Red Flags When Selecting a Carrier for Professional Liability Insurance (Errors & Omissions)

Choosing the right carrier for Professional Liability (Errors & Omissions, E&O) insurance is one of the most consequential purchasing decisions a professional services firm will make. A poor carrier choice can mean costly coverage gaps, slow or adversarial claim handling, surprise exclusions, and material financial exposure. This guide — focused on buyers in the United States (with particular attention to major markets such as New York, California and Texas) — identifies the top red flags to watch for and practical steps to verify carrier reliability before you bind coverage.

Why carrier selection matters (quick summary)

• Claims handling determines value. Low premiums don’t help if the carrier fights or delays legitimate claims.
• Policy language varies widely. Two $1M/$1M policies can cover very different exposures.
• State and venue risks differ. Rates and litigation environments in California and New York often drive different underwriting standards than Texas or the Midwest.
• Long-tail risk matters. E&O exposures can surface years after services were rendered — make sure tail/run-off is clear.

Top red flags to watch for

1. Extremely low quotes that undercut the market

• Why it’s a red flag: Too-good-to-be-true pricing often hides restrictive endorsements, high sub-limits, or poor claims service.
• How it plays out: A quote that is 40–60% cheaper than comparable offers commonly has narrower definitions of “professional services,” higher retentions, or excludes common allegation types (e.g., intellectual property or subcontractor liability).
• What to do: Request the full sample policy and compare exclusions line-by-line.

2. Weak financial strength or limited operating history

• Why it’s a red flag: A carrier with poor capital, or a startup MGA with limited reserves, may struggle to pay large or complex claims.
• How to test: Check independent ratings and regulator records (A.M. Best, S&P, state DOI complaints).
• Note: Large carriers like Chubb, Travelers and The Hartford historically carry stronger ratings — but also consider divisional underwriting strength.

3. Lack of industry-specific underwriting expertise

• Why it’s a red flag: Carriers unfamiliar with your profession (e.g., software-as-a-service, architects, financial advisors) will likely add broad exclusions or deny coverage for common exposures.
• What to ask: Can the underwriter provide examples of prior claims handled for firms like yours?

4. Vague or unfavorable claims handling terms

• Specific red flags:
  • “Consent to settle” absent or limited — the insurer can settle without your approval.
  • Duty-to-defend vs. duty-to-indemnify ambiguity.
  • Defense outside the limit (DOL) not provided — legal costs erode the limits.
• Why it matters: These terms determine who controls litigation strategy and whether defense costs reduce indemnity limits.

5. Excessive sub-limits and hidden endorsements

• Examples: Cyber-related liability sub-limits, punitive damages exclusions, or contract liability carve-outs that drastically reduce protection.
• How to detect: Ask for schedule of endorsements and highlight any “sublimit” or “excluding” language.

6. No retroactive date or run-off/run-off restrictions

• Why it’s a red flag: If you purchase claims-made coverage, a missing or poorly defined retroactive date (or no run-off for sold businesses) can leave prior acts unprotected.
• Action: Confirm retroactive date, tail cost estimates, and whether an extended reporting period (ERP) is available.

7. Slow underwriting and long turnaround times

• Why it’s a red flag: Slow quote and binding times can mean an overloaded claims staff or underwriting bottlenecks.
• Expectation: For routine small-business E&O, a responsive carrier or broker should provide a clear timeline and sample policy within days.

8. No transparent claim examples or references

• Why it’s a red flag: Carriers with good claims practices can (anonymously) share redacted claims examples showing how they resolved similar matters.
• Ask: “Can you provide anonymized examples of three E&O claims from the past 24 months for firms in my industry?”

Regional considerations: New York, California, Texas

• New York & California: Higher legal costs and plaintiff-friendly forums can drive higher premiums and more restrictive underwriting; watch for higher retentions and stricter exclusions.
• Texas: Historically more favorable for defendants in some courts, but regulatory and contractual differences still matter (e.g., choice-of-law, arbitration preferences).
• Tip: Ask carriers for state-specific endorsements — some policies vary materially by state.

Sample carrier pricing and positioning (U.S. market examples)

Prices vary widely by profession, revenue, past claims, and state. The table below provides representative starting ranges for a standard small professional firm seeking $1M per claim / $2M aggregate (illustrative only; obtain tailored quotes).

Sources: insurer product pages and market aggregators. Actual premiums vary; national median estimates for small firms range roughly from $350–$1,200 annually for typical professional exposures (NerdWallet, Insureon). See further pricing context: https://www.nerdwallet.com/article/small-business/errors-and-omissions-insurance and https://www.insureon.com/errors-omissions.

How to verify carrier reliability (practical steps)

• Check independent ratings: A.M. Best and S&P.
• Review state Department of Insurance (DOI) complaint ratios for the carrier in your state.
• Request a sample policy and endorsements (not just a summary) and have counsel or an experienced broker review key clauses.
• Demand recent redacted claims examples and average claim settlement timelines.
• Validate agent/broker authority: confirm the broker’s binding authority and whether the policy is admitted in your state.

Binding checklist — confirm these before signing

• Full policy form and all endorsements in writing
• Clear retroactive date and availability/cost of tail coverage
• Defense outside the limit vs. within the limit confirmed
• No surprise sub-limits for common exposures
• Consent-to-settle language favorable to the insured
• State-specific endorsements reviewed for venue/choice-of-law
• Carrier A.M. Best/S&P rating and state DOI complaint search done
• Broker has provided comparative quotes and written placement rationale

Useful related resources (internal links)

• How to Choose a Broker for Professional Liability Insurance (Errors & Omissions): Questions to Ask
• How to Compare Professional Liability Insurance (Errors & Omissions) Proposals: A Practical Spreadsheet Guide
• How to Evaluate Claims Service and Reputation for Professional Liability Insurance (Errors & Omissions) Providers

Final takeaways

• Price matters, but claims handling and policy language matter more. A slightly higher premium with strong defense terms, clear retroactive protection, and a carrier with proven claims experience provides real value.
• Use the red flags above as a checklist during underwriting, and insist on sample policy language and redacted claims examples. If a carrier or broker resists, treat that resistance as a warning sign.

References

• Hiscox — Errors & Omissions Insurance: https://www.hiscox.com/small-business-insurance/errors-omissions-insurance
• Insureon — Errors & Omissions Insurance: https://www.insureon.com/errors-omissions
• NerdWallet — How Much Does E&O Insurance Cost?: https://www.nerdwallet.com/article/small-business/errors-and-omissions-insurance