Chris Burand identifies two exposures that many agencies are failing to guard against because they’re unaware of them.
E&O insurance seems to be resisting the general softening-market trend, with rates increasing significantly. A more significant problem for agencies is reduced underwriting tolerance for claims: Carriers are less forgiving than they have been. Although agencies are trying harder than ever to prevent E&O claims, many are failing to guard against two possible exposures because they’re unaware of them: Lawsuits brought against them by their carriers and the risks involved with E&S markets.
CARRIERS SUING THEIR OWN AGENCIES
In the past, agencies and their companies were usually on the same team when clients filed E&O lawsuits. This was an advantage for agencies because the companies provided much-needed support. However, anecdotal evidence suggests that company lawsuits against agencies are responsible for an increasing share of E&O suits. This means that you need to exercise the type of caution with your companies that you’ve always used with insureds. You must “document, document, document” discussions of coverage with companies and make sure that all applications submitted are accurate and complete. Failure to do so creates a significant E&O exposure.
Clear communication between agencies and companies is more important than ever. One of the most common miscommunications involves binding coverage. For instance, just because a company underwriter advises an agency that it will write a risk does not mean that the company has agreed to bind coverage.
Consider this scenario: A company agrees to write a risk, but hasn’t yet bound coverage. The agency doesn’t have binding authority and advises the client incorrectly that the company has bound coverage. The next day the insured has a $300,000 claim. The company sees an opportunity to save a lot of money; because it hadn’t agreed to bind the risk, it doesn’t have to pay the claim. It might decide to reject the claim, or might pay and then sue the agency to recover the payment.
Although this might not sound fair, such a scenario is a real possibility — especially if a company has cash-flow problems — and the number of carriers with cash-flow problems could be significant.
To avoid problems like this, make sure that everyone in your agency clearly knows what they can and cannot bind, and realizes the importance of explicitly requesting a company to bind and write a risk — not just write it. Everyone must understand the difference between a company agreeing to write a risk and to bind the risk. After all, a company can bind a risk for a short period, usually as a favor to the agency, with the clear understanding that they don’t intend to write it. The opposite practice is just as possible.
E&S MARKETS
Several large E&O claims in the past few years have involved E&S brokers having less authority than they said they had (or, according to some opinions, being outright crooks). Some claims involved agents who believed that E&S brokers had binding authority with the broker’s company, when in fact they did not. As a result, the agencies’ clients had no coverage — except under the agencies’ E&O policies.
Independently verify that your brokers have binding authority with their companies — even if they assure you that they do. When they tell you their company has agreed to bind a risk, demand proof. You can’t do this kind of business on a handshake.
Take these precautions:
- Always get E&O certificates of insurance from all of your E&S brokers. Their limits should equal or exceed those of the agency’s E&O coverage. This is not as important for large, nationally known brokers, but it’s essential for all others, especially small brokers.
- Read your E&S contracts carefully before signing them. Don’t do business with an E&S broker until you have a contract agreeable to you.
- Make sure that your brokers represent the markets they claim to represent.
- Never do business with brokers smaller than your agency.
- Do business with as few E&S brokers as possible. This reduces E&O exposures considerably; using fewer markets means that your staff doesn’t have to learn or remember as much information. It will also help your agency develop closer relationships with brokers, which often leads to better communication and further reduces E&O exposures. With fewer markets, your agency will be less tempted to write oddball stuff that you have no business writing anyway.
- Perform due diligence on your brokers every year. Don’t make the common mistake of assuming that you’re safe just because you’ve been doing business with small brokers or with the same brokers for an extended time. Such an assumption presumes that nothing ever changes. The two largest E&O claims I’ve seen in the last six months involved agencies and E&S brokers with which they had done business for years.
- Advise your clients about the risks associated with E&S markets before they purchase coverage. Too often, agencies advise clients only that a company is non-admitted — and this possibly only after the policy is written. Provide clients with complete disclosure of the risk involved at the proposal stage, as well as when the policy is issued. If you bring this up for the first time at policy issuance, it’s too late for the client to shop for an admitted market.
E&O risks are increasing as agency/company and agency/E&S broker relationships change, and the use of E&S markets increases. Is your agency prepared?