Navigating the complexities of the insurance industry requires independent insurance agencies to be vigilant in mitigating risks, particularly when it comes to errors & omissions exposure. In today's volatile market, independent agencies face various emerging challenges that can lead to significant financial consequences.

In recent years, agencies have adapted to the pressures posed by the hard market. However, whether an agency has increased agency marketing, embraced artificial intelligence (AI) integration or combined resources via an agency aggregator or acquisition, agencies must adopt strategic measures to safeguard their operations from an E&O claim.

Here are six key areas where agencies can focus their efforts to reduce E&O exposure and protect their businesses in an ever-changing industry landscape:

1) Agency aggregators. Over the past decade, there has been a significant rise in the number of independent insurance agencies joining clusters, networks, alliances or aggregators. These groups vary in size, ranging from a few members to thousands. They offer independent agencies key benefits that can be challenging to secure independently.

Aggregators leverage collective bargaining power. They allow small agencies to access large carriers and often provide vetted technology resources, offering a streamlined path to adopt necessary tools, sometimes at a discounted price. They also may offer training and other essential resources. These benefits have led to an increasing number of independent agencies joining these groups.

Aggregators and their members structure E&O insurance in different ways. The aggregator could secure a master E&O policy, under which all its members are insured. The master entity is listed as the first named insured, with members as additional insureds. This setup allows the aggregator to ensure all members have consistent coverage, simplifies administrative tracking and reduces the risk of gaps in coverage.

A significant downside of this model is the potential sharing of limits, which could leave members underinsured if claims exceed the policy's liability limits. Additionally, members might need specific endorsements for unique services, which can be difficult to manage under a shared policy.

An alternative structure involves each member securing individual E&O policies, allowing tailored coverage. However, this can lead to inconsistencies in coverage across members, and the aggregator may lack the capacity to verify the adequacy of each member's policy.

The recommended approach is a hybrid model: an E&O alliance program where the master policy provides a general framework, and each member carries a certificate of coverage with individual limits under a separate member policy. This setup offers the best of both worlds—tailored coverage for members without the risk of shared limits and simplified administrative management for
the aggregator.

2) M&A. In 2020, mergers & acquisitions (M&A) increased notably within the insurance industry, driven by private equity investment, large brokerages and retiring agency owners. When considering these transactions from an E&O perspective, it's crucial to start by securing a key adviser, such as a lawyer, accountant or underwriter, who specializes in M&A. Involving them early in the process ensures that potential issues are identified and addressed before the contract is signed, rather than uncovering problems too late in the process.

Due diligence is essential, especially for buyers. This includes reviewing the seller's E&O history and assessing its risk control measures to understand how it manages and mitigates E&O claims. One of the most critical acquisition decisions is whether to buy only the business's assets or to acquire its assets and liabilities.

From an E&O perspective, it is strongly recommended to purchase assets only. This approach minimizes exposure to unforeseen E&O claims that may arise from the seller's past actions, which might not be fully apparent—even after reviewing E&O loss runs and files. However, in some cases, acquiring both assets and liabilities may be necessary to close the deal, especially if the seller refuses to purchase an extended reporting period (ERP) policy and insists that the buyer assumes its liabilities.

Misunderstandings here can lead to significant E&O exposure, so it's essential to ensure that the purchase agreement—a vital aspect of the transaction—accurately reflects the terms of the sale. Additionally, the agreement should include an indemnification clause and outline the ERP requirements, ensuring that the seller is responsible for covering any E&O claims that arise from activities before the sale date.

3) Marketing. Exaggerated marketing assertions can expose insurance agencies to E&O claims. To make insurance seem more appealing, agencies may use hyperbolic language in their marketing materials, from websites and brochures to social media. This can unintentionally raise the agency's standard of care, increasing its liability if it fails to meet the expectations set by these exaggerated promises.

Agencies often describe themselves as “experts" or “specialists," or promise things like “best price" or “fully covered." These terms can be dangerous because they create unrealistic expectations, which can lead to E&O claims if the agency is unable to deliver on the promises. Terms like “fully covered" are particularly risky because they imply complete protection, which is rarely achievable in insurance.

To mitigate these risks, agencies should carefully review marketing materials and replace problematic language with more measured statements. Instead of saying, “Find the best coverage," an agency could say, “We will listen to your needs and help find solutions to address your insurance coverage requirements at a competitive price."

The Big “I" and its carrier partners have developed resources to help agencies identify and correct these issues. Agencies should regularly audit their websites, brochures and other marketing materials using these resources to avoid E&O pitfalls. This includes not just revising language but also keeping content up to date to avoid outdated claims.

4) Artificial intelligence (AI). The increasing use of AI in the insurance industry presents significant benefits and considerable risks. On the positive side, AI offers enhanced efficiency, accuracy and consistency in tasks such as policy form reviews. Unlike humans, AI can work around the clock without interruptions, potentially reducing costs and eliminating human errors. This can lead to significant time and cost savings for insurance agencies. However, the risks associated with AI are equally substantial. Given that AI's effectiveness depends on the quality of the data it processes, inaccurate data may lead to errors in critical tasks, such as policy comparisons. Relying solely on AI without human oversight could expose agencies to E&O claims.

Moreover, serious security and privacy concerns stem from the nature of insurance policies, which often contain sensitive information. Inadequate data security measures could result in data breaches or cyberattacks that represent major risk factors for an agent's clients and business.

The evolving nature of AI makes it difficult to stay on top of its benefits and risks, which change almost daily. While AI offers promising advantages, it's crucial for insurance agencies to balance its use with caution, ensuring human oversight and robust security measures to mitigate potential liabilities.

5) The hard market. The property & casualty insurance market has been challenging in recent years, with rising premiums, stricter risk selection and tighter capacity. While these factors have applied pressure to agency operations, these factors have also increased E&O exposure.

In the hard market, agencies often face nonrenewals and reductions in coverage terms and limits. To mitigate E&O risks, agencies must ensure that clients sign off on any policy changes or declinations, particularly when coverage can't be replaced. Proper documentation, including vetted and signed policy changes or declination forms, is crucial. Without these, agencies are vulnerable to E&O claims, particularly if they fail to offer appropriate coverage or reassess property values annually.

Agencies must avoid “rinsing and repeating" the previous coverage without a thorough review, particularly as fluctuating property values and construction costs require updated assessments to ensure clients are adequately insured. Documenting every offer and change in coverage can protect against potential E&O claims, making it essential to maintain diligent records in a hard market.

6) Carrier solvency. In the current insurance environment, carrier insolvencies and downgrades are making it crucial for agencies to diversify their carrier portfolios and conduct thorough due diligence. Relying on a single carrier, even if highly rated, can be risky due to potential downgrades or insolvencies. Agencies should regularly research and monitor their carrier partners, using resources like AM Best, Standard & Poor's or Moody's to evaluate carrier financial health, because conditions can change rapidly.

Moreover, education is essential. Agencies must stay informed and educate their clients and staff about the risks of carrier downgrades and insolvencies. This involves ongoing conversations about the importance of monitoring carrier health and understanding the potential impact on clients and the agency.

In scenarios where only specialty carriers or surplus lines carriers are available, especially in challenging markets, agencies must document their efforts thoroughly. If a client must accept a carrier that isn't backed by a guarantee fund, it's vital to secure client signoffs by acknowledging the risks involved. Proper documentation, including evidence of exploring other options and client acknowledgment, is key to protecting the agency.

Agencies must avoid complacency by regularly reassessing their carrier choices, staying vigilant about market changes and ensuring that both the agency and clients are protected through careful documentation and ongoing education. This proactive approach can help mitigate the risks associated with an unstable market and safeguard against potential E&O claims.

Even though agency E&O claims frequency has not increased, the amount paid on claims arising from these exposures has risen significantly. This is driven by factors such as higher property costs, inflation and larger jury awards. Lawsuit frequency remains steady, but payouts have been known to reach tens of millions of dollars. This trend highlights the increasing financial risks for agents in an environment where plaintiffs' lawyers become more adept at involving multiple parties in lawsuits to maximize potential payouts.

Amanda Juratovic is Big “I" Professional Liability assistant vice president of E&O operations.