By Richard F. Lund, J.D., Vice President, Senior Underwriter, Swiss Re Corporate Solutions*
At some point in your insurance career you may have to decide, is it time to sell my agency? Or, if you're making a transition in your insurance career, the opportunity arises to consider whether you should purchase an agency. In both situations, one of the most overlooked and under-considered aspects is what to do about the E&O policy.
A while back we presented a webinar with industry professionals about the entire aspect of selling or buying an agency. "Agency Risk Management Essentials: Navigating the Hazards of Buying, Selling and Merging an Agency" is available on the E&O Happens website (independentagent.com/eohappens) under the "News & Publications" tab in the "Risk Management Webinars" section. If you are thinking of selling or buying an agency, start there so you can learn about those things that you should consider BEFORE you take that big step.
What you do about the E&O policy is very important for you as the seller or the buyer to decide. Do you transfer the policy from the seller to the buyer, or does the seller purchase an extended reporting period (ERP)? Does the buyer purchase a new E&O policy? What makes the most sense? What are the ramifications? As an E&O carrier, we want both the seller and buyer to be aware of their options in order to make an informed decision.
Often the cleanest and best option for both the seller and the buyer is for the seller to purchase ERP, and for the buyer to purchase a new policy. This allows the seller to be assured of coverage for a specified period without relying on the buyer to keep coverage in place and prevents the buyer from assuming the liabilities for errors or omissions that occurred prior to the sale.
If you decide to transfer the policy from the seller to the buyer, understand that the carrier will need to approve this option, and may not allow it, depending on the circumstances. If the policy is transferred, we will want the seller to acknowledge the following:
- I have been offered to purchase an extended reporting period for my insurance agents errors and omissions policy, and after full consideration I am declining to purchase the extended reporting period.
- I agree to transfer of the policy to the buyer.
- Upon transfer of the policy I understand that I will no longer have control of the policy effective on the date of transfer.
- The buyer may terminate the policy at any time and I may no longer have coverage for any E&O claims that may be made against me or my agency after that time.
For the buyer, we will want them to acknowledge the following:
- I am aware of the claims history of seller.
- I agree that I will assume the liability for all prior acts, errors or omissions that might lead to future claims being made against the seller.
- I agree that I will make any future deductible payments as required under the policy for existing or future claims made under the policy.
- I agree that coverage for any and all claims prior to the date of transfer of the policy will be covered under the policy and subject to the terms and conditions of the policy.
- I have been advised that the seller has been given the opportunity to purchase an extended reporting period for the policy, but has declined that offer.
- Moreover, I have been advised that I could apply for a new errors and omissions policy that would exclude coverage for any and all prior errors or omissions, and after due consideration, I am declining to make such application.
Before you decide to either sell your agency or buy an agency, be sure to take the time to consider all possible outcomes regarding the E&O policy. The old saying “an ounce of prevention is worth a pound of cure" still applies.
This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article do not necessarily represent the views of the Swiss Re Group ("Swiss Re") and/or its subsidiaries and/or management and/or shareholders.
*Richard F. Lund, JD, is a Vice President and Senior Underwriter of Swiss Re Corporate Solutions, underwriting insurance agents errors and omissions coverage. He has also been an insurance agents E&O claims counsel and has written and presented numerous E&O risk management/ loss control seminars, mock trials and articles nationwide since 1992.
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