2009 Professional Risk Symposium: EPL, E&O and Fiduciary San Diego, CA ~ April 29 & 30, 2009 Insurance Professionals How is the current market affecting your E&O exposures and coverage?

INSURANCE PROFESSIONALS: HOW IS THE CURRENT INSURANCE MARKET AFFECTING YOUR E&O COVERAGE? MODERATOR: Curtis Pearsall, CPCU, AU, AIAF, ARM, Vice President and Director of E&O, Utica Mutual Insurance Company PANELISTS: Robert Eilers, ACS, AIAA, AIRC, President and Owner, The Eilers Group Joseph Labieniec, Assistant Vice President, Darwin - E&O Underwriting Alex Wayne, CPCU, ASLI, RPLU, Vice President, A.J. Wayne & Associates Paul S. White, Partner, Tressler, Soderstrom, Maloney & Priess, LLP

How Is the Current Market Affecting your E&O Exposure and Coverage?

The Wholesale Broker’s Perspective More people are interested in becoming insurance agents in this economy A lot of qualified people are looking for work People from the industry have traditionally been able to find coverage People from outside of the industry – used to be difficult to place – coverage is now readily available Financing issues and cancellation for non-pay are common with new agents

The Wholesale Broker’s Perspective Payment issues - The non-standard marketplace will get submissions for accounts cancelled for non-pay: Vast majority are very small agencies The insured must provide an explanation for non-pay cancellations – health issues are the main reason We recommend that no financing be offered to agencies cancelled for non-pay…some will finance anyway

The Wholesale Broker’s Perspective Saving premium Limits reduction – not recommended sometimes necessary Increase deductible – is the savings worth it? Stay claims-free to get a loss free credit! Avoid areas that are considered more hazardous ▪Brokerage exposure ▪Surety, Med Mal, Professional, Aviation, Marine ▪Lower rated carriers and non-standard carriers ▪Tougher services – TPA, reinsurance, captive management Have good loss control procedures in place

The Wholesale Broker’s Perspective How to present your renewal after you’ve had a claim Provide a legible, professional application Explain your claims and steps taken to avoid a similar incident in the future Take a proactive, remedial approach – have an audit performed, even if one is not required If there is an element of fraud or dishonesty, address it and explain it

The Wholesale Broker’s Perspective Market conditions Market is still soft We expect changes this year Timing for a hard market is not good

The Underwriter’s Perspective The Underwriter’s Perspective Implications for the agency in response to the economic downturn – what measures are being undertaken that have potential impact Reductions in staff / not filling positions Failure to implement or a discontinuation of various risk management tools Steer business to carriers paying more commission to make up for decreased agency revenues Moving away from lines of business & professional services an agency knows best to increase revenue

The Underwriter’s Perspective Agencies will have to deal with ramifications that the economy is having on their clients To save money, some clients may : Reduce limits Restrict coverage Fail to purchase or drop “discretionary” coverage Move coverage to a weaker carrier, lower premium Insurance agencies will need to consider: How will they handle requests for the above Whether or not they need to amend their controls & procedures – particularly in the area of documentation

The Underwriter’s Perspective The Hard Market is coming…eventually Agencies will need to be aware that: Incumbent carriers will restrict terms / conditions and increase premiums More business will need to be moved at renewal Carriers will be less likely to make accommodations in the event of a claim Because of the above – claims frequency will increase Bottom line – an agency’s clients will be paying more and getting less – and unhappy clients bring claims

The Underwriter’s Perspective Now is NOT the time to reduce staff, discontinue risk management, etc. The economic downturn combined with the hard market will only make things more difficult for an agency Now IS the time to spend money and invest time – wisely – on the things that will help an agency avoid E&O claims in a down economy and a hard market

Mr. E&O Claims Prevention E&O External Audits Not as scary as the IRS Overpromise of abilities or services Previous examples where agency have under- delivered What is an E&O Audit Process Evaluating of agency E&O loss control measures and their current effectiveness Agency Management Issues (i.e. electronic management system)

Mr. E&O Claims Prevention The E&O Claims Rule Underwriting Reasons Claim problems Voluntary Audits Election of the agency Desire to improve operations Agency Mgt. Issues Practice Procedures

Mr. E&O Claims Prevention Building Agency E&O Claims Prevention Program Identify / appoint agency’s E&O Claims Prevention Point Person How to identify that person within your agency Develop internal procedures Utilizing development teams Keeping it practical and efficient Development of each department’s internal file audit form

Mr. E&O Claims Prevention Implement agency procedures Train staff Monitor use of procedures and workflows Conduct internal client audits Internal Audits quantify by staff member Internal Audits quantify by department

The Legal Perspective Two Risk-Enhancing Factors are at work simultaneously The economy causes insureds to seek lower costs by sacrificing all but what are perceived as “essential” coverages Certain types of liability claims are seeing increased frequency and will not decrease: Internet/Cyber Liability Intellectual Property Privacy torts Consumer protection-related class actions

The Legal Perspective These claims are insurable under specialty forms from major carriers and some niche players – however these coverages are considered non-essential by agents and insureds (until there is a loss)

The Legal Perspective Agencies relying heavily on construction industry and auto industry will suffer tremendously Will cause agents to search for business in other sectors with which they have less client knowledge and less coverage knowledge

The Legal Perspective These factors / issues will cause E&O claims to surface in a variety of areas: A.Infrequent but “high dollar” E&O for construction industry insurance failures – both first and third party coverage being inadequate, And some surety bond related E&O B.E&O for failing to provide infringement insurance and intellectual property protection to businesses that rely heavily on IP assets or which face uninsured infringement claims

The Attorney Speaks Factors causing E&O claims (cont’d) C.E&O caused by construction and auto industry agents seeking new business with which they have little experience D.E&O caused by inadequate first party coverage upon which insureds will rely as tort defendants become insolvent (more pressure on underinsured motorist coverage as a simple example)

Questions for the panelists??  Please identify who you are directing the question to

Thank you