When it comes to E&O insurance, surprises are the last thing you need. For example, if a client begins to threaten you with a lawsuit, you want to know your E&O insurer will stand behind you, not that there isn’t enough coverage left in the policy to protect you. Similarly, there are many nuances in E&O policies that may catch you by surprise if you haven’t uncovered them ahead of time. Here are seven common examples.
- Did you know that all “claims made” policies aren’t made equal? Some policy forms are a purely claims made design, while others are “claims made and reported.” The difference? The latter provide coverage only if you file a claim within the policy term or within a short period thereafter. If you try to file the claim after either of those two-time frames, you may find yourself without coverage. Solution: read your policy to confirm which type you have.
- Does your policy cover your specific duties? To find out, read your policy’s insuring agreement to see how it defines professional services. It will typically be quite explicit about whom and what it covers. For example, one life insurance agent E&O policy has this definition: “Coverage is limited to general agents or agents with valid licenses in a client’s state or jurisdiction, as well as the general agent’s or agent’s state or jurisdiction, and who are involved in the sale or servicing of life, accident, and health insurance, disability insurance, and indexed or fixed annuities. Covered duties also include financial planning and supervision and training of agents.” The key point? Your actual duties must align precisely with the policy language in order for you to have coverage under the policy. For example, if you have a sideline real estate business, you will not be covered under this policy because those activities aren’t listed in the insuring clause.
- Are you familiar with your policy’s exclusions? One of the most common ways E&O policies surprise agents is when they file a claim and the insurer tells them an exclusion applies. If this has ever happened to you, you know how infuriating it can be. Solution? Whenever you purchase a new E&O insurance policy, immediately read the exclusions list. Doing so, for example, will show you’ll have no coverage for claims arising out of litigation that occurred before the policy’s effective date or were in process on that date. Or that E&O claim payments that benefit a family member won’t be covered. Or that financial advisors will not be covered for E&O losses if they use or disclose confidential client information or non-public information. There will be a dozen or more scenarios in which you might assume coverage, but that your policy, in fact, excludes. Study your contract so you know exactly what exclusions apply.
- Are you aware of the nuances of coverage limits? The first is the difference between per-claim and aggregate limits. As its name suggests, the former establishes a maximum dollar amount that can be paid on a given claim from an insured. The aggregate limit refers to how much coverage is available for multiple claims from one insured in a given year. However, shared limits introduce a further complexity. Here multiple people within a firm may be covered under one master policy with a limit that applies to every agent and/or advisor insured under the policy. So if the firm suffers a large number of E&O insurance claims in a year, which consumes the entire shared limit, you will be out of luck if you need to file a claim later.
- Did you know that some E&O insurance policies apply the stated deductible for all claims filed in a policy period? So if you have five claims and your deductible is $1,000, you will be on the hook for $5,000. Other policies provide for an aggregate deductible for multiple claims. In the example given, this might limit your deductible to only $2,000 in E&O claim outlays in a given year.
- Have you heard of E&O policies that apply your deductible to legal fees as well as to claim payouts? Policies with so-called defense-and-loss deductibles make you pay for legal fees up to the deductible amount even if the claim is ultimately proved groundless. Compare that to E&O insurance policies with first-dollar deductibles, which only require you to pay if you’re found liable and a claim payout is required. Obviously, the latter type is more appealing.
- Finally, does your claims made E&O policy have an extended reporting period or “tail” provision? This will allow you to file a claim even after your policy expires, as long as the wrongful act happened prior to the end of the policy period. Although most E&O policies have this feature, the length of the period can vary. EOforLess’ life/health agent E&O policy has an unlimited extended reporting period. This can be important if you are planning to sell your business.
E&O insurance policies for life and health insurance agents, P&C agents, registered investment advisors, and real estate agents and broker/owners have many other nuances. To make sure your business is fully protected, carefully read your policy’s fine print. This way, in the unfortunate event you need to file a claim, you will avoid nasty surprises that put you at risk.
But here’s the good news. Many of these surprises can be avoided entirely by purchasing the right policy in the first place. By reading specimen policies before you buy, you can select one from a company that doesn’t impose restrictive provisions. Shopping carefully can literally save you tens of thousands of dollars or more at claim time. Worth the extra work? You bet!
