By David Thompson, CPCU
It’s very common that a customer asks his or her insurance agent a question like, “How high should the liability limits be on my CGL and auto policies?” It’s about equally as common that FAIA member agencies ask staff in our E&O department, “Please recommend a limit of insurance on my E&O policy.”
Tom Cotton is an FAIA member, FAIA Past Chairman, and also an expert witness in his “spare time!” I’ve had the pleasure of working with Tom in several E&O classes recently. Tom says when customers ask him, “How high should my liability limits be” his response is, “How big will the claim be?” Of course, Tom’s question does not have an answer because we never know what will happen. In my agency days, I used to answer a customer when they asked about the limits of coverage, “You need liability limits that are one dollar more than you’ll be sued for.” Tom went on to say that his “serious” answer to the customer is, “You should always buy as much insurance as you can comfortably afford.”
When it comes to liability limits for customers, agency staff should explain the coverage, quote what was requested, and then provide quotes for limits above what was asked for. In E&O classes, I stress, “Always quote at least the next higher limit, and maybe a few more above that.” That advice comes from work I have done with E&O defense attorneys. With technology today, that’s very easy. E&O attorneys will tell you that by quoting multiple limits of coverage above what was asked for, the agency is a lot better off if the limits on the policy are not adequate.
The same concept is true when it comes to selecting a limit of coverage on an agency E&O policy. How bad will the E&O claim be? That question, of course, has no answer. A few things to consider when selecting a limit of coverage for an E&O policy might be:
- What is the most expensive building you insure?
- What liability policy (umbrella) has the highest limit?
It makes sense that the E&O limit should be for the worst possible mistake by an agency.
I ran this question by Dan Britto who is an attorney at the Law Office of William W. Price. Dan and I have worked together on several E&O classes in the past few months. Dan has been defending agents in E&O claims for over a decade, and about 75 percent of his practice is E&O defense. His response to the question was:
I have many clients who ask the same question. I think it’s a slippery slope for an agent to "pick" the limits for the insured. In the world of CGL and auto liability claims, there is always the potential for a claim that will far exceed any given limits. As we discussed in our last seminar, the question on how high the limits should be should be answered with another question, "How big will your future claim be?" I think it’s a good way to open the conversation with the customer to make the point that there is no predicting or completely controlling how big a future claim might be.
After educating a customer on this point, I think the best practice is to "put the ball in the insured's court" by quoting various levels of insurance limits: $1 million, $2 million, 5 million, $10 million, etc. The insured should then be told to purchase the highest limits they can afford. The insured customer cannot later make the argument that his agent should have recommended a $5 million combined limit when the agent has a documented file that the insured passed on a $2 million quote. This practice puts the decision making on limits back in the insured's court, where it ultimately should be.
This practice will also educate the insured on the affordability of the next layer in coverage. I have sat in many depositions where the plaintiff, whether being truthful or not, will testify that "had they known how cheap an umbrella would be they would have most certainly purchased it IF IT WAS OFFERED." The insured cannot make that argument if the agent has a well-documented file where higher limits were offered, including the price or estimate of the premium, and the insured opted to pass on purchasing those higher limits.
The point is, at the end of the day, we don't want to be in front of a jury on an under insurance E&O claim where the insured tells the jury he relied on his insurance "professional/expert" to pick the limits for him, and the agent has no documentation of offering higher limits to refute that testimony.
As to purchasing E&O limits:
Unlike auto and CGL claims, most of the time we know what the cap will be on an E&O claim. Usually, the exposure on an E&O claim against an agent is what the insurance policy would have paid out had it been "properly procured." For example, if an agent negligently fails to renew a $1 million umbrella and there is a claimed loss of $5 million, the agent's liability is capped at $1 million. There are exceptions to this rule, such as consequential damages, but for the most part the worst day in court is set at the limits of the policy that was not properly procured.
Using this rule as a measuring stick, if an agent is writing policies with $ 5 million in coverage, then his or her exposure is $5 million. Ideally an agent should have E&O limits high enough to cover the largest policies they sell.
When I was teaching the Accredited Adviser in Insurance (AAI) designation classes a few years back, the textbook suggested several methods to use in selecting a limit of liability insurance:
- Buy all that is available in the market.
- Purchased based on a “comfort level,” as Tom Cotton suggested.
- Purchase until the cost per $1 million starts to increase. (I never understood that method to be honest.)
Insurance professionals who quote and rate liability insurance know that the cost to increase liability limits can be very small. For example, I just went online to look at my own auto policy. My current limits are 500/1,000/500 (with the same UM limits, STACKED of course!) on two autos, and my six-month premium is $654. (Yeah, Tallahassee is the land of inexpensive auto insurance!) To decrease those limits to 300/500/100 with 300/500 of stacked UM the savings would be only $25 per six months; less than four percent! On an E&O policy I recently saw, the quote requested was $1 million per occurrence with a $2 million ($1M/$2M) aggregate and the premium was about $1,800; the premium for a $2M/$2M policy was only 13 percent more.
In summary, whether you are providing a quote for liability insurance for a customer or looking at your own E&O policy, it just makes good sense to look at higher limits. Quote and recommend those for your customers, and also look at how in expensive it is to have higher limits of E&O coverage.
What does your agency do in these situations? Let us know by posting in The Community.
Copyright FAIA, February 2016