Insurance agencies focus so much time on assisting clients with the right coverage that they sometimes miss a critical step: getting the right coverage for themselves.
When insurance agencies don’t adequately protect themselves, they face fines, loss of business, and, ultimately, closure. Taking a proactive approach to your agency’s coverage is crucial in protecting your business today and in the future.
Case Study: Error Leads to Insurance Agency Owing Millions to Client
One insurance agency recently discovered just how crucial Errors & Omissions (E&O) coverage can be. The agency was working with a sawmill on commercial property coverage and advised the client that they could lower their business income coverage premium by removing coverage for ordinary payroll expenses. They reasoned that if the sawmill was shut down due to a fire, hourly workers would be laid off and payroll expenses would cease. Excluding ordinary payroll coverage would allow the sawmill to purchase a lower Business Income limit without a coinsurance penalty.
The agency sent the application to a wholesale broker, who then received a quote from a surplus lines carrier. The quote did not mention an exclusion for ordinary payroll and it was also missing the 1/6 Monthly Limit of Indemnity option included in the retail agent’s submission, which suspends the coinsurance condition for the Business Income Coverage. The carrier sent the wholesaler the quote, which was sent to the retail agent, and then the retail agent presented it to the client. At no point did anyone involved realize the ordinary payroll exclusion and monthly limit of indemnity were missing, and the carrier issued the policy.
Unfortunately, a fire damaged the sawmill and the owners submitted insurance claims for the loss of business income. Because the purchased limit was under what was required by the policy condition, the insurance carrier issued a hefty coinsurance penalty. The sawmill only received an amount equal to 53% of its losses.
The sawmill sued the insurance agency, and a jury ordered the agency to pay the sawmill $2.2 million in damages for breach of contract and negligence related to the Business Income coverage.
The Right E&O Coverage: A Necessity for Agencies
While it’s not clear how much E&O coverage the agency had in the situation above, many agencies opt for the minimum (typically $1 million) since that’s all that may be required. For example, if that insurance agency only had $1 million in E&O coverage, they would have been responsible for the remaining $1.2 million.
Insurance agencies dedicate significant amounts of time to understanding their clients’ needs and the cost of risk, but they often neglect to consider this for their own business. E&O coverage is just as critical for insurance agencies since they advise their clients on protecting themselves.
Unexpected risks and issues arise all the time – and it’s happening more frequently in the insurance industry. For the second year in a row, the insurance industry saw the largest growth in digital fraud attempts with a staggering jump of 159% from 2021 to 2022. First-party application is the most common type of fraud, which occurs when someone submits an application to an insurer with false information in an attempt to obtain better pricing or coverage.
Understanding and preparing for these risks can save an insurance company millions in damages, allowing them to continue serving their clients while proactively protecting themselves against future issues.