Preserving Agency Value

This month we will take a look at two more areas where agencies and their owners can get into serious legal and financial trouble: real or perceived errors and omissions and Equal Employment Opportunity Commission (EEOC) violations. In a society where people can sue for almost any reason and where the publicity of high jury awards makes legal action appear to be more lucrative than working for a living, it is impossible to completely protect yourself or your agency from litigation. But there are a number of steps that can be taken to lessen the probability of a lawsuit in the first place and to mitigate the ensuing financial damage if a subpoena does get served.

Despite the recent strides made in improving automated support in the industry, the selling and servicing of insurance policies through the independent agency system is by and large still dominated by manual intervention. As a result, the number of mistakes that are made at every level of the policy issuance and claims handling process are simply mind boggling. Willis Corroon, one of the country's largest professional insurance brokerage firms, conducted an audit not too long ago and discovered an average of 2.6 mistakes in more than 58% of the agency's insurance policies. There are undoubtedly a number of well-run independent agencies with a lower percentage of errors in their files than this, but there are undoubtedly many firms with the same or worse experience than Corroon's findings.

Most of the identified errors relate to schedules, forms, coverages, or policy dates which could all potentially result in claim problems for insureds. Although 88% of the mistakes could be traced back to the insurance company involved, the E&O implications at the brokerage level are nonetheless very real. The agent will probably be included in the lawsuit and may indeed be liable if it can be shown that a reasonable and prudent agent or broker using standard procedures would have caught the company's error.

Legally, an insurance agent operates in a fiduciary capacity and is therefore 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 scrupulous good faith and candor. In most jurisdictions an insurance agent's obligation is to use reasonable care, diligence, and judgment to obtain adequate coverage for a client. Courts have held that an agent must conduct him or herself 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, you may very well be legally expected to have followed that procedure as well, even if your agency has never done so.

Most E&O claims evolve from poor management rather than lack of knowledge. Agency owners who practice crisis management with their staff and their accounts tend to find themselves in hot water more often than those who run a tight ship. By imposing rules and procedures designed to avoid E&O problems, you will instill a level of discipline in the operation that will make the agency better organized and eventually more profitable. And better organization will permit you to enhance the level of service provided. Agents who deal honestly and proactively with insureds, keeping them informed about what is happening and allowing them to participate in the decision-making process regarding their risk management needs, have fewer claims and a higher retention rate.

While the number of E&O claims has increased significantly during the past decade, the basic reasons for the claims have remained the same. The following is a list of the four most commonly filed categories of 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 sustained because of inadequate or nonexistent coverage when the agency undertook to procure the insurance or failed to notify the customer properly if they were unable to obtain the requested coverage.

Plaintiff alleges that the agency misrepresented the coverage. In these situations, 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 of cancellation. Note that in direct bill situations where the cancellation is the company's responsibility, agents may put themselves in future jeopardy by contacting the insured when a lapse notice is received.

Plaintiff alleges that the agency failed to promptly and appropriately renew coverage that had been in force. This reason includes the failure to obtain a policy with comparable coverages at renewal.

The best way to protect the agency from errors and omissions liability is to have standardized procedures that everyone must follow, including the owners and other producers. Once a year, management personnel should conduct an audit and review the way transactions are being handled, and by whom. Quality control should be part of every individual performance review and the salespeople should not be exempt from this scrutiny. In fact, they should be watched more carefully than the staff personnel since most of the E&O suits that are filed are the result of something that a producer did or did not do. And everyone in the agency (even the clerical people and particularly the owners) should attend at least one E&O seminar every other year to keep the level of awareness high.

It is also a good idea to appoint an E&O Coordinator in the agency. This person would, in addition to his or her other functions, review the trade press and association newsletters to keep abreast of new developments in the relevant types of legal actions being filed and to look for loss-control suggestions from other people in the industry who have been exposed to recent litigation activity. This person should also review the literature from insurance companies that accompanies the announcement of new policies or forms since important changes or reductions in coverage are often hidden in the fine print. A procedure should be set up to have the coordinator summarize items of note and then report them to the other agency personnel in a memo, newsletter, or meeting.

Presently, there are two areas of concern that are not new E&O risks but that have taken on added importance because of what has happened as a result of Hurricane Andrew and Felix, the Oakland and Malibu fires, the Midwest floods, and various other catastrophes in recent years: the effect of building code changes on Replacement Cost coverage and the high volume of business that some agents must now place through nonstandard markets. An agency with a person in a coordinator position reviewing trade press articles would already have prepared an action plan and revised procedures to address both of these very real and rather frightening concerns.

In light of the devastating effect that the ordinance and law exclusion has had on claim settlements and the public's perception of the insurance industry, every agency needs to be re-evaluating standard communications and risk review procedures regarding this and related coverage issues. It now appears that the term replacement cost may be just as tricky to use in proposals and letters as all risk. Are you aware of how many of your insureds have policies with that exclusion and how it might affect them in the event of loss?

And while the people who normally handle claims in the agency are aware of what they can and cannot say to an insured about a loss being covered, does everyone else in the agency know what to do if they have to get involved in claims reporting as the result of a heavy influx of claim calls? Many agencies got into trouble during recent catastrophes because insureds were told that they were covered and that they should start getting the damage repaired. Leave it up to company personnel to handle acceptance as well as declination.

If your agency is located in coastal areas along the eastern seaboard or the Gulf of Mexico, you may find that you are now writing a substantial amount of business in non-admitted and excess markets or through the pool. Agencies located in the Midwest having to deal with Flood insurance, which also has a different set of rules. Do you have a separate set of detailed procedures for handling non-conventional business? Do you have an up-to-date understanding of the agency's responsibilities with respect to the potential insolvency of a carrier?

While changes in consumer awareness and in the insurance marketplace can alter an agency's exposure to certain E&O risks, internal redirection in the agency itself can also have a significant impact. As a result of the soft market conditions and the trend toward niche marketing producers may have started directing their sales efforts into new types of accounts or lines of business. It is critical that agency management make sure that the producers and employees have the necessary expertise to properly evaluate and insure these accounts, and if they do not, that they are not out there representing themselves (and your agency) as experts to either the insurance companies or the prospects/insureds.

In establishing the agency's approach to E&O loss control, management has to decide how far to go in establishing back-up and often duplicative procedures to prevent claims. It is certainly important to have proper documentation of conversations and written records of all coverage sensitive issues, but there comes a point when the people in the agency have to be allowed the freedom to sell and service insurance. In order to completely avoid the risk of a lawsuit you would have to shut the doors. If you stay in business you are taking a certain amount of risk. Deciding how much risk to take is up to the owners, and we suggest that they base that decision on the common sense gut instinct that has guided the decisions that have made the agency successful in the past. Set up procedures that will treat customers fairly and with respect for their intelligence and decision-making capabilities. Keep them informed of both the good and bad news in a timely manner. And meet their needs with courtesy and professionalism. A satisfied insured will be less likely to call a lawyer if something goes awry.

The Equal Opportunity Commission sees more than 90,000 claims to be filed against employers in any given year. Almost two-thirds of these actions relate to Title VII of the Civil Rights Act of 1991, which now also permits punitive damages in certain employment discrimination cases. And one-fifth will be related to the Americans with Disabilities Act, soon to be expanded to any business that employs more than 15 people. The number of sexual harassment lawsuits in the workplace is also on the rise. As a result, the possibility that insurance agency owners will end up in a legal tussle with current or former employees is much greater than it was in the past.

Because social and legal attitudes are constantly changing, agencies should review employee relations and personnel issues as part of the annual planning process. What might have been acceptable or at least tolerated last year could be a ticking time bomb this year. We have not yet seen a class action suit filed because the females in the agency were referred to as girls by one of the male owners, but we would certainly not be surprised if it happens some time soon!

Lawsuits for wrongful termination, discrimination, defamation, intentional infliction of emotional distress, and breach of contract usually arise from charges of real or perceived unequal treatment in the areas of compensation, promotion, or discharge. Procedures, policies, or employee benefits cannot be applied differently because of a person's gender, age, marital status, or even a family relationship. For example, if the agency provides dependents' coverage in the group medical plan for married men, it must also do so for divorced women.

Salaries must be fair and equally applied as well-something that many insurance agencies have yet to address. An agency hiring a male underwriter will often bring him in as a marketing manager, commercial lines manager, or producer with compensation at least $10,000 a year more than they would pay a female underwriter with equal experience who is only being considered for a CSR position. Or a male applicant with an accounting degree will often be hired as a controller at $35,000 a year while a female with the same education will be considered to be a bookkeeper at a salary of $25,000. It would be far better for agencies to voluntarily change their hiring and salary practices before they are legally forced to do so.

No matter how small the agency is, it is essential to have written rules and to follow those rules in all personnel decisions. If agency owners tend to operate with a seat of the pants management style and make snap decisions about hiring, performance, and disciplinary issues they are asking for trouble. Standardized job descriptions with specific qualifications and salary ranges for the position, written performance evaluation systems, and salary administration plans not only improve agency productivity, they also go a long way towards helping avoid legal pitfalls.

Employee handbooks or personnel manuals are the best place to outline agency policies and procedures regarding employment issues. These manuals must be carefully constructed to avoid misinterpretation, and they should be reviewed and revised every six months to make sure that current practices reflect the written word. One position in the agency should be given the responsibility for handling this review (often the office manager in larger agencies or the bookkeeper in smaller ones) and they should be held accountable for conducting it in a timely fashion.

The law does not require a business to provide a written manual  but the existence of one is generally accepted to be an indication that the owners intend to treat employees and customers fairly and consistently. Having the office rules in writing also eliminates misunderstandings regarding interpretations that often occur in verbal communication. The document should clearly state that it is not a contract of employment; that it is only a general source of information about policies, procedures and rules as they exist on the date of publication or revision. Employees should be asked to sign a paper acknowledging that they have received and read the manual and that they understand what was in it. This confirmation should then be made a permanent part of the employee's personnel file. The following is a general outline of what is commonly included in an insurance agency personnel manual:

The filing of legal action is not the only way that employees can hurt the financial stability and value of an insurance agency. Even with sophisticated computer systems there are still a substantial number of instances where dishonest bookkeeping personnel are embezzling funds or where incompetent employees are getting the books or insurance accounts so screwed up that owners have no idea where they stand once they discover the problem. There are also the more insidious and difficult-to-handle situations surrounding long-time employees who believe that they are invulnerable. Owners and producers have come to count on them over the years, and they are allowed to get away with subverting the computer system or new organizational and procedural programs designed to streamline processing and improve customer service. These malingerers can have a dramatic effect on the morale of the other employees and the overall productivity of the agency, and yet the owners feel that they cannot force them to shape up or they will leave. In most cases, this is precisely what needs to happen.