10 Things an Underwriter Considers When Quoting Professional Liability Coverage for a Consulting Firm
This article will help you understand ten things E&O insurance underwriters will want to know about your business before they issue a quote for professional liability coverage.
Experience of Owners & Key Personnel
Underwriters will want to know if your organization’s key personnel have experience in their industry. An organizational chart and management bios are typically requested by underwriters to help them get comfortable with the management’s experience within your organization. If complete resumes or formal bios are not available, you should prepare a short synopsis of each owner’s experience and qualifications.
Revenue
Revenue is one of the most important items underwriters look for when pricing E&O policies. To put it simply, when revenues increase, so do insurance premiums. Underwriters commonly price these policies by applying a rate per $1,000 of revenue. For example, if a consulting firm’s annual revenue is $1,000,000 and it is charged a $5 rate per $1,000 in revenue by the underwriter, the resulting coverage premium would be $5,000 ($5*($1M/1,000)). If the consulting firm’s revenues increase the following year, the firm can expect a proportional increase in E&O premium.
Consulting Services Provided
Typically, your business will fall into a category that the underwriter can use as a starting point. If your firm provides unique services, be sure to clearly explain them to your broker. Management consultants will be rated differently than technology consultants and so on. Each type of consulting service comes with its own set of risks that can result in E&O claims for services performed. To ensure they are being compensated fairly for taking on a firm’s risk, insurance carriers charge different rates depending on the consulting services offered.
Online Information
Underwriters will likely take the time to review your website to get a better understanding of the services provided. Also, the underwriter may look at social media pages and recent news involving your business to get a good understanding of what services your company performs. If you do not have a website, it is important to clearly document and explain your business’s services to your broker.
Past Claims
Past claims will not automatically preclude you from being able to purchase insurance, but it is necessary to disclose and provide details of past claims (if any). Insurance carriers usually require loss runs showing past claims from the prior three to five years. This provides the underwriter with transparency on the types of claims your business has faced and could face moving forward. Past claims activity can have an impact on E&O premiums, as a business with more active claims history will be seen as riskier to cover versus a business with no loss history to date.
Performance Guarantees
Underwriters are cautious when they see consulting firms make guarantees in their contracts. For example, a contract may state, “If you use our services, your revenue will increase 15% and your expense will decrease 20% or your money back.” If these guarantees are not achieved, the customer can allege breach of contract and potentially sue for damages. Although performance guarantees can be a competitive advantage for consulting businesses, insurance companies do not view them in the same positive light.
07. Standard Client Contract
Underwriters understand that contracts are negotiated, but they like to see that your firm has a standard contract in place that includes “hold harmless” and “indemnification” language in your favor. Hold harmless and indemnification clauses limit one party’s ability to hold another party liable. Underwriters like to see a contract that protects their insured (your consulting firm) to the extent permissible by law.
08. Legal Review Process
Underwriters like to know that contracts are being reviewed by a legal professional to ensure contractual mistakes are not made because these mistakes can result in E&O claims. By having a legal representative review client contracts, your company is actively managing risk. The better the contracts, the better underwriters feel about providing insurance for your business.
09. Revenue Allocation Based on Client Size
Underwriters want to get a sense of whether your revenue is generated from one or two large clients or several smaller clients. A consulting business with only a few large clients making up the bulk of revenues will be exposed to more severe claims if an error or performance issue results in adverse loss to the client. However, this also can be a sign of a business which should have lower claim frequency, as they do not have a large book of clients. A company with many smaller clients can be exposed to increased risks of E&O claims, as it has a larger number of projects going on at any one time, which can increase the probability of E&O claims occurring. This is information an underwriter would like to know when evaluating your business for E&O insurance coverage.
10. Professional Designations
Underwriters like to see professional designations if your industry has them. Designations are not imperative, but it gives the underwriter a sense of the insured’s expertise and commitment to the industry. For example, an accounting firm where all client facing employees are required to be a CPA will look more qualified (and less risky) than the same organization having only one CPA on staff.
In Summary
E&O insurance is a necessary coverage for any service-oriented business. In today’s litigious society, this coverage gives your business the protection it needs to defend itself from lawsuits that can be a financial nightmare if retained solely by the business. These key factors will help you understand how your premium is derived. Now it’s up to you to obtain the coverage that best fits your organization.