(This is the second of a ten-part series highlighting significant coverage issues in agents’ E&O policies. Take a look at your E&O policy. If it includes the wording described below or something similar, you may need an E&O makeover. Contact Gunnar Kephart at IIAT Advantage E&O at 800.880.7428)
Defense Inside the Limit
Look for this wording: “The limit of liability available to pay damages shall be reduced and may be completely exhausted by payment of claims expenses.”
A policy with this wording covers the cost of defending you in court, but those expenses reduce the limit available to pay settlements or judgments against your agency. How important is that? It could be a significant problem, especially if you purchase a limit as low as $1,000,000.
Customers of IIAT Insurance Agency have experienced claims expenses in excess of $250,000 on several occasions. In one complicated case dating back to 2002, the allegations against the agency involve multiple claimants in a fraudulent scheme related to a nationwide program for insuring large property schedules. The agent was able to get the E&O carrier to use his preferred counsel, one of the most expensive law firms in the nation, to defend seven separate legal actions in a number of states. The carrier has paid more than $10 million in legal fees so far.
In another case, the E&O carrier paid $954,000 to defend an agency named in a class action lawsuit against a number of agencies and other defendants. The allegations involved mobile home insurance sales practices.
An IIAT policyholder is involved in a lawsuit brought by a former customer demanding millions for loss of income and reputation when a bonding company pulled the plug on his bonding line. He refuses to settle for any amount of money less than his demand, and so far the E&O carrier has spent more than $300,000 to take depositions and file motions.
These cases all involve E&O policyholders with defense costs provided outside their limit of liability. Imagine how these situations could escalate from mere annoyance to something much worse if their policy limits were eroded or wiped out by defense costs. The preferred wording to look for in your policy will clearly indicate that defense costs are covered in addition to the limit of liability.