Make No Mistake

• Dennis Gorski
• August 2014
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Nobody's perfect, and that's reason enough for professional service firms to carry lots of errors and omissions coverage with broad inclusions.

E&O is shorthand for a kind of insurance whose cousins include professional medical liability, cyberrisk products and directors and officers insurance. It primarily protects businesses against claims of negligence that result in financial loss.

Such allegations usually emerge when a client believes a professional service provider hasn't provided the caliber of expertise for which the company was hired, according to John T. Andreoli, CPCU, president and CEO of the Sullivan Group, a full-service regional broker headquartered in Worcester, Mass.

Andreoli is a graduate of Harvard University Graduate School of Business Administration, and holds an MBA from Clark University Graduate School of Management and a Bachelor's degree in economics from the College of the Holy Cross.

"There are so many different applications for the coverage, and there are so many different professions," Andreoli said. "Traditionally you think of architects, engineers, lawyers, accountants and management consultants. But there really are so many different businesses that have exposure where they provide a professional service for a fee."

And because it's a specialized product, E&O policies by and large are individually tailored--by industry class, coverage amounts, exemptions and the business profile of each applicant, Andreoli explained.

"I think having the ability to understand the different coverage forms and how they apply to different businesses is really the secret sauce in this business," he said. "That's one of the important things when you get in this space."

To be sure, the professional services industry is growing. According to the Commerce Department, in 2012, the U.S. professional services industry comprised about 760,000 firms with combined annual revenues of $1.5 trillion.

The industry employed 7.8 million Americans. The sector includes accounting, architectural, engineering, legal and management consulting firms.

Agents and brokers who want to serve this sector should be aware that its employees tend to be well-educated and paid better than average wages, according to Census Bureau data. But that shouldn't deter well-prepared insurance producers from getting a foothold, Andreoli noted.

"Obviously there are components [of E&O policies] that are similar but every company and every form can be different in terms of the way companies respond to different classes of business. So that's one of the important things when you get in this space. You have to understand the differences and explain what they'll mean to the insured."

One example he cites highlights different kinds of risk in the management consultancy space. On the one hand, Andreoli says, a firm might specialize in executive coaching; another may be advising a pension fund.

The risks of a negligence claim don't compare in magnitude, even though both would carry E&O. The executive coaching firm would probably have a bolt-on policy to its general business coverage, he said, while the pension adviser would have a separate policy with broader, deeper endorsements because "the cost of an error could be significant."

The pension fund adviser's limits and premium would be higher, too. Most E&O coverage is sold in $1-million layers with rates depending on underwriting factors including the applicant's financial history and revenue forecast, among other criteria.

Policies can cover a range of exposures, again depending on the client's area of expertise. All address "duty of care" failings and giving erroneous recommendations that cause a loss. Legal defense and punitive damages are included, along with reimbursement for attending court rather than being able to work. Some firms, like ad agencies, would opt for libel and slander and media/content liability cover; others, like a software development firm, may carry errors and omissions, information security, privacy and personal injury and media and content liability cover.

Other possible coverages can protect against claims of negligence by subcontractors or part-time employees, and their policy coverage reach can be local, regional or even global.

Andreoli's advice to agents and brokers who are interested in growth opportunities with E&O is to study the forms inside out, develop expertise in the chosen specialty and nurture long-term relationships at the producer and carrier levels.

"Understand what the terminology means in terms of how it impacts different insureds and different businesses," he said. "When you can develop that focus, you really can create a differentiator as someone who's specializing in placing and servicing E&O coverage. You can't go into this thinking that one size fits all."

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How to Sell Errors and Omissions Coverage

Who Should Have It: Anyone who is providing a professional service for a fee, where the ultimate result of an error or omission is a financial loss, as opposed to a bodily injury or property damage claim.

Purpose: The coverage defends against claims in court, even if they're without merit. Trigger is claims made or claims made and reported. Defense expenses are included within the limits of insurance, along with punitive damages.

Product Type: Can be bolt-on or stand-alone. Bolt-on coverage is usually utilized in small-limit, small-risk circumstances. Most E&O is written as stand-alone coverage through admitted carriers and, as needed, through Lloyd's and London market writers.

Exclusions: Bodily injury, property damage, contractual liability, ERISA or employment practices liability claims, pollution, disputed fees, fraud.

Premiums and Limits: From $500 for certain low-risk classes if attached to a business owner's policy, to $5,000 to $10,000 per $1 million of insurance for more sophisticated, riskier policies. Limits above $10 million are not uncommon.

Admitted or Surplus Lines: Written in both spaces. The trend over the past 10 years shows many carriers have developed expertise with these products in providing claims- and loss-control backup and now have a significant presence.

Underwriters Look At: Type of service provided by applicant; who are its customers and their businesses; applicant's revenues, volume of contracts coming in and what applicant supplies to clients--very important for understanding risk; partners' experience; and how applicant helps clients mitigate risks. Underwriters will examine revenues for last two years and projected revenues for next year.

Market Conditions: Not overly soft. Many players. Marketplace is good right now for availability of coverage. Andreoli sees a "more sophisticated market than it's been."

Capacity: Sufficient. Broad market in both admitted and nonadmitted spaces.

Andreoli's Words of Advice:

-- "An E&O policy has so many different facets that every word means something and there are no two policies that are alike."

-- "Having coverage that goes back as far as possible for wrongful acts is critical. Going forward, extended reporting periods (or tail coverage), are equally important, especially if a business is acquired in a sale or takeover. For example, if you have an attorney retiring, coverage for any claim resulting during the work life of that professional is critical. Basic tail cover is built into the policy but extended tail can be negotiated into the policy for either a specified or non-specified period after that."

-- "Have very strong contracts and quality controls in place for documentation of your service. Internal checklists need to be maintained that outline what basically has been done for your client over time. Have an effective risk-management process internally."

-- "Companies have been more receptive to entertaining a wider variety of risk and having underwriting expertise in these areas, so it's been a good thing for the marketplace."

Dennis Gorski, Best's Review managing editor