Brokers Continue With Efforts To Cap Their Own Liability; Intense Competition Seen Limiting Spread Of E&O Limits.

Some brokers' efforts to get clients to agree to limit broker liability for professional errors have met with success, but the practice also has its critics.

The practice dates back more then two years ago, when Marsh Inc. began asking middle-market and large-account clients to sign agreements limiting Marsh's own errors and omissions liability mistakes at $10 million. Marsh said parent Marsh & McLennan Cos. Inc. mandated the move across its units and that such limits are common among many professions.

But some risk managers say that agreeing to such a limit runs counter to their own risk management approach. And risk management and brokerage consultants say they are not seeing widespread adoption of the approach by brokers.

"In the private broker group, the middle-market group, they're not using them," said Timothy J. Cunningham , a principal at OPTIS Partners L.L.C. in Chicago.

"I've seen it, but it's not pervasive at all," said Richard S. Betterley , president of Sterling, Mass.-based Betterley Risk Consultants L.L.C. "I don't like it. I can understand why they would want it. We've seen similar caps with other service provider relationships."

The practice stemmed from Marsh's efforts to bolster its enterprise risk management.

"It started as a result of our own internal ERM process," said Daniel Glaser , group president and chief operating officer of MMC. "Most risk managers understand when they put themselves in our company's shoes and they look at our responsibilities and obligations coupled with our levels of engagement and remuneration. If they were our risk manager, they would agree, one of the ways that we will mitigate risk would be through clear service-level agreements that contain limits of liability."

He said client response has been "overwhelmingly positive," with more than 90% of Marsh's clients agreeing to some sort of limit of liability arrangement. Mr. Glaser said the initiative will be rolled out to other countries as a part of Marsh's "de-risking strategy."

Last year, Aon Corp. began a similar, although not identical, approach.

"We try to improve our risk management practices, as part ofimplementing a simpler, clearer, more transparent engagement letter," said Mike O'Connor , chief operating officer of Aon Risk Solutions in Chicago. He said one element of the approach is setting an "appropriate, transparent limit of liability."

"Our client base is large and diverse," Mr. O'Connor said. "We could not employ a one-size-fits-all model. We have to be able to adjust to the given situation of the client. We want to make sure we're providing clients choice."

Mr. O'Connor said that since October, Aon has updated about 80,000 client engagement agreements. "The vast majority have accepted," said Mr. O'Connor . "We have not seen any major resistance."

But not all risk managers agree.

Gary Langsdale , risk officer for Pennsylvania State University in State College, Pa., said Marsh asked Penn State to sign a liability cap agreement and he declined.

"We're working off an old agreement and we're going through an RFP process for the excess casualty brokerage for 2012," said Mr. Langsdale "I'm sure this will come up."

He said Penn State was approached by another major broker, which he declined to identify, and "I explained to them why we weren't interested in that sort of language, either."

"The big issue is to me is, just as Marsh has explained, that they're trying to do their risk management by trying to implement a limit. We also are doing our risk management by rejecting a limit," Mr. Langsdale said. "If we're asking them to place $100 million of liability insurance for us, if there were an error or omission on their part, why would we be willing to limit their liability to some low amount? I would be very curious as whether Marsh's legal department accepts limitations of liability from their vendors or suppliers when they're negotiating contracts."

Honeywell International Inc. also declined to sign any agreements that limit broker liability for errors and omissions, said Paul Piazza , director-corporate risk management for the Morris Township, N.J.-based company.

"Honeywell does not sign any limitation of liability in our broker agreements," said Mr. Piazza , a Marsh client. "We've never been asked to before and we have to report to senior management on all of our agreements, so it would be very tough for us to explain to senior management that we're capping liability for broker services on large insurance placements when we've never done it before."

Another risk manager, who said he was prohibited contractually from disclosing his arrangement with his broker, said risk managers should accept nothing less than total transparency from their brokers.

"I think the broker has an obligation to disclose in advance any restrictions they would have with the risk manager," said John Phelps , director-business risk solutions at Blue Cross and Blue Shield of Florida Inc. in Jacksonville. "I'm paying a fee for service. Why would they need to limit their liability? Does that mean that they don't have the confidence in their expertise, their people and their resources and have to hedge their bet?"

Not all brokers seek a liability cap in service agreements.

Willis Group Holdings P.L.C., for example, does not have a limitation of liability in its standard U.S. brokerage and fee business, but does for other types of business, the broker said in an email statement.

"In our consulting business in the U.S., we do have a limitation of liability of three times the fee or $5 million, whichever is lower. Outside of the U.S., we currently have a $10 million limitation-of-liability limit in some countries and on some lines of business," according to the statement.

"We continue to examine this issue to ensure that we are making prudent risk management decisions for Willis and, at the same time, considering our clients' best interest," Willis said in the statement.

"We continue to examine the issue and the approach that others have taken, but we have taken no action on this ourselves," said a spokesman for Kansas City, Mo.-based Lockton Cos. L.L.C.

Mr. Betterley said industry competition could hamper the effort. "The brokerage industry is way too competitive to impose this on all clients," he said. "Some people would walk."

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