With so many new concepts, new types of business, and changes in existing insurance products, insurance agents need to be more diligent than ever in analyzing their Errors and Omissions risks and exposures.
Some of the areas that open up agency E&O exposures are trusts, cyber risk, Non-Ownership Auto exposures (Personal and Business Auto), D&O Liability, Umbrella & Excess Liability, Employment Practices, home-based businesses, intellectual property exposures, and company solvency issues.
Everyone at every agency should keep “due diligence” and “awareness” in mind while taking care of clients. Agents, like other professionals, must demonstrate their knowledge and skill. The technical and complex nature of insurance raises the standards they must meet. Breaching their duty in a way that injures a client could make the agency liable for the damages. Remember that “perception is reality.” If a client perceives that the agency harmed them, the agency will have to defend itself against that accusation.
Remember, too, that many other professionals, such as doctors, lawyers, architects, engineers, and CPAs, have much more rigorous training, testing, apprenticeship, and licensing than people in insurance. Because insurance contracts and transactions are so technical, court decisions about what a professional standard of care is often go against the insurance professional.
This means that, as they write new and renewal policies, process changes, and interact with clients, insurance professionals must be aware of problems that can arise.
OWNERSHIP TRANSFER
For example, let’s take a look at transferring ownership of homes, personal property, and automobiles to trusts. Many older people cede ownership of such property to adult children to reduce estate taxes or qualify for Medicaid. However, Personal Lines contracts don’t include trusts in their definition of “insured,” and they don’t recognize legal entities. They’re written to recognize individuals named as insureds who are owner-occupants.
If insurance policies aren’t amended so both the trust and the individual(s) who have formed the trust are listed as co-named insureds, there will be a serious problem if there’s a property or personal liability loss. This is also true if a parent passes ownership to an adult child. Both people need to tell their insurance professionals about the changes and make sure their own insurance policies recognize both property and liability exposures. If investment or business property is involved, any Business insurance policies should be amended, too.
The matter gets complicated because there are many types of trusts and ownership transfers, and most estate planners don’t address Personal Lines insurance issues.
So do Personal Lines agents have to know about trusts and property ownership transfers? This is where due diligence comes in. Due diligence in this kind of situation means advising all insureds to notify the agency if they make a trust or property transfer arrangement. This could be done on renewal, as part of your new business profiling, or with a special mailing or newsletter. If you don’t have trust expertise, ask your company underwriters their position on the subject and what they need. It’s better to use co-named insureds in lieu of additional insured arrangements, if possible.
It’s also wise to ask companies that write a lot of Personal Lines programs for affluent clients for general information, because they probably have expertise in this area. Some experts predict that trusts and ownership transfer arrangements will become as common as wills in the near future, because they provide an easy, inexpensive way to avoid the delay and public disclosure of probate.
An agent who neglects to perform due diligence in such a situation and winds up with a client who has a large uncovered loss will wind up contacting their E&O carrier.
E-COMMERCE RISKS
Computers, the Internet, e-mail, and e-commerce have opened up a whole new arena of cyber risk. There’s a plethora of high-tech businesses and applications that no one even imagined 20 years ago. General Liability, Errors & Omissions, Directors & Officers Liability, Media & Internet Liability, Crime & Fidelity, and Intellectual Property policies are just some of the insurance contracts dealing with these exposures. Intellectual property rights, copyright and trademark infringement, defamation, privacy and confidentiality, liability, and crime are example of losses that can arise from not safeguarding your system exposures. A multitude of property exposures also loom.
Due diligence here means being aware of the types of exposures and the products that cover them. And because there are so many home-based businesses and home offices now, agents must include e-commerce and cyber-risk fact-finding in their renewal process in Personal as well as Business lines. Agencies should also give ongoing training on new cyber risks and products for producers and others who deal with clients.
NON-OWNED AUTO EXPOSURES
There are also Non-owned Auto exposures, such as short- and long-term car rentals, non-owned autos provided to employees for regular use, autos rented for business purposes with personal credit cards and used for both personal and business ends. In all of these situations, there are coverage gaps to be handled.
Few agencies ask their clients the relevant questions at renewal review or as part of the fact-finding process on new business accounts, either in Personal or Commercial lines.
For example, “short-term rental” and “long-term rental” aren’t defined in the Personal Auto policy. When does a long-term rental fall into the definition of regular use - after two weeks, one month, two months? The fact is, the agency should then determine the time frame. Most insurers have no problem with two or three weeks, but it’s important to ask the company where it stands on this.
Generally, a rental company’s Liability coverage is primary but with only standard limits, and most Personal Auto policies are excess over those limits. What about an auto rented outside the United States? The territory definition wouldn’t pick up even excess coverage in some countries. One solution is to write an Umbrella policy so the drop-down coverage might apply.
Where an employee is furnished a company car, Extended or Named Non-owner coverage may be provided under the Personal Auto policy, or the commercial equivalent may be used if the business is willing to provide it.
The point is that if the agency doesn’t ask the right questions, they’ll have an E&O exposure. Don’t wait for the client to tell the important details - take the initiative. Case law is full of E&O events involving non-owned autos that could have been avoided if the agency had addressed the issue before the loss occurred.
EMPLOYMENT PRACTICES
Any business that has employees has Employment Practices Liability exposures, and the use of computers and the Internet has opened up all kinds of new ones.
The simple due diligence required on EPL is to explain the exposure and coverage in general to the client and then try to give a quote. Review any changes in the business operations or employee relationships of clients with existing coverage. After you review the coverage and exposures and make appropriate recommendations, your client can make a business decision. Whatever they decide, you’ve fulfilled your due diligence responsibility.
HOME BUSINESS EXPOSURE
Home-based businesses are booming, and agents need to automatically ask clients who have such businesses about their work situation during fact-finding and before renewals. People working out of their homes have General Liability, Professional Liability, and Property exposures that the typical Homeowners policy doesn’t cover.
Exercising due diligence here means asking the questions and getting a handle on the types of exposures. Conflict between Personal and Business exposures might be resolved by writing the client’s Homeowners and Home Business policies with the same insurer.
DIRECTORS & OFFICERS LIABILITY
Nonprofit and for-profit corporations both have an obvious D&O exposure that the insurance professional should deal with in fact-finding and at renewal.
What about the exposure of an individual who’s a director for either type of corporation? The Personal Lines agent needs to be aware of the corporation’s coverage to pick up the exposure for this person. State laws vary, but often non-profit directors have less individual exposure than for-profit directors. In any case, if the corporation has no D&O coverage and the director is actively involved in decision-making, the agent needs to address this. D&O policies aren’t standard, and neither are the duties directors perform.
Directors and officers often don’t realize their exposures or know the extent of the corporation’s D&O coverage and limitations. The agent needs to review the policy with both the management and the board of directors and have a discussion about the general differences among D&O contracts.
INTELLECTUAL PROPERTY
Patent, trademark, and copyright infringements are the main areas of intellectual property exposure. There are also various Personal Injury exposures related to libel, slander, defamation, violation of right of privacy, piracy, unfair competition, and title or slogan infringement. In some cases, directors and officers may be held accountable.
The issue is more widespread than you might think: A recent market survey of a low- population Southwestern state found that about 150 businesses controlled more than 5,600 patents. Use of the Internet has worsened the problem. The ability to download information from World Wide Web can be an enormous exposure to the downloading party and the source alike.
There are intellectual property exposures for those who’ve been infringed upon and those who do the infringing. Either way, there’s a long-term, complicated legal process for both parties and substantial legal expenses. There’ve been minimum estimates of $250,000 to $300,000 to take such a case to trial.
Most carriers are very conservative about offering Intellectual Property coverage, and there’s no standard way to deal with the exposures. An agent’s best course is to know about the exposures a business faces and to be able to offer risk management and coverage options. At the very least, the agent should point out the exposures so the client knows the areas that lack coverage or for which coverage isn’t available.
From an E&O standpoint, not discussing a problem until after there’s been a loss and the claim denied for lack of coverage will certainly tarnish the agency’s position.
COMPANY SOLVENCY
A wealth of articles, reports, and statistical studies tell us that an enormous number of companies and groups is vulnerable to insolvency. Inefficient operations, poor management, high loss ratios, low investment returns, automation problems, misguided marketing strategies, and poor reserving practices are just a few of the problems. Any one or combination of these can lead to disaster.
In the past it was probably sufficient for an agency to check ratings in A.M. Best’s “Key Rating Guide” or a similar publication every year. Today there’s so much data available on demand and reaction time is so tight that ongoing ratings diligence is necessary.
Many E&O policy contracts deny such claims because they have company insolvency exclusions. Sometimes a company might amend its exclusion by limiting it to companies below a certain ratings category or to an unrated company. Whatever the particulars, this exclusion alone means an agency should carefully scrutinize the financial performance and ratings of the standard and surplus lines carriers it uses.
Sometimes your only choice may be a carrier that’s not up to par, and you’ll have to make a business decision whether to use it. In such a case, give the client a very specific and careful explanation of the risks involved in using the carrier. If you go ahead, carefully document your file with written confirmation that the client understands their decision and that the client received a copy of the confirmation.
It’s probably preferable to have an agency policy never to use a carrier that A.M. Best’s or another secure ratings organization rates below a certain level. When a carrier falls below the standard, agency and client must decide how to proceed.
CONCLUSION
These are only a few of the emerging E&O exposures that agencies face. Making sure producers and staff know about them and practicing due diligence in day-to-day activities will go a long way toward reducing agency exposures.
There’s no guarantee that asking the proper questions and taking appropriate action will prevent an E&O, but doing nothing is certain to leave an agency in a poor position to defend itself. Due diligence can help reduce the frequency and severity of E&O claims as well as give your clients a valuable service.