Are Your Clients Carrying Adequate Limits

by Curtis M. Pearsall, CPCU, AIAF, CPIA, President – Pearsall Associates, Inc. and Consultant to the Utica National E&O Program

There’s a good chance that the answer to the question posed above is “maybe, maybe not” or “I’ll tell you after a claim whether their limits
were adequate.” Needless to say, after a claim occurs, it is impossible to do anything about the limits. When looking at E&O claim statistics,
most E&O carriers will report that 6-8% of all E&O claims involve the issue of inadequate limits. For the purpose of this article, the focus is
on liability limits, including umbrella coverage for personal and commercial clients.

Suppose your agency is faced with an E&O claim. While each situation and fact pattern is likely a little different, the goal is to have a strong
defense that protects your agency. There are two E&O claim buckets: one filled with the issues that will be part of the agency’s defense,
and the other filled with the issues that the plaintiff’s attorney will be looking to use to find your agency negligent. Make sure that the agency
bucket is overflowing with strong defense items.

A good starting point when dealing with liability limits is acknowledging that it is extremely difficult, if not impossible, to predict what the
proper limits are. Benchmarking data is available for many commercial industry classifications and, while this has benefit, caution should
be exercised. Benchmarking data advises what clients of a certain size (revenue, sales, etc.) are carrying. This data does not mean
that the limits noted are appropriate for your client.

Below are several suggestions on how to address limits and to include in your “defense bucket” at the time of an E&O matter.

  • For a new client, don’t just duplicate the coverage they currently have. Make a concerted effort to better understand your client and to determine the potential liability issues and ramifications. Every day, we hear stories of events occurring in our country that were probably not considered and, in some cases, redefine the “worst that can happen.” Fortunately, this should help agents to navigate the issue of liability limits through discussion of “what’s your typical liability claim” as well as “what’s the worst that could happen.”
  • If the client insists on “just give me the same limits I have now,” the suggested approach is to include in the proposal either some additional limit options (such as additional umbrella limits) or a statement like “higher limits are available upon request.” The objective is to advise the client of options to consider. If limit options are provided, require the client to sign off on the limit they are choosing and those limits they are rejecting. This is called “customer accountability” and can be a strong element of an agency’s defense.
  • DO NOT recommend a specific limit! Recommending a limit implies to the client that this limit will be adequate at the time of a claim.Since claim size is impossible to predict, avoid recommending a limit. Once again, it is suggested to provide options for the client to consider.
  • Don’t assume the client does not need higher limits or an umbrella. There have been numerous stories involving agency staff that did not address the issue of an umbrella because they did not believe the client had the assets worth protecting. A common misconception is “they can’t sue you for what you don’t have.” But they can and will – and this may include garnishing wages for years to come. A recent story involved an agency staff member being asked by a client for their thoughts on securing higher limits. The client had a $1 million umbrella and was interested in securing higher limits. The agency staff member advised them that the $1 million umbrella was more than sufficient. As discussed above, it is impossible to predict the size of a liability claim, so the statement of the staff member is inaccurate and could put the agency in jeopardy in the event a liability claim exceeded the available limits.
  • Consider including some language on this topic in the cover letter to the client. Include language such as “Please note that the policy limits are those you have chosen and we cannot guarantee they will be sufficient at the time of a claim.” Although it might sound harsh, technically it is true.

Bottom line, predicting the size of a liability claim is virtually impossible. Following a few best practices could play a key role in your agency’s
defense should a problem develop.

Not sure you have adequate limits? Talk to the experts at TIPS (Texas Insurance Professionals Services). 

This information is provided solely as an insurance risk management tool. Utica Mutual Insurance Company and the other member insurance companies of the Utica National Insurance Group (“Utica National”) are not providing legal advice, or any other professional services. Utica National shall have no liability to any person or entity with respect to any loss or damages alleged to have been caused, directly or indirectly, by the use of the information provided. You are encouraged to consult an attorney or other professional for advice on these issues.

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