As published in Insurance Journal
2020 was a year of disruption, change and challenges. Businesses were forced as never before to adapt in order to survive. With these changes, many businesses took on new exposures that potentially threaten their businesses and their livelihoods. Following are five of the most common changes businesses have made, often resulting in new or increased errors and omissions (E&O) exposures.
1. Expansion into providing professional services. Many businesses are expanding into new areas, including providing advice, consulting services or training. While these new revenue streams can help offset lost income, businesses may not be aware of the potential implications to their insurance policies. Often, services of this nature would not be covered under general liability policies.
2. Reduced client-spend for services. Many businesses have seen sharp declines in revenue, as their customers too have been impacted by economic pressure. As a result, customers increasingly have been reducing or delaying payments, or even terminating service contracts early. Often, this creates added pressure on ongoing projects or long-term service agreements and leads to increases in contract disputes. For example, a recent study of more than 500 U.S. professional services businesses, conducted by The Hanover Insurance Group and Zogby Analytics, indicated 44% of businesses surveyed had customers withhold payments due to contract disputes in the past two years, which may only increase in today’s environment.
3. Diminished ability to meet contractual deadlines or performance metrics. Service providers may be challenged to meet deadlines that were agreed upon pre-pandemic. Additionally, they may not be able to deliver on contractual performance metrics which were based upon pre-pandemic levels. Nearly half of businesses experience allegations of non-performance in the usual economic market, according to The Hanover’s research. Whether a result of staffing changes, finances or general business disruption, these businesses may now find themselves facing more allegations of non-performance of their products or services.
4. Accelerated adoption and usage of technology. Historically, service providers have been traditional in their approach to office-based work, relying heavily on face-to-face interaction with their clients. But the pandemic has forced providers to find new ways to interact and has accelerated the adoption of technology that enables them to continue their business remotely. It’s likely we will see this continue. With the introduction of new technologies, providers may also be introducing new data privacy and security risks to their organizations that they may not realize.
5. Increased use of independent contractors. The economic downturn has put pressure on operating costs, forcing many businesses to be more efficient, while accounting for fluctuating demand for their services. Service providers may choose to leverage independent contractors to reduce payroll costs and nimbly scale staffing up or down depending on the demand. This can come with challenges – a service provider may have less control, influence or oversight of independent contractors, which can adversely impact service and put the provider’s reputation and profitability at risk.
The role of agents
With businesses changing their operating models as never before, the good news is an overwhelming majority of professional service providers rely on independent agents for advice – a testament to the important role agents play in this complex industry. In addition to providing experienced counsel themselves, independent agents also partner with insurers that are able to offer the following:
Robust stand-alone coverage. Some clients can get the insurance coverage they need through an endorsement, but an increasing number require higher limits and broadened coverage that is only available through a stand-alone professional liability policy.
Independent contractors as insureds. Any contractors or temporary employees working on behalf of a client should be explicitly named as insureds in policy terms and conditions. This helps protect the small business.
Strong risk management solutions. Regardless of the size of the business, carriers should offer risk management capabilities to insureds. This is especially important for smaller businesses that often do not have a dedicated risk management function. Small businesses can benefit from training resources or discounts on background checks.
In today’s uncertain economic environment, E&O coverage is more important than ever.
About the author
Gregory W. Leffard is president, professional and executive lines at The Hanover Insurance Group Inc.