Independent insurance agents are facing new and growing risks related to errors and omissions (E&O) insurance. Many agents don’t realize how much these risks have increased, especially with the current tough insurance market making things harder. When insurance carriers shift policies between each other during renewals, agents must carefully review and compare the new policies with the old ones. This practice is known as the Mirror Test, and it’s a key responsibility for agents.
The Mirror Test means agents have to check that the new policy matches the coverage of the previous one. If there are differences, especially if coverage is lost, agents must inform their clients—ideally in writing. This rule applies regardless of the insurance carrier type and is legally backed by long-established case law. It’s a crucial duty that many agencies don’t fully appreciate.
The challenge is even bigger with surplus lines insurance policies, where carriers usually don’t have to tell clients about coverage reductions at renewal. That leaves agents as the only ones responsible for this important notification. Even though some agents depend on brokers or carriers to flag these issues, they shouldn’t rely on that. No one else is legally required to inform them about coverage changes.
Passing the Mirror Test perfectly is nearly impossible because comparing policies is complicated and very time-consuming. Still, agencies need to show they tried in good faith to review differences and keep their clients informed.
One difficult issue involves “absolute exclusions.” These are specific clauses that take away certain coverage, often related to defense costs. For example, a financial auditor sued over a cyber-related issue might find their insurance carrier denies coverage because cyber work wasn’t part of their professional services. This leaves a big gap, as the insurer refuses to defend claims outside the auditor’s defined role.
Another example concerns pollution claims. When a claim targets a dry cleaner for pollution, other businesses nearby might also face lawsuits. Some insurers refuse to cover these related claims if the insured’s normal business activities don’t involve pollution. Although defense coverage is usually needed for allegations, these absolute exclusions can leave gaps in protection.
Experts note that agents’ E&O policies themselves often include various absolute exclusions, ranging from none to as many as 14. Some of these exclusions deal with criminal acts and are written broadly. This can cause problems if a client faces a criminal claim, even if the agent had no involvement. The insurer may deny coverage because the exclusion applies to acts “directly or indirectly” tied to criminal behavior. This is a serious risk since it might leave agents exposed to claims just because their clients or others were involved.
More complicated exclusions touch on areas like ERISA, securities, employment practices, and cyber risks. In many cases, agents lose coverage because they didn’t sell policies protecting clients from these threats in the first place. That highlights the importance of making sure clients have the right coverage to avoid E&O claims.
Insurance carriers are adding more exclusions that are hard to spot or explain. This only makes the Mirror Test more important than ever. Agents must carefully identify and discuss these changes with clients every time a policy is switched or renewed. Paying close attention to these details can help agents protect themselves and their clients in an increasingly challenging insurance environment.