Agents E&O Loss Prevention

Is specialization worth the risk?

A combination of the good, the bad and the ugly

By Curtis M. Pearsall, CPCU, AIAF

The benefits of specialization have been a common industry theme for some time. This is not to suggest that the days of the generalist are over, as many agencies either don't want to go in the specialization direction or would be hard-pressed to become a specialist because of the demographics of the communities they market to and serve. However, the many agencies that see the benefits that specialization can provide should "remove those rose-colored glasses" to also see the risks it can bring.

Marketing your agency as a specialist strongly implies to the public and other agencies that you are an "expert" on specific classes or lines of business. With this focus, you should have a solid handle on the exposures of those classes or lines, enabling you to better understand the needs and uniqueness of your clientele. Your markets will mirror your specialty and will have developed customized "solutions" and product enhancements that should be well received in the marketplace. Depending on the niche, you will need to do business in many states, which creates some issues. Many agencies, though, have successfully pursued their "specialization dream."

That's the "good." So what are the "bad" and the "ugly"?

A higher standard

One of the biggest issues agencies must understand is that "specialist" status could result in your agency being held to a higher standard of legal liability. In the event of litigation involving an errors & omissions claim, this standard could make the difference in whether you "win" or "lose."

In most, if not all, states, an insurance producer (agent/broker) has a common-law duty to obtain the coverage the client specifically requests within a reasonable time or inform the client of the inability to do so. In other words, the producer's duty is defined by the nature of the client's request and, absent a specific request for coverage, the agent/broker has no continuing duty to advise, guide or direct a client to obtain additional coverage. In layman's terms, this borders on an agent's being held to the standard of an "order taker."

In the legal liability arena, there is a phrase called "special relationship." Being an "expert"/"specialist" has the potential to raise the legal liability standard. Instead of being an "order taker," you could be held to the level of an "advisor," and thereby held to a greater duty to educate and advise the client of the necessary coverages. Consider this actual E&O claim:

The agency promoted itself as a specialist, in this case experts in D&O insurance. When a D&O claim was made under the policy, the carrier denied, due to a policy exclusion. The specialist broker was subsequently sued on the grounds that it was aware of the exposure the client faced and, due to its expertise, should have ensured that the policy provided the proper coverage.

Know your product

Specialists typically promote themselves as such to attract business. While this may enhance your ability to be successful, it also has the potential to create a heightened expectation in customers' minds that they are dealing with an expert and will get the best coverage possible. Once again, you could be held to be more of an advisor, not an order taker. Knowing your product inside and out should be your objective if you pursue the specialization path.

Publicly stating that you are a specialist implies you have a significant amount of business in your specialty. This should be the case, as this marketing "puff" will not go over well if, for example, it is discovered that you insure, say, only two accounts in the specialty.

When it comes to your E&O, many agencies may be of the belief that specialist status enhances the ability to secure this important coverage. There are several schools of thought on this. After all, as a specialist, you should possess the experience and expertise to manage these accounts. Take "claims-made" coverage as an example. Is an agent who specializes in this type of coverage and who theoretically understands the terminology a better E&O risk than an agent who writes only a handful of accounts? In some respects, yes; in others, no. The biggest drawback E&O carriers see is that they may lose some of their typical E&O defenses when an agent holds specialist status.

To be successful, a specialist will probably need to write business in multiple states. This is a potential drawback as E&O carriers like to see agencies that "service" their accounts and truly know the exposures. This is much harder to do if your customer base covers a significant number of states.

So, if you are a specialist, don't be surprised if carriers are not knocking down the doors to write your agency when you apply for E&O coverage. If they are willing to consider your agency, you may find yourself with a higher premium and maybe a higher deductible (or a less favorable type of deductible) than those agencies that are generalists. There is the possibility the type of business you write could influence the E&O carrier, but there are no guarantees.

The right path

Look to "sell" the E&O carrier on your expertise and your staff's proficiency in your classes of business. Advise the E&O carrier that you have procedures specifically designed for your specialty. In addition, indicate how long you have been handling these classes as this should be an indication of your proficiency.

Without a doubt, being a specialist has its rewards. Yet it is not without some risk. Understanding the issues involved with specialization will help you decide if this is the right path for your agency.

The author

Curtis Pearsall, CPCU, AIAF, ARM, CPIA, is president of Pearsall Associates, Inc., a risk management consulting firm that specializes in helping agents protect themselves. He is also a special consultant to the Utica National Agents E&O program. He can be contacted at curtis@pearsallassociates.com or (315) 768-1534.