By Richard Giroux
Is my coverage limit sufficient? This is one of the most frequent questions asked by our errors and omissions (E&O) insurance clients.
Consider the following scenario : a broker insures a restaurant in a shopping centre by means of a multi-risk policy with a $2 million civil liability limit.
Due to a fire caused by the restaurant owner, the shopping centre suffers significant damage, with various other businesses affected and/or closed for repairs for several months.
The lawsuits against the restaurant owner stemming from the various insurance claims total nearly $5 million!
Needless to say, the restaurant owner is facing a significant coverage deficit (nearly $3 million), so he blames his broker, claiming that he received bad advice. He sends the broker a formal demand letter holding him liable for the insufficient coverage.
And this is where the problem arises: the broker in question also has insufficient insurance, with only $2 million in E&O coverage!
Here's the best advice I can give you: choose the highest possible coverage limit depending on the type of portfolio you have.
In the event that a broker insures a risk with significant exposure that exceeds the brokerage's E&O limit, he or she is advised to pay close attention to how the file is processed; the file could even be worked on together with a colleague (double checking, audit) to ensure that the risk analysis is correct and that the proposals made to the insured are complete.
What about the deductible?
At RCCAQ Insurance, the preferred deductible amount for our clients is $5,000.
Taking into account the fact that when an E&O claim is filed, the deductible applies only to the effective loss (not to the legal defence fees), choosing an even higher deductible might be wise.
Brokers are sometimes reluctant to choose a higher deductible because they see limited benefit in the idea.
That is because most cases are settled based on legal defence fees, so no deductible applies.
So it would be better to choose a higher deductible and invest the difference in a higher coverage limit!
In this regard, E&O insurers do not all take the same approach. Some of them try to settle claims quickly to avoid having to pay legal defence fees.
That may seem like a good idea. But at the same time, the insured will have to pay the deductible. Settling an E&O claim quickly is not necessarily the best way to go!
Other insurers, such as our partner Westport (SwissRe), take a different approach, i.e. taking into account the broker's interests and liability. In some cases, that means providing the broker with the maximum possible defence, thus avoiding an unfavourable legal decision and/or avoiding payment of the deductible by the insured.
We recently settled a case involving a $25,000 lawsuit against a broker.
The case was settled to the advantage of our insured, despite the legal defence fees ($31,000), which were covered in full by the E&O insurer, even though the insurer could have simply acceded to the claimant's requests. That would have only cost the insurer $15,000, but would have also cost the broker the $10,000 deductible.
That's one way to recognize the quality of an E&O insurer. Not only on the basis of the premium paid, but also on the type of partnership you want to enter into!
If you have any questions, please feel free to get in touch with me.
