Managing To Avoid Errors & Omissions Problem

MANAGING TO AVOID ERRORS & OMISSIONS PROBLEM

by Carol Hammes

Professionalism + education + training = fewer E&O claims.

Today, it’s an unfortunate fact of life that an insurance agent does not have to do anything wrong to be sued. People who have a loss that’s not covered tend to lash out at the closest party - often the agent who recently sold them a policy. One in every five insurance agencies will be hit by a lawsuit, and the average agency is four times more likely to be sued today than it was 20 years ago. It’s a small comfort that more than 70% of all E&O claims are settled without payment. The loss of valuable management and sales time, impact on employee morale and productivity, and the damage that the news can do to the agency’s reputation can be devastating. To avoid having a claim filed against you, you must make sure that your insureds have confidence in the agency’s ability to take care of their needs. To successfully defend and mitigate the damages from a lawsuit, your staff must be confident that the situation has been handled appropriately.

Professionalism, education, and training are the keys to developing that necessary confidence both from the insureds and the agency employees. While the average agency now spends close to 0.4% of its revenues on education, agencies that are actively involved in E&O prevention activities are investing around 1.0% of their revenues in keeping employees up to date. Merely sending everyone to classes to meet continuing education requirements for licenses is not enough. Every employee and agency principal, no matter how experienced, should have a formal training and education program that includes both in-house and external activities. This program should be discussed as part of the performance review process, put in writing, and maintained in the personnel file. The training should include effective use of automated systems, spelling, grammar, and communication skills, as well as the traditional educational subjects regarding changes in insurance coverages and products.

Although the first step in preventing E&O problems is to have a staff that is capable of handling risk management and account servicing tasks, it is absolutely critical that these people be managed effectively. When all is said and done, most E&O claims result from poor management rather than lack of knowledge. Agency principals who tolerate “loose cannon” producers because they are afraid of losing someone who has a large book of business are prime targets for successful litigation. Salespeople who will promise anything to get an account, who insist upon doing things their own way, who force CSRs to bend the rules, who are constantly interrupting others, and who routinely create crisis situations with poor time management skills are ticking time bombs. Owners who only look at the top line can become so fearful of losing a high-volume producer that they will raise their E&O coverage rather than take steps to tighten rules and discipline offenders. This response can be costly. First, tolerating unprofessional behavior increases the chances of successful legal action against the agency. Second, it almost always impacts the bottom line adversely since loss-control measures that involve better organizational controls and tighter discipline are also the keys to higher levels of profitability.

Meeting the Obligations of an Insurance Professional

Legally an insurance agent operates in a fiduciary capacity and is held to the high standards demanded of a trustee. An agent is considered to be more than just a salesperson in the eyes of the law and must act in good faith and with complete candor. In most jurisdictions, an insurance agent is obligated to use reasonable care, diligence, and judgment to obtain adequate coverage for a client. Courts have held that agents must conduct themselves according to the professional standard of the business, and the agent will be held responsible for any deviation from that standard. As agents become more professional and are viewed as such, the standards to which they can be held will rise. And if the plaintiff can prove that most of the other insurance agents in your marketing area practice a certain procedure, your agency might very well be legally expected to have followed that procedure as well, even if you have never before practiced in this manner.

Here are the four most commonly filed categories of E&O claims in order of frequency:

1. Agent did not obtain proper or adequate coverage. More than half of the claims fall into this category, many relating to uninsured perils that the insured alleges were to be covered by the policies being purchased. Other related claims involve the agent failing to notify the insured if the requested coverage could not be obtained.
2. Agent misrepresented the coverage.
3. Agent or company failed to properly notify the insured and other parties of cancellation.
4. Agent failed to promptly and appropriately renew coverage that had been in force or failed to obtain a renewal policy with comparable coverages.

The best way to protect your agency from errors and omissions liability is to make sure first that your risk management and servicing procedures cover all the bases, and second that everyone in the agency follows those procedures at all times. Standardization is the key to preventing and defending lawsuits. Any deviation in procedures - no matter how minor - can lead to trouble. Agency principals must set the tone by following the rules themselves and be willing to monitor performance and back up their threats with action. No one is exempt, and noncompliance is grounds for termination. Three strikes and you’re out. Period.

The commitment to standardization starts with a quality control program that outlines all procedures in writing, assigns the responsibility and authority to someone to conduct periodic audits of accounts, and builds accountability into the performance evaluation process. In addition to handling the audits, the E&O coordinator should also review trade press and company bulletins to keep abreast of loss control suggestions and coverage changes so that they can be communicated to everyone in the agency. This person would also be responsible for maintaining and updating the procedures manual as new computer upgrades are installed or new job positions are staffed. All procedures should be reviewed thoroughly at least every two years and/or when another agency or book of business is acquired.

During the past ten years automation has become one of the best allies of a loss-control program. Not only do the computer systems enforce standardization, they make it a lot easier to keep detailed records of every transaction. Most courts will now accept electronic data storage as comparable and sometimes even preferable to paper files. Virtually every communication to and from insureds and insurance companies and those between agency personnel can now be documented and stored in the computer. Extensive use of internal fax capabilities, E-mail, and upload and download of data reduces errors and limits the amount of time that people must spend on routine clerical tasks. This should, in turn free, agents up to focus their attention on risk management analyses and sales activities.

It will also give agents time to check every policy and endorsement before the contracts are sent or delivered to the insureds. Independent agents must always assume that insurance company personnel could have made a mistake. Being “too busy” to do something as important as verifying that what you received is what you ordered is simply not acceptable. Even a small clerical error can literally cost thousands of E&O loss dollars - this is one of the most important services that the agent can provide to insureds. Otherwise, they might as well order the policy over the phone or Internet.

Automation, however, can also lead to a false sense of security. Agency principals should not assume that they have covered all of the procedural bases once an expensive new system has been installed and implemented. Unless top management personnel mandate the consistent use of the computer and word-processing system with its standardized checklists, applications, data storage, note logs, boilerplate letters with integrated word processing, proposals, suspense capabilities, E-Mail, binders, certificates, and other resources, some employees will inevitably find a way to work around it. For example, it’s simply astonishing how many people in the industry still use manual diary systems, in addition to or instead of computerized diary systems. Not only is this costly duplicative work, it jeopardizes the integrity of both of the systems since there is no foolproof way to monitor follow-up on suspensed items. Once again, the underlying cause of errors and omission claims is the lack of management control.

Loss Control Procedures

There are hundreds of suggestions for what to do and what not to do when setting up quality control system and standardized procedures. Everyone in the agency should attend at least one E&O seminar a year, and the ideas from those meetings should be shared with others. Agency principals or other employees who have been around for a while might dismiss these outside suggestions as not practical, not necessary, or too time consuming. While common, this stubbornness is a shortsighted response. Most of the loss control measures that your employees pick up at these meetings can and should be incorporated into your operation. In almost every case, following these procedures will provide better service for the insureds, a more satisfying work environment for the employees, a smaller chance of successful litigation, and more money for the agency’s bottom line.

Some of the most basic loss-control procedures - the ones that all insurance professionals instinctively know that they should be following - are often not implemented. Or worse, they might be included in agency guidelines, but their compliance is not enforced by management. Here’s a synopsis of some of the more critical procedural guidelines. Some of these procedures are important to help prevent a lawsuit in the first place: others will help you mount a successful defense:

• Have written procedures for every transaction, and make sure that all employees and owners follow them.
• Document every conversation with insureds and company personnel, preferably in the computer. Producer notes from client meetings that weren’t entered in a laptop computer at the event should immediately be clipped in the paper file.
• Use standardized checklists for every piece of new business and every renewal. Always assume that the previous agent made a mistake in coverage. Never “renew as is.”
• Use standardized transmittal letters and proposal forms with pre-approved descriptions of coverages, coinsurance clauses, deductibles, etc. Allow only cosmetic changes to formats.
• Always obtain a written rejection when prospects/insureds turn down recommended coverages or limits, and when they ask to have coverages removed or limits reduced.
• Become thoroughly familiar with the risk management needs of industries to whom you’re niche marketing. If you pass yourselves off as experts you will be held to this level of responsibility.
• Maintain centralized expiration and suspense controls.
• Be careful of what you promise. If you tell someone that you will obtain coverage, this becomes your responsibility. To reduce responsibility, you might say that you will survey the market for them. In either case, get back to them as soon as you know what you can and can’t provide.
• Never use the words “all risk” or “you’re covered,” and be very careful with the term “replacement cost.”
• Routinely review accounts for missing coverages (e.g. Flood, Business Interruption, etc.), for inadequate limits, or for exclusions, such as “ordinance & law.”
• Ask the insurance companies to issue all cancellations and use certified mail in instances where that is not possible.
• Never sign an application for an insured.
• Make sure that everyone in the agency knows your binding authority with every company, and that binders are faxed or E-mailed to the company immediately.
• Have separate procedures for handling E&S or non-admitted placements that include binding and insured notification.
• Report all claims promptly and leave it up to the company to accept or deny them.
• Insist that all employees file “incident reports” with one of the agency principals whenever something happens that could result in an E&O claim.
• Never follow-up on direct bill lapse notices. If you’ve been doing so in the past, clearly communicate this change in procedure to all insureds and stop (with no exceptions).
• Avoid prospects or insureds who want the cheapest program, have poor loss experience, or don’t qualify for financing. Cutting corners to get an account generally isn’t worth it — sometimes the best deal is no deal.
• Give clients bad news immediately and go armed with a plan of action to solve the problem.
• Unless you have a specialty program or an MGA, avoid placing risks for other agents or brokers.

While these guidelines are critical, there are many others that can be considered optional. In establishing your agency’s approach to E&O loss control, the owners have to decide how far to go in implementing back-up procedures to prevent claims. There comes a point at which the people in the agency have to be allowed the freedom to sell and service insurance. To completely avoid the risk of a lawsuit, you would have to shut the doors. Recognize that most lawsuits arise from unfulfilled expectations and act accordingly. Know what your customers want and need. Set up procedures that will treat them fairly and honestly, with respect for their intelligence and decision-making capabilities. Keep them informed of both the good and the bad news in a timely manner — and meet their expectations with courtesy and professionalism.

Agent’s Responsibility for Company Insolvency

Court cases since 1975 have made it clear that an insurance agent who holds themselves out to be qualified to procure insurance is required to have adequate knowledge not only of the types of coverages, but also of the underwriting companies providing them. Agents can be liable for placing a risk with an insolvent carrier if due diligence would have revealed this fact before the insurance was obtained. Later while the insured can still find alternative coverage options, the agent is obligated to inform the insured of circumstances (often learned by reasonable diligence) affecting the financial stability of the company. For this reason, monitoring the financial condition of carriers has clearly become an ongoing legal responsibility for agents.

Most E&O claims that charge agents with lack of due diligence in selecting unstable insurers have been settled out of court for relatively small sums. But as the number of insolvencies is increasing, the number of cases is also climbing, and awards will probably also increase. While some E&O policies provide coverage for these losses, others do not (check your policy). Even if there is coverage, agents stand to lose a lot of money if one of their carriers goes under. Deductibles can use up all the agency’s profits for a year. Some states require agents to continue to pay accounts current to insolvent companies while standing by their insureds for unearned premiums. A lot of personnel time must also be spent in replacing the coverage with another company — time that could have been directed to writing new business.

Considering the price that your agency might have to pay, insolvency control should be an integral part of your loss-prevention procedures. Every time that an insured or prospect is offered coverage with a carrier that has a Best rating under A-, that ‘s not admitted in your state, or with whom the agency is in some way uncomfortable, explain the ramifications and obtain a signed letter from the insured indicating that they know the situation and accept the consequences. Do not accept premium payment or issue a binder until that letter has been signed and received in the agency.

Make one agency employee responsible for tracking and disseminating financial information and ratings on all admitted and non-admitted markets. Once a year, have each company evaluated with respect to financial and operational red flags that might indicate a problem. These guidelines are not meant to be all-inclusive, but they should give you a head start in developing your own company checklist.

Possible Signs of Insurance Company Instability

• Best Rating drops below A- or goes directly to A- from A+
• Combined ratio is much higher than industry average.
• Combined ratio is increasing rapidly.
• Any state has taken any kind of action against the company
• Finance companies don’t want to finance their premiums
• Umbrella carriers won’t accept their underlying coverage
• Major executive level management changes