We’re not selling a shiny widget—something tangible for you to touch, utilize, and admire. We are selling a piece of paper and a promise to pay. We are insurance agents, and we cannot commoditize the peace of mind we offer our clients.

Insurance policies are not created equal, and you must understand the differences in coverage to properly insure your clients and yourself. When I started my career about 20 years ago, we were encouraged to pick a niche and become a master in coverage. I’m sure you’ve heard the adage: if you are a jack of all trades, you are a master of none. That advice remains sound 25 years later.

In fact, it’s one of the principles taught in our E&O risk management courses: do not attempt to write coverage you aren’t knowledgeable about. Trying to place insurance coverage that is unfamiliar to you is a huge exposure and increases your chances of an E&O claim. Stay in your lane, if you will.

Your E&O team consists of knowledgeable individuals when it comes to E&O insurance. We’ve been placing professional liability insurance for decades. It’s a unique coverage, unlike most of the insurance policies handled by most agents.

Claims-made…

Claims-made and reported…

Defense inside the limits…

Defense outside the limits…

Deductible (this one isn’t as straightforward as you’d think!)…

Retro date…

Is your head swimming yet? Let me help.

Errors and Omissions (E&O) policies are designed to protect your assets when you commit an alleged wrongful act. You want to be sure that when that happens, you have the protection you intended. It’s like the old saying, “Here’s where the rubber meets the road.” Your insurance policy needs to live up to your expectations.

Purchasing the right policy form that offers the coverage you need, along with the guidance of an agent who understands the coverage details, is crucial.

Claims-Made Versus Claims-Made and Reported

Errors and omissions policies are not occurrence-based policy forms; rather, they are written on either a claims-made or a claims-made and reported basis. Although they sound similar, there is a major distinction that is important to understand.

A claims-made and reported policy form provides coverage for claims made and reported during the policy period. If your policy is written on this basis, you need to review it carefully as it may require you to report the claim during a specific timeframe. I’ve seen policies with a 30-day or 60-day window, and the insured was unaware of that requirement. The claims-made and reported forms with this specific timeframe do not allow reporting after the expiration of the policy period.

Conversely, a claims-made policy form states that the claim must be made against the insured during the policy period and typically reported as soon as practicable. Generally, they allow reporting of the claim for a period of time past the expiration date of the policy. This is a major distinction and one of the reasons the claims-made policy form is more flexible than a claims-made and reported form.

How Does Claims-Made and Reported Work?

It’s helpful to put the claims-made and reported form into a practical example. Let’s say your agency’s errors and omissions policy period is Aug. 1, 2023, to Aug. 1, 2024. On July 15, 2024, you receive notice that a lawsuit was filed against you by a client who alleges you failed to procure insurance coverage for them. You report it to your insurance carrier on Aug. 8, 2024.

Under the terms of a claims-made and reported form, the carrier could deny coverage for this claim since it was not reported during the policy period. The policy language states that it only covers claims first “made and reported” during the policy period. Your claim was first made on July 15 and should have been reported prior to the expiration of the policy period on Aug. 1, 2024. It’s also important to note that the renewal of the policy does not extend the policy period.

Defense Inside or Outside the Limits

Professional liability policies are written either with defense inside the limits of liability or outside the limits of liability. Defense inside the limits means covered defense costs erode your limit of liability, which impacts the amount of money available to pay damages awarded to a plaintiff. It’s preferable to have an errors and omissions policy that has defense costs outside the limits of liability.

Defense outside the limits of liability does not impact the amount the insurance carrier will pay to defend you against an alleged wrongful act, and it doesn’t reduce the amount of recovery available to a claimant. As a result, defense outside the limits offers you more protection.

Deductible

Choosing the right deductible can be confusing for some. It’s not the selection of the deductible amount that trips people up, but rather the application of the deductible that can lead to misunderstanding.

What does that mean? When completing your errors and omissions application or electing which coverage to bind on your quote, you may have options for selecting a deductible that states loss only or loss and litigation (litigation is sometimes referred to as claims expense, defense cost, etc.). These choices don’t refer to coverage, which is a common misunderstanding.

Choosing between loss only and loss and litigation determines how your deductible will be applied if you have a claim under your policy. Loss only means that your deductible will apply to payments for loss. Similarly, if you choose loss and litigation, the deductible will apply to payments for both loss and litigation expenses.

Regardless of which deductible you choose, you will still have defense for claims reported to the insurance carrier (subject to the terms and conditions). However, whether or not you pay the deductible for the cost of defense depends on the option you select. If this sounds foreign to you, you could be insured with a carrier that doesn’t provide the option to have your deductible apply to only loss payments (which means you may be on the hook for paying your deductible for defense costs). Be sure to read your policy to find out.

Retro Date and Prior and Pending Litigation

It’s important to understand what the retroactive (retro) date is and how it applies to coverage under the claims-made policy form. A retro date is used to exclude coverage for wrongful acts that allegedly occurred prior to that date, even if the claim is made against you during the policy period. Frequently, the retro date is the same as the first policy effective date you purchased.

Insurance carriers are also willing to extend the retro date, or look-back period, to what is referred to as “full prior acts.” This provides coverage for the entire time you’ve been in business. If you move between carriers, it’s crucial that the new insurance carrier provides the same retro date to avoid any lapse in coverage.

Beware of the use of a prior and pending litigation date, which excludes coverage for any litigation proceedings that began prior to that date. This exclusion is absolute and doesn’t require that you have knowledge of the pending litigation. If a lawsuit is filed against you and the date of the pending lawsuit occurs before the prior and pending date, there is no coverage afforded to you under the policy. In most cases when a prior and pending litigation date is used, the carrier lists the date as the first coverage date for the insurer—even if the retro date of the policy is being honored from the previous carrier. This can create serious coverage gaps.

Need Help?

This list is not meant to be exhaustive but serves as a guide to the most prominent features to consider when evaluating an errors and omissions insurance policy. There are many other unique features you must consider to ensure you have the right coverage.

If you are concerned about what’s in your errors and omissions policy, we are happy to help. Reach out to us today—we are the agent’s agent.

About the Author

Ashley Riley is the Director of Risk Management for Ohio Insurance Agents. She is responsible for helping independent agents protect one of their most significant assets, their businesses. Ashley is a seasoned professional with two decades of invaluable experience in the insurance industry with a track record that spans claims handling, underwriting, and adeptly leading the Agency Services team at OIA. 

One of Ashley’s distinctive contributions is empowering independent agents to fortify their agencies against potential risks. Through knowledge, mentorship, and an understanding of the insurance landscape, Ashley has become a reliable ally for those navigating the complexities of risk management. Ashley’s professional philosophy is rooted in a passion for safeguarding clients’ interests. This attitude ensures the protection of assets and fosters enduring relationships with clients and colleagues alike.  

Ashley graduated from The Ohio State University with a bachelor’s degree in risk management. She and her family currently reside in Gahanna; outside of work and spending time with her family, she enjoys traveling, cooking, and reading.