COVID-19 may be dwindling as a widespread medical issue, but its repercussions are still being felt in the insurance industry. Lawsuits for business interruption coverage flooded courts, and even though most cases were resolved in favor of the insurance providers, they still required time and resources.

When insureds were unable to recover due to lack of coverage, they—and their attorneys— turned on their insurance agents, alleging that the agents were negligent in failing to recommend pandemic coverage. Most of these cases were also resolved in favor of the agents; however, they did become a learning experience for the industry.

Because of this, independent insurance agents, along with many other professionals, are reviewing their errors & omissions coverage and considering scenarios they might not have thought about in the past.

As with any major shock to the market, COVID-19 caused overall insurance capacity to contract. That meant prices went up, limits went down, and coverage was more difficult to obtain. Many businesses made tough economic choices regarding how much coverage they would purchase, while others had no choice because insurance providers were not offering favorable terms at premiums that they felt they could afford.

As a result, many businesses found themselves without the necessary insurance protection when an incident occurred. And in attempting to make themselves whole, insureds claimed that agents had not fully explained changes to policy terms, limits, retentions, exclusions or endorsements.

In some cases, agents countered that they were dealing with sophisticated clients who owned a business, understood the issues and had reviewed their policies. However, without documentation, agents found it difficult to prove that they had counseled their clients appropriately. Now, agents are paying more attention to their E&O policies, limits and exclusions, and are documenting their interactions with clients.

Agency Consolidation and E&O

Over the last few years, many independent insurance agencies have merged with others or have been acquired by large brokerages. However, a merger or acquisition changes the E&O exposure of both the acquired agency and its buyer.

Consider this example: A small agency with $500,000 to $3 million in revenue is absorbed by a large brokerage. The small agency has E&O insurance suitable for its size, locale and clientele. Those policies often have only a one-year extended reporting period (ERP). The buyer typically takes on the agent's E&O coverage and wants longer-term protection—usually three to five years—for potential tail claims.

The buyer needs a standalone ERP policy to protect itself, but such policies are difficult to obtain. Sellers should factor in agent E&O and their ERPs as part of their strategy for selling the agency.

Documentation: The Key to Obtaining E&O Coverage 

Even with more positive market conditions, the number of carriers willing to provide $10 million E&O limits is shrinking. Most are setting limits of $5 million and deductibles are increasing with individual restrictions that vary by insurance provider and agency.

What can agencies that are struggling to find the desired amount of E&O coverage do to help their case? The key is documentation.

Insurance providers want to see an E&O risk management plan in place. At a minimum, the plan should include a checklist of what agents should be doing and with management oversight.

Insurance providers want to know that the agent has documented client interactions, especially when the insured declines or reduces coverage, to eliminate accusations of negligence for failure to advise the client properly. The courts will ask for evidence that the client was fully informed, either through a signed document or a verified conversation.

Perhaps most importantly, agencies need to keep their insurance providers informed of any material changes. This includes the addition of new products, location changes, acquisitions and significant new hires.

If a claim is filed, the agent should contact the E&O insurance provider as soon as possible. Prompt notification allows the insurer to assist from the beginning. E&O carriers are usually well-equipped to deal with litigation and can help with defending the claim.

Laura Gookin is senior vice president at Berkley Service Professionals, a Berkley Company. She has more than 30 years of experience as a professional liability risk analyst.

The remarks in this piece are Gookin's and do not necessarily represent the views of Berkley Service Professionals or W. R. Berkley Corporation.