magazine and weekly digital articles, including market trends and analysis to help agencies succeed.
- Assistance with hiring: Big “I" membership provides hiring tools, and it provides access to interview resources and job descriptions to help your new agency hire top talent for your team.
- Access to Virtual University: The Big “I" Virtual University provides new independent agencies with a huge research library on numerous subjects, including certificates of insurance, commercial lines and personal lines. It also has experts standing by to answer tough coverage questions.
- Insurance company contract reviews: Periodically, the Big “I" Office of General Counsel reviews and provides observations of key provisions of insurance company agent agreements.
- Branding resources through a consumer brand, Trusted Choice®: Being independent doesn't mean going alone. Trusted Choice, the recognizable consumer brand from the Big “I," provides a host of tools, with a special emphasis on digital marketing and branding. You don't give up your agency's identity; instead, you co-brand your agency with Trusted Choice to explain to your customers what is different about independent insurance agencies.
- Agency listing on TrustedChoice.com: Big “I" member agencies appear on the largest directory of independent agencies available to consumers. TrustedChoice.com has driven more than 30 million insurance shoppers to independent agents over the last few years.