Pace of P&C industry cited as a reason for more broker E&O claims

The frenetic pace required for brokers to meet the Canadian P&C insurance industry’s premium growth targets — not to mention keeping current with the kaleidoscopic transformation of products — is putting brokers in harm’s way, broker E&O experts told Live with CU  Wednesday.

Anecdotally, many P&C insurance professionals talking to Canadian Underwriter over the past few months have indicated insurance companies are trying to grow their book of business post-pandemic. Plus, in the hard market, coverages, capacity appetites and sub-limits are constantly changing, which means brokers have to be on top of all market updates.

It’s all happening very fast, and it’s leading to errors and omissions (E&O) exposure for brokers, Live with CU panellists observed.

Hugh Fardy, Gallagher’s senior vice president of professional liability, Ontario Region, roughly estimated there is fewer than one broker E&O claim for every 1.5 insurance policies in force.

“I think the biggest exposure today is the pace,” Fardy said on LinkedIn Live Wednesday. “I think we’re just working too fast. Speaking generally in business terms, we’re not taking the time to do the kinds of things we need to do….

“This is not just brokers, it’s an industry brokers work within. The pace has just gotten a little too quick. Everybody needs to take a breath every now and then. And make sure you’re doing quality versus quantity.”

For one thing, Fardy says, brokers are working with less information about their clients than they used to. The focus now is on chasing new business rather than on renewals. But not having sufficient knowledge of the client is one quick way to an E&O claim against a broker.

Danish Yusuf, CEO and founder of Zensurance, agreed. “This whole point around being in a hurry, [brokers should be] completing full applications,” he said. “And not just checking a box on the application, but truly describing the exposures of that particular client, while also answering all the questions of the market.”

Not having a thorough understanding of what insurance products are available and how they work contributes to broker E&O exposure, said panellist Josée Trottier-Turcotte, underwriting specialist and vice president at Victor Canada.

“From Victor’s perspective, the most common cause of claims [against] insurance brokers arises from the failure to place or obtain — or also properly place — adequate coverage,” she said. “This represents more than 50% of the claims that we receive. The second highest common cause of claims is failure to give proper advice. The third most common cause of losses is misrepresentation.”

Insurance products are constantly evolving, which contributes to the challenge for brokers in staying on top of everything. This in turn creates an E&O exposure for brokers.

Echoing a point made by Fardy, Yusuf noted many brokers are “jacks of all trades, masters of none.” But as products become more sophisticated and specialized, a lack of specialized knowledge is to the detriment of brokers, he observed.

One cause of broker E&O exposure “is insufficient experience of that individual broker for the clients that they’re serving at the time,” said Yusuf. “[Fardy] mentioned it’s hard to be a jack of all trades. If you’re a broker that’s one day insuring the restaurant, and the next day an electrical contractor, and the third day a technology company, it is really hard for you to be able to do a proper assessment of risk coverage, know the wording and then make an informed decision.”

The increasing frequency of broker E&O claims in 2022, which had levelled off during the pandemic, is of concern to brokerage E&O insurers, because the costs to defend the claims are escalating.

CU Live panellists estimated the average cost to defend a broker E&O claim is in the range of $75,000 to $100,000 — far more than the $25,000 it took to defend such claims about 15 years ago.

“While everybody’s always talked about that multi-million dollar claim against a broker doesn’t really exist, it certainly does these days,” says Fardy. “We see more of them….

“We’re settling out million-dollar-plus claims every year, but we’re only doing one or two of them, so it doesn’t bring the average up fast enough to scare people. But I can tell you, it’s only a handful of years ago that we paid a $5-million policy limit on a broker E&O claim.”

Editor’s note: Stay tuned for part two of this article in Tuesday’s newsletter, which will explore best practices for brokers to avoid E&O claims.

Feature image courtesy of iStock.com/hxdbzxy