(This is the sixth 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 Costs Subject to the Deductible
Look for this language:
“The deductible amount stated in the declarations shall be satisfied by payments by the insured for damages and claims expenses resulting from all claims.”
Deductibles on insurance agent E&O policies come in different types and sizes. There are two types of deductibles available from most E&O providers. One type is the first-dollar-defense (FD) deductible, where the deductible applies only to actual paid claims, so the agency pays nothing until the claim is settled or a judgment is rendered. The other deductible type applies the deductible to defense costs, as well as actual paid claims, and is called the defense-and-loss (DL) deductible.
If the agency is sued and the E&O insurer hires an attorney to defend the lawsuit, the agency will pay the attorney’s fees up to the amount of the deductible. In most cases, the attorney will bill the agency soon after the claim is reported, as he or she sets up a file, interviews agency personnel and answers the lawsuit. If the deductible is not fully paid by the time the claim is settled, then the balance of the deductible is applied to the settlement amount. With this type of deductible, the agency pays something even if the lawsuit is totally without merit and eventually thrown out.
Your E&O premium is affected by the type of deductible you select. An FD deductible is more expensive than a DL deductible.
If your E&O policy applies the deductible to defense costs, ask your E&O agent or carrier if first-dollar-defense coverage is available. If not, ask for alternate quotes from other markets the next time your policy is up for renewal.