While rates for errors and omissions coverage for insurance agents and brokers are beginning to harden, there are steps they can take to reduce their claims costs.

In the past six months, E&O rates for agents and brokers have been flat to up 5%, said Mike Smith, a principal at Franklin Lakes, N.J.-based Axis Insurance Services L.L.C. “We do have markets trying to get 10% to 12%, but they are having a hard time doing it.”

Superstorm Sandy has become a source of claims.

“I would expect the frequency of claims has increased because of Sandy,” said Jim Donovan, New York-based senior vice president in the professional liability unit at Liberty International Underwriters, a unit of Liberty Mutual Holding Co. Inc..

Fundamentally, a broker's duties are to get proper coverage and limits as well as “explain the importance of possibly carrying” particular coverages and the “implications of what could happen if you turn it down,” Mr. Donovan said.

Ernest Weeks, Utica, N.Y.-based resident senior vice president at Utica National Insurance Co.'s agents errors and omissions program, said more than half of claims made under coverage underwritten by the company deal with failure to obtain proper coverage.

This can be for a wide variety of reasons, including missing coverage, inadequate liability limits, failure to explain coverage adequately, and suggesting to a client they do not need the coverage, when it is needed or desirable, Mr. Weeks said.

“Best practices are all about communication with the client and, in that sense, you've got to have clear expectations regarding claims reporting, clear expectations as to what the policy covers and does not cover,” said Phil Norton, Chicago-based president of the professional liability division at Arthur J. Gallagher & Co.

“We hear stories all the time” about other brokerages “where the communication was poor” and the client thought it had coverage when, in fact, it did not and was “somehow blaming the agent or broker,” Mr. Norton said.

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Mr. Donovan said brokers should have written procedures, guidelines and checklists in place and make sure that “every employee in the organization” is well-versed on the procedures and the reasons for them, he said. In addition, make sure that clients understand the implications of what could happen if they turn down a particular coverage, he said.

Documentation is important.

“Sadly, the broker's clients are wrong more than half the time, but they're just angry because something hasn't gone right,” such as their not getting any claims recovery and wanting to blame their broker, Mr. Norton said.

“If you have documentation, you can show them, "We told you that this type of risk is a business risk. It's not covered by the policy that we sold you,' or we might say, "You declined earthquake coverage. We tried to tell you. You even checked the box in writing and said you don't want earthquake coverage, and now you've got earthquake damage and you're mad at us.'”

“Memory is fallible, and people have convenient memories when things get, unfortunately, ugly, so you need to document” the process when clients turn down coverage, Mr. Donovan said.

In particular, he recommends that brokers be sure to offer their clients cyber liability coverage.

Kevin Kalinich, Chicago-based national managing director at Aon Risk Solutions, said examining the language in insurance policies is essential.

“The broker must scrutinize and review every policy and proofread it before they send it back to the insured,” he said.

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“You have to be good at your process of doing policy checking,” agreed Jim Hackbarth, Columbus, Ohio-based president and CEO of Assurex Global Inc., which represents 110 brokers worldwide. Mr. Hackbarth is also president of Assurex's Bermuda-based Par Ltd. captive, which is known in the United States as E&O Plus.

Mr. Donovan said if coverage is switched to a new insurer, the agent or broker needs to conduct a detailed comparison “to run down any differences” between the expiring and new policy. “Little things can sometimes fall through the cracks, and little things can become big things in terms of coverage.”

Mr. Weeks said one of Utica National's largest claims was generated from a situation in which an agency moved a client from one insurer to another “and failed to recognize that they had a blanket limit” for their property coverage with the previous insurer but had specific, described limits with the new insurer. It resulted in the client being significantly underinsured on one property after a loss, he said.

It also is important that brokers explain policy exclusions to their clients, which “is a huge issue with respect to malpractice claims,” said Mr. Kalinich. Another issue is whether the broker or the insured takes responsibility to notify the insurer of a claim.

Getting all the required signatures on applications also is essential, Mr. Weeks said. “That sounds easy enough, but it isn't.” Broker E&O claims can be generated from unsigned applications, he said.

Brokers should stay within their areas of expertise and turn unfamiliar coverage over to someone who has expertise, said Mr. Donovan. “You have to stick with what you know best as a broker or insurance agent.”