E&O Insurance
Chapter 4
The Policy
By Any Other Name . . .
Insurance agents know the policy by the name of E&O insurance. Doctors and attorneys call them malpractice policies, and security dealers call such insurance a blanket bond policy. Whatever the name happens to be, it is liability protection for professionals.
Financial planners have less to choose from when obtaining liability protection for their role as a professional. Currently, some of the liability coverage is supplied by the companies who market the products used. The problem is the narrowness of these policies. Insurance agents, for example, are covered for the actual insurance policies sold under E&O insurance, but not for sales of products that are not specifically insurance. This is an important point. We have seen lawsuits filed against agents who were selling revocable living trusts. Their E&O liability policies would not cover any liability which resulted from these sales because it was not an insurance product.
For any risk to be insurable, certain elements must exist. A very important element is the ability to determine what the loss could be. When nursing home policies first came out, underwriters complained that they felt they were working without any guidelines. As one underwriter put it: “I am underwriting with a crystal ball.” The reason was simple: there were no facts or figures from which to gain insight into possible profits or losses for the underwriting companies. It was a new field with little data. As a result, the early policies had so many restrictions that they were nearly worthless.
A similar situation existed for financial planners. Because there was so little data available insurance companies were reluctant to enter into that market. Until that data emerged, financial planners and insurance agents who dealt with financial planning elements had little options for their liability coverage. Today, this is not the case. There are policies available.
An insurance company looks at several elements when putting together an insurance policy for sale:
1. a marketplace that will support the existence of the policy (enough people who will purchase it);
2. the loss must be able to be measured; the insurance company must be able to tell when a loss has happened, and the size of that loss;
3. the loss must be unintentional. No insurance company wants to issue a liability policy for intentional acts! Herein lies one problem. While the financial planner would surely say an error or omission was unintentional, the client may still sue on the basis that they consider it to be intentional. Intent could be a vital issue.
4. the quantity of losses must be measurable. In other words, the insurance company must be able to know that most financial planners will not be sued. If there is the possibility that large quantities of planners will experience a lawsuit, it is not likely that an insurance company would want to develop such products. After all, the end goal of the insurance company is a profit. They want to end up with a profit after all losses have been paid. If too many lawsuits are likely, the risk becomes uninsurable.
Financial planners can find liability protection, but there are less policies to choose from. Insurance agents (who are not financial planners) have more options, since E&O insurance has been marketed for many years.
There are two basic types of professional liability policies:
1. claims-made, and
2. occurrence policies.
A financial planner is most likely to find a claims-made policy than an occurrence policy. A claims-made policy is more rigid since it covers only claims filed during the time the policy is in force. This is an important point, since many lawsuits are filed years later. Even if the claim is based on a date during the time in which the policy was in force, once the policy has lapsed, it will no longer cover the claim. An occurrence policy covers any occurrence during the time the policy was legally in force, even if that policy has now lapsed.
Even though an occurrence policy is harder to come by, the value of them is considered better by some professionals. Most lawsuits do not happen immediately. They happen much later when the client or their family sees results that surprise or disappoint them. Since the 1970s, most liability insurance written for doctors and attorneys are claims-made policies. If the professional keeps themselves insured, a claims-made policy will be adequate. The secret to being protected, of course, is continued coverage. Primarily, policies now tend to all be claims-made policies.
Why would insurance companies prefer claims-made policies over occurrence policies? While there are differing opinions, many feel claims-made liability policies offer more protection for the insurance companies. Such policies limit the duration for which the insurance company is liable. With an occurrence policy, the liability for the insurer could potentially go on forever, unless a clause limited it in some way. This point was especially demonstrated by the asbestosis class action suits. People who had been exposed 30 years ago were winning settlements against corporations exposing their insurance companies to huge payouts through occurrence policies.
While asbestosis is a well-known case, any product liability suit can develop at any time. We have seen many examples of this over the years. There are likely to be many more cases in the future as today’s products experience results that were not anticipated.
Insurance companies face another problem: the exposure theory. This holds that an insurance company can be held liable once a person is exposed, regardless of when the disease or disability actually becomes recognizable. Another theory is the manifestation theory which states that the insurance company cannot be found liable until the disease can be diagnosed. Yet a third theory, called the triple trigger theory, states the insurance company can be found liable from the time of exposure all the way through manifestation of the disease. Obviously, the triple trigger theory is the most damaging for the insurance company. Of the three, insurance companies would prefer to deal with the manifestation theory.
Because the courts place blame based on the exposure of many conditions, insurance companies face the problem of determining exactly when the occurrence happened. For the insured, this can also be a problem if they must prove coverage during occurrence. Since professionals need to be covered continually, in many ways it can be easier to simply deal with claims-made policies.
Different professions have different policies. Each profession must be covered for the perils their profession faces. There will be similarities and differences in the various types. As previously stated, liability coverage for insurance agents is called E&O policies. E&O stands for errors and omissions. Such policies pay on behalf of the insurance agent or broker should a lawsuit arise. The policy, within the bounds of policy limits, will pay all sums for which the agent is found legally responsible due to any negligent act, error or omission of the insured or, if applicable, their employees in the scope of business conduct. It is important to note that this applies only to business as general agents, insurance agents, or insurance brokers. It absolutely would not apply to business that was not related to insurance products. While this might seem self-explanatory, many agents now also deal with noninsurance products. These include such things as prepaid legal and revocable living trusts.
Even when the issue is an insurance product, the policy will not cover lawsuits under all conditions. Some things are still excluded. Exclusions would include such things as dishonesty, fraudulent, criminal or malicious acts, libel, and slander. Of course, E&O policies do not cover such things as physical injury, sickness, death of any person, or property damage. This would be true even if injury or property damage happened directly due to the actions of the agent. E&O policies directly relate to the sale of insurance products in the scope of statements made or implied, and omissions of necessary information. The agent can be covered for liability to the clients themselves, to third parties who have an involvement, and to the insurance companies for which they work. Liability amounts vary. Obviously, the agent is covered only to the limits of the policy they own. Some may be for as little as $25,000 per claim/$75,000 single limit, but it is best to carry much higher limits. It is not at all unusual for an agent to carry policies with limits in the millions of dollars.
Some license lines of insurance tend to be insured more often than other lines. Property/casualty lines generally must carry professional liability insurance in order to work. The insurance companies they contract with require it in most cases. In addition, because E&O policies are a type of property/casualty coverage, these agents better understand how they work. Property/casualty agents are accustomed to the terminology, whereas life/health agents may be less schooled in the types of benefits offered by E&O policies. Property/casualty companies may offer policies only for their agents, with policy clauses relating directly to this field of insurance. Life and health agents may need to contact their companies for professional liability policies which relate to their areas of business. Such policies can be quite specific, so it is important to understand who the policy is intended to benefit.
Insurance Agents
Insurance professionals are realizing how vulnerable they are when it comes to professional liability. The legal profession moves from occupation to occupation in their quest for lawsuits. Insurance and financial planning is sure to be hit massively within the next few years. Some of the suits will be well deserved since there has been little regulation enforced in some areas of financial planning. Other suits will be frivolous and undeserved.
Industry experts have not missed the coming trend. An analysis done by Shand, Morahan, administrators of the National PIA Errors and Omissions Insurance, makes this point clear. Their analysis revealed that three fourths of all liability claims fell into three categories: 44 percent resulted from failure of the agent to place coverage correctly; 22 percent resulted from not placing insurance coverage where it was needed (none at all); and 9 percent resulted from the failure to forward and/or process a renewal of an existing policy. Seven percent of the claims resulted from agent failure to advise the insured of a pending cancellation of an existing policy. Only 1 percent of the claims came from dishonesty or fraud. This study shows that agent judgment is a primary cause of lawsuits.
Financial Planners
In the beginning, financial planners had difficulty obtaining adequate coverage. Today, there are policies to choose from, although perhaps not in the quantity offered to insurance agents. Financial planners, as a profession, has only been in existence since the early to mid-1980s. That is not to say that there were no financial planners prior to that time; rather they were not recognized as a profession until that time period. There have actually been financial planners, for as long as insurance has been in existence.
Once financial planners were viewed as professionals, liability protection became a necessity. One of the first companies to offer liability insurance to financial planners was the Alexander and Alexander policy which was offered through the International Association for Financial Planning. They were expensive policies with costs coming in around $450 ($200,000 of protection; $100,000 per occurrence) for a planner with less than two years’ experience. As expected, higher limits of coverage were more expensive. As early as 1985, there were more than 1,500 policies issued. Of course, there were certainly more financial planners around the country than this, but it does show the awareness that was developing.
End of Chapter 4