E&O claims are rare because most of the time almost no one has a loss, and if customers don't have losses, it is really difficult for an agency to incur an E&O claim. The math works like this: There are around 330 million people in the U.S. Many people have multiple homes and often multiple people live in one house. Let's assume three people per home or 110 million homes. There are around 9 million homeowner claims annually. This means somewhere around 8% of homes will incur a loss in any given year. That is not that many claims.
If something goes wrong with a claim from an insurance perspective 10% of the time, that is only 900,000 or an E&O issue equaling 0.8%. That is probably an overstatement, but even then, not much goes wrong even when it should go wrong, because I know that far more than 0.8% of homeowners' policies are written incorrectly!
I introduce the following with the above analysis because I want readers to take the following seriously and avoid thinking I am making the future of E&O claims look too dire. Even considering what does happen, most of the time nothing bad is going to happen from an E&O standpoint but going forward if agents do not improve their exposure analysis and coverage procurement, they will be less lucky.
Reason #1: Private Equity
E&O exposures are going to increase for many reasons but for three in particular. The first is that plaintiff attorneys are getting private equity to back their suits. It is really pretty simple. Many people and attorneys cannot afford to bring suits using only their own financial resources. Additional funding can greatly help them bring suits.
More businesses have suffered losses, not necessarily insurance claims but business losses, due to the economic shutdown than perhaps any time since the Great Depression. A lot of pain exists. A lot of anger exists. If someone gives you a lifeline, you probably are more likely to take it now than ever before. A phenomenal example of this situation is how Century 21, a bankrupt retail store has sold its $175 million insurance claim to its creditors (December 7, 2020 Insurance Journal). The article notes this claim is its most valuable asset!
Match desperation with money, lots of money and according to a CNBC article from June 2020, private equity has $9.5 billion of assets under management related to commercial litigation financing, just in the U.S.! Forty entities or so are providing the financing. The median return from one such firm is 52% for resolved cases after fees and expenses on an annualized basis!!!!!! Such investments are not for risk averse people but in a time of basically 0% interest rates, a potential 52% return is awfully appealing. It is my guess is these funds will attract more and more money.
Reason #2: Technology, Technology, and More Technology
Technology #1: Plaintiff Technology
All that technology designed to read pdfs and documents and then analyze what is contained in those documents are great for increased productivity and reduced drudgery. However, the plaintiff bar has discovered similar tools, including one that can go through your agency's files to discover inconsistencies in your processes from one customer to another.
You have likely heard numerous times in E&O classes that consistency is a key to successfully defending against E&O suits. Historically the plaintiff bar had to spend huge amounts of time and money to discover whether the agency was inadequately consistent. From what I have heard, this technology reduces the time required for a thorough search by 75%.
Just a note too, a judge can rule the plaintiff has a right to go through your other clients’ files to verify your level of consistency.
Technology #2: Insurtech
All that technology designed to make processing faster and easier may be creating new E&O exposures. I have already seen one E&O case based on the use of such technology.
In particular, any technology that fills in answers on applications and warranties and such, is a new E&O exposure. If the application is completed with incorrect information, who is responsible? My strongest recommendation is to never take answers at face value. Verify with your client the answers the software provides.
Similarly, the technology that overwrites information in the agency management system and/or inputs information in the system without verification. If for example, the application shows the answer is "X" but the software overwrites this with "Y" and that affects coverage, who is responsible for the error?
When software promises to go through your entire client database and fix or input data, who is guaranteeing the accuracy? Who is verifying the accuracy?
Reason #3: Emotions
Another factor is the loss of small agencies. Small, hometown agencies generate sympathy at times. Big agencies owned by private equity do not garner much sympathy from anyone.
However, here is the good news: You can get ahead of these issues with better E&O risk management. The best outcome of great E&O risk management is increased sales and simultaneously reduced E&O risk -- at least with the way I approach the opportunity this is the common outcome. If you are interested, and how can you not be interested, in reducing your risk and increasing sales, let me know.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.