23 May Who Pays the Deductible?
For the benefit of some of the newer staff in the agency, the agency you work for has E&O coverage, essentially a professional liability policy that provides protection and coverage for claims made against the agency alleging negligence of some type. Every E&O policy has a deductible that puts the agency at a financial risk if claims are made against them. This deductible is typically $100,000 or higher based on the agency size, prior E&O activity, etc.
While claims are made annually against agencies, it is important to realize that whether or not the agency did anything wrong, it may still have to pay an amount within the deductible, typically for defense costs. Attorneys who handle E&O cases do not come cheap. For your agency to get a strong defense, you want attorneys with tremendous experience and expertise. The costs for these attorneys are a direct hit to the bottom-line financials.
So let’s take the scenario that your agency has been hit with an E&O matter, one in which it looks like there is some liability. An attorney has been hired to represent your legal interests. As bills are generated, who pays them? Of course, the agency would. But, I have seen some agencies with a structure where the parties responsible for the claim have some responsibility for a portion of the deductible. The amount can vary, but I recollect that one agency has a $100,000 deductible with the parties responsible (often, this is the producer) for payment, possibly up to $5,000.
So that is the reality. One additional issue/question is whether this practice is a good idea. Very honestly, that is a hard question to answer since I have not seen any data or heard any stories that showed that having/not having this practice made a substantial difference in the staff’s commitment to good E&O best practices. I hope that if you have some “financial skin in the game,” you will have a stronger E&O culture and commitment. Even if you have some responsibility for part of the deductible, the amount is normally minimal; thus, the agency still has to absorb the overwhelming share. Also, it is often difficult to pinpoint an E&O matter on one person in the agency.
Bottom line, when an E&O claim occurs, the agency takes a hit financially, and that is probably a good reason why your agency has a strong focus on E&O loss prevention. They want to make every effort to keep claims from happening because it hits the bottom line when they do.
Would you handle matters differently if you were responsible for part of the deductible? Hopefully, it shouldn’t make a difference at the end of the day.