RISK MANAGEMENT
Mix of Business: The sophistication and risk profile of customers materially impacts potential E & O loss severity. Standard personal and small commercial lines have a vastly lower risk exposure profile than large commercial accounts like manufactures, healthcare, and public entity business.
Complexity of Policies: In addition to mix of business, agents should consider the complexity of the policies written. Highly complex placements include layered programs, those with manuscript forms, executive and professional liability lines with retro dates where clients rely more heavily on the agent for coverage design / risk advice. Keep in mind the more financially sophisticated the insured, the more likely they are to aggressively pursue recovery from the agency when a severe uncovered loss occurs.
Max Possible Loss vs. Max Probable Loss: Similar to the risk assessment conversations you have with your customers, agents should take a disciplined approach to estimating MPL and MPrL scenarios. Identify your largest and most complex accounts and imagine the worst-case scenario – a total failure to bind coverage, a catastrophic client loss, missing an umbrella layer, a missed retro date, etc. While uncomfortable this exercise can help quantify the MPL and get you warmed up to the more applicable concept of MPrL.
What is the largest realistic claim your agency could face? Review your book of business with an eye towards property values, average limits, claims history of customers, inflationary and legal trends, recent changes in coverage, and location of customers. Your limit will be closer to the MPrL.
Legal Environment: The jurisdiction where the E & O claim is filed can have a material impact on outcome and severity of an E & O claim. An agency’ s standard of care and duty to advise customers varies by state. For example, the state of Mississippi is considered an“ order taker” state where the agency only has an obligation to procure the coverage the customer requests. However, in Arizona an agent may be required to inform customers of additional types and limits of insurance coverage.
Fortunately, Kansas generally requires the insureds to specifically request the insurance that they claim the agent failed to procure. Where your customers are located influences your E & O exposure.
Defense Costs Inside vs. Outside: Approximately 1 / 3 of total E & O claim costs are legal fees. It is important to know whether defense costs are inside the policy’ s limit of liability. As an example, a policy with a $ 2M occurrence limit with defense costs outside the limit of liability to comparable to a policy with a $ 3M occurrence limit with defense costs inside.
Staff Experience: The knowledge and experience of staff can influence E & O exposure. Make sure that employee duties are commensurate with their skill set, experience level, and complexity of customers. Keep an eye on employee workload as the agency grows and understand that turnover opens opportunities for errors.
Procedures / Workflows: Perhaps the most important factor driving the limits decision is the quality of the agency’ s procedures and workflows. Defined processes that are consistently followed are at the core of E & O risk management. Are you confident with your procedures? Do you audit accounts for adherence to agency standards? Are processes periodically discussed with input from staff?
E & O Limits Benchmarking: While every agency should evaluate numerous factors to determine the E & O limits that are right for them, it can be helpful to know what others are doing. Below is E & O limit benchmarking data from over 200 Kansas agencies segmented by gross annual premium( GAP).
Limits data points include average, median, range( min and max), and the 50 % percentile middle set. Some outlier data points were removed to provide a more visually streamlined graph.
JANUARY / FEBRUARY 2026
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