In our lawsuit-happy society, in which even the spillage of hot coffee can lead to a multi-million dollar settlement, virtually every business needs some form of errors and omissions (E&O) insurance. Also referred to as professional liability insurance, professional indemnity insurance and, in the medical field, malpractice insurance, E&O insurance covers various types of businesses against the costs associated with civil lawsuits.
The economy remains strained, however, and business executives want to know how they can minimize the cost of E&O insurance.
In this article, we’ll look at five ways companies can reduce E&O costs.
1. Basic Insurance Principles Apply to E&O Coverage
As with any insurance policy, companies can enjoy a lower insurance premium when they have a higher deductible amount. Although the highest deductibles offer the lowest premiums, business managers should think twice before clamoring towards the policy with the highest deductible and lowest premium. Remember that any deductible will come out of the company’s pocket. Knowing this, managers should seriously consider the question, “If we were sued and had to pay this deductible immediately, how detrimental would that be to our business?”
Another basic factor that will impact E&O policy cost is the amount of coverage the business or professional desires. Some policies pay all costs associated with a lawsuit, including defense costs, court costs and punitive damages awarded by the court. Other policies cover only part of those costs. Likewise, the larger the company’s book of business, the more risk exposure it has and the higher its premium is likely to be. Again, business managers should analyze how much coverage they realistically need based on how much they could afford to spend on legal defense in the event of a lawsuit.
An additional point managers should take into account is how likely it is that the company might be sued. The quantity of lawsuits vary by field, by specialty within that field and by geographic location. For example, among doctors, neurosurgeons are the most likely to be sued. Among states, West Virginia is notoriously bad for awarding plaintiffs especially high settlements. If managers aren’t sure of the litigation environment for their own field and geographic area, they should do some research first before making a final decision about how much coverage they require.
Along the same lines, businesses would be wise to choose an insurance company that has experience providing policies within their particular industry. The realm of medical malpractice, for example, is very different than the types of lawsuits that might be faced by a software firm. Insurance companies will be more likely to create a policy that will adequately protect the business when the insurance provider already has experience within that field.
2. Follow the Law to the Letter
The remaining four tips concern what factors E&O underwriters take into consideration when writing a policy for a business or professional service/advice provider. Just as car insurance policies take into consideration the driving record and driving habits of the car’s primary driver, so E&O policies are concerned with the business habits and practices of the company to be insured.
The first point that an underwriter will examine is how meticulously companies follow the regulations that govern their industry. Some insurance companies will give discounts to companies where employees take continuing education courses that deal with mitigating risk and following industry regulations.
To make sure that the company policies are in lockstep with the law, it may be necessary for the company to seek legal help. A lawyer with experience within the industry should review the common practices, contracts and forms that the company uses with its customers.
3. Always Document
Companies should keep careful records of their interactions with clients in order to prove, if a lawsuit comes up, that they communicated clearly and consistently with the client, that they were above-board in their dealings and that they followed the law.
To improve the paper trail, keep written records of all client interactions, including verbal agreements and conversations. When a representative of the business has an oral conversation with a client, for instance, he or she should follow up with an email. Following up by email serves to create an electronic paper trail while also minimizing any potential miscommunications between the company representative and the client. This type of follow-up prevents errors before they occur.
When a client makes an accusation against a company, it is often the client’s word against the company’s. When the company has a paper trail to back up its word, however, the business is in a far more defensible position. A paper trail not only gives an insurance underwriter confidence but also gives the company confidence that it could prevail in a lawsuit.
4. Use Industry-Standard Paperwork
In nearly every industry, certain wording within contracts, disclosure forms or particular applications is almost always the same. When it comes to minimizing the costs of E&O insurance, these forms are not the time to be an industry maverick. Instead, businesses should stick to tried-and-true forms.
Insurance companies will be interested in knowing if the forms the company uses contain wording already been approved by governing bodies and regulating agencies. Insurers frown upon forms that have been “made up” by the individual company.
5. Ensure That All Employees Have Necessary Licenses
In virtually every service/advice industry, states regulate workers with licensing requirements. To reduce both risks and premiums, make sure that all the company’s employees are current on their licensing and continuing education requirements.
Following these five tips will great help business owners and managers to reduce both risk exposure in general and E&O premium costs in particular.
Jim Cunningham is the President and CEO of Cunningham Group. Jim began his career as an underwriter for the Insurance Company of North America in 1973. In 1975 he joined J. H. Cunningham Insurance Agency and has become one of the nation’s leading agents specializing in medical malpractice insurance. Cunningham Group now provides insurance services for medical professionals and practices. Founded in 1947 as a physician focused agency, Cunningham Group provides medical malpractice insurance, business owner policies, worker’s comp and employee benefits packages.