Errors And Omissions Considerations

The old saying 'The cobbler’s children go unshod' could apply to many insurance agencies today. Thousands of agents don’t carry any E&O insurance at all, and many more might not have the right coverage. Although they analyze risks and review policy forms to give their prospects and clients the best and most comprehensive insurance plans, they often don’t give their own situations the same type of evaluation. With the expanded responsibilities that agents have taken on, such as fee-based consultative services or providing underwriting decision-making assistance for insurance companies, comes additional professional liability exposure. The available E&O coverage has been changing dramatically, too. There’s no standard policy anymore, and having the wrong coverage can literally bankrupt a firm. If a claim isn’t covered by the policy or is in dispute, the legal costs alone can be devastating — not to mention the settlement.

Agents need to review their E&O policies 60-90 days prior to renewal for potential gaps in coverage and to see whether they can get better coverage and better pricing. A policy can and should be customized to fit your situation. Are you doing anything beyond the traditional agency’s scope, such as placing business in or having an ownership interest in a captive? Are you involved in reinsurance, TPA, or risk management consulting? Do you sell annuities, mutual funds, or other securities, particularly in situations that might involve ERISA? What about the joint venture that was just completed with the local bank — is it covered? In short, a full financial-service insurance agency is not traditional, so a normal E&O policy might not cover it.

Rather than accept the standard policy provided by major insurers, you might consider finding a specialty broker with the background to address your specific exposures. Or perhaps your insurer can modify the standard policy. Some policies offer first-dollar defense, others do not. Some include EPL coverage for a much lower endorsement premium than the full premium on an EPL policy would be. What about exclusions for punitive damages or carrier insolvency? What are the cancellation provisions? Do your homework on your own risk in order to give your clients the best protection. If your agency gets into legal and financial difficulties, you won’t have time for your insureds’ needs.

It’s important to have appropriate insurance in case of a loss, but it’s far better to make sure a loss doesn’t happen in the first place. More than two-thirds of all E&O claims are settled without payment, but the expenditure of valuable management and sales time to fight the battle can be very costly. The impact on employee morale and the agency’s reputation often can’t be measured, either. To avoid claims against your agency, instill your insureds with the confidence that the agency and its personnel can adequately meet their needs. Your personnel must also have the comfort of knowing that the situation was handled properly. A professional atmosphere, continuing education, and training are the keys to developing that confidence.

Every employee, producer, and principal should have a formal training and education program that includes external and in-house activities. Discuss the training program as part of the performance review, and place a written confirmation in the personnel file. Traditional insurance product updates are important, but in this new environment, also include such subjects as effective use of automation and communication skills. In some cases, business writing, spelling, and grammar will also be a key part of the training.

The first step in preventing E&O problems is to have well-trained employees who can service accounts and handle production and risk management. More important, however, is for agency principals to make sure the employes are managed effectively. Most E&O claims result from poor management rather than lack of knowledge. Owners who practice 'crisis management,' running to put out fires that shouldn’t have started in the first place, will tend to face E&O problems more often than those who run tight ships. Imposing rules and procedures designed to avoid problems will instill the kind of disciplined operation that will make for a better organized and eventually more profitable agency. And better organization will permit you to give even better service to the insureds, making claims less likely.

One of the worst things agency principals and managers can do is to focus on the commissions salespeople produce rather than on the quality of the business they bring in. Producers who’ll promise anything to get an account, lie on applications, insist on doing things their own way, force service reps to bend the rules, constantly interrupt others, and continually create crisis situations because of their own poor time management can’t be allowed to continue to behave that way. Some owners think the top line is so important that they must tolerate such behavior to keep a high-volume, egocentric producer. Unfortunately, they’d rather raise their E&O coverage limits instead of disciplining the producer for fear of clipping their wings or losing the large book of business they’ve produced.

Principals who are watching out for the agency’s profitability, productivity, and value know better. First of all, tolerating unprofessional behavior increases the chance of a successful lawsuit against the agency. Secondly, producers who don’t follow procedures and other control measures almost always create more work for the service and support personnel, hurting productivity, morale, and often the agency’s internal or external selling price.

E&O CONSIDERATIONS AND GUIDELINES

Legally, an insurance agent operates in a fiduciary capacity, so they’re held to the high standards demanded of a trustee. In other words, the law considers an agent to be more than a salesperson; the agent must act in good faith and candor. In most jurisdictions, an insurance agent is obligated to use reasonable care, diligence, and judgment to obtain adequate coverage for a client. The courts have held that an insurance agent must adhere to the professional standard of the industry and will be held responsible for any deviation from that standard. As insurance agents become more professional and are viewed as such, the standards to which they can be held will rise. Also, note that if a plaintiff can prove that most of the other agencies in your marketing area practice a certain procedure or do certain things for their insureds, you may be legally expected to do so, too, even if your agency has never done so.

The number of E&O claims increased significantly in the late 1980s and early 1990s, then fell off. That’s no reason to be complacent, though: what with overextended insurance companies, a litigious society, and the number of attorneys hungry for work, plenty of claims — legitimate, questionable, and frivolous — will be filed. Most agencies can expect that at least one will be filed against them within the next five years, and some will have more.

These are the most common types of E&O claims, in order of frequency:

• Plaintiff alleges that the agency failed to obtain proper or adequate coverage. Generally, a client may recover from the agent the loss they sustained because of inadequate or nonexistent coverage when the agency undertook to procure the insurance or failed to notify the customer/prospect properly if they were unable to obtain the requested coverage. At least half of the E&O claims filed during the past 20 years fall into this category.

• Plaintiff alleges that the agency misrepresented the coverage. In such cases, either the agency led the client to believe that coverage was in force or that the policy covered certain perils that it did not.

• Plaintiff alleges that either the agency or the company failed to properly notify them of a pending cancellation. It’s important to note that in direct billing, in which cancellation notification is the insurer’s responsibility, an agency may jeopardize itself by contacting the insured when they receive a lapse notice. The insurer holds the agency harmless unless the agency injects itself into the situation.

• Plaintiff alleges that the agency failed to promptly and appropriately renew coverage that was in force or failed to obtain a renewal policy with comparable coverages. This problem mostly arises when there hasn’t been sufficient communication about renewal options.

The best way to protect your agency from E&O claims is to make sure your risk management and servicing procedures cover the important bases. A commitment to standardization starts with a quality-control program that:

• Outlines all procedures in writing
• Gives a designated E&O Coordinator the responsibility and authority to periodically audit accounts
• Builds accountability into the performance evaluation process

In addition to handling the audits, the coordinator can also review the trade press and company bulletins for loss control suggestions and coverage changes and inform everyone of them. The coordinator should also maintain and update the procedures manual as new computer upgrades are installed and new positions are filled. Review all procedures thoroughly at least every two years and/or when the agency acquires another agency or book of business.

After establishing your procedures, make sure everyone follows them at all times. Standardization is the key to preventing and defending lawsuits. Deviation from your procedures, no matter how minor, can lead to legal action and the possible loss of a lawsuit. Agency principals must set the example by following the rules themselves. Also, they must be willing to monitor the performance of the staff and, more importantly, the producers. In fact, the salespeople should be watched more closely than the other employees, because most successful E&O suits result from something a producer did or didn’t do.

LOSS CONTROL PROCEDURES

You can learn about quality-control systems, standardized procedures, and loss-control measures from the trade press and seminars. Any knowledge gained in an E&O seminar is important and should be incorporated into your agency operations. Principals and other employees who’ve been in the business for some time may stubbornly and shortsightedly dismiss new methods as impractical, unnecessary, or too time-consuming. However, following these procedures will result in better service to the insureds, less chance of successful litigation, a better working environment for the employees, more profits, and a higher agency value.

Some of the most basic loss-control procedures, the ones all insurance professionals know they should follow, are often the ones that aren’t implemented. Or they may be in the agency guidelines, but management doesn’t mandate compliance with them. Here are some of the more crucial procedures to help you prevent and defend lawsuits. This list isn’t all-inclusive, but it will give your agency a starting point in developing an effective E&O loss control program.

• Have written procedures for every transaction and make sure all employees (including owners) follow them.
• Document every conversation with insureds and company personnel either in the computer or manually. Producer notes from client meetings that aren’t entered into a laptop at the time should immediately be clipped to the paper file or entered into the computer when the producer returns to the office.
• Use standardized checklists for every piece of new business and every renewal. Never 'renew as is.'
• Create standardized transmittal letters and proposal forms with pre-approved descriptions of all coverages, deductibles, coinsurance clauses, and so forth.
• Always obtain a signed written rejection when a prospect or insured turns down recommended coverages or limits and when they ask to have coverages removed or limits reduced.
• If you tell someone you’ll get coverage for them, you have an obligation to do so. If you tell them you’ll survey the market and see what you can find, your legal level of duty isn’t so high. Whatever you promise, follow up in writing as soon as possible after you get an answer, especially if the answer is negative.
• Maintain centralized expiration and suspense controls on the computer, and make sure all employees use them all the time.
• Learn the risk management needs of industries to which you’re niche marketing. If you pass your agency off as expert, you’ll be held to a higher standard.
• Never use 'all risk' or 'fully covered' in any communication, and be careful with the term 'replacement cost.'
• Review all agency accounts (including Personal Lines) annually. Watch for missing coverages, such as flood or business interruption, limits that are too low, and exclusions that might cause a problem. If you feel that an account is too small for such a review, get rid of it. You can’t afford the exposure.
• Use certified mail to issue all cancellations out of the agency. If the insurance company requests a cancellation, have them contact the insured in an appropriate manner.
• Don’t sign an application for an insured, and don’t make up missing information. It’ll come back to haunt you, and the commission just isn’t worth the risk.
• Report all claims promptly, and leave it up to the insurance company to accept or deny them.
• Make sure everyone in the agency knows your binding authority with each insurance company (this should be in the procedures manual) and that binders are numbered, recorded, and faxed/e-mailed to the company immediately.
• Have separate procedures for handling E&S, nonadmitted placements, and insurance companies with ratings lower than A-minus, and include a written sign-off from the insured acknowledging that they understand the placement risk.
• Never follow up on direct bill lapse notices. If you’ve done so in the past, stop and send a written notice to the insureds that you won’t do so in the future.
• Unless you have a specialty program or an MGA, don’t place risks for other agents and brokers.
• Avoid prospects and insureds who have poor loss experience, want the cheapest program, or don’t qualify for financing programs. Cutting corners just to get an account isn’t worth it.
• Give clients bad news immediately, and present them with a plan to solve the problem.

These guidelines are only a starting point. In establishing an agency’s approach to E&O loss control, owners and managers have to decide how far to go in setting up duplicative procedures to prevent claims. It’s important to have proper documentation of conversations and written records of all coverage-sensitive issues, but at some point the people in the agency must have the freedom to sell and service insurance. If you want to be completely free of the risk of a lawsuit, you’ll need to shut your doors. If you stay in business, you take a certain amount of risk. Deciding how much risk is up to the agency principals. Set up procedures that will treat customers fairly and respect their intelligence and decision-making capabilities. Keep them informed of good news and bad in a timely manner. And meet their needs with courtesy and professionalism. A satisfied insured is less likely to call a lawyer if things don’t go their way.

The late Carol Hammes, principal of the Middleton Group, was one of the Independent Agency System’s most widely respected management consultants. She will be sorely missed. Reproduced, with permission, from The Middleton Letter.