LIFE/HEALTH E&O AVOIDANCE
by Sheri Pontolillo
These guidelines for managing Life/Health E&O exposures also apply to any independent agency.
Offering Life and Health insurance involves Errors & Omissions exposures that require special guidelines.
“I’ve heard I should do business only with insured agents or subproducers. Why?”
It’s prudent to do business with individuals who consider E&O important because they’re generally more professional in their understanding of protecting business and personal assets. If they’re concerned enough about errors to buy E&O, they’re probably also implementing stronger in-house controls to prevent such errors. Few agents buy E&O as a safety net for recklessness.
Second, in the event of a claim, your E&O will be less impacted if there’s another carrier to share in the losses. Errors do happen, and if you suffer a claim with a valued agent who has collectible insurance, chances are your relationship with this agent will be salvaged. If the agent has to pocket the claim, they might go out of business or at odds with the agency. Also, you don’t want to be in a position of being the “deep pocket” if one of your subproducers is uninsured, especially if that producer has provided you with very little business.
“What do I do if I’m sued?”
First, consider any demand for payment a claim. Don’t wait until you receive a court summons and complaint to contact your E&O carrier. Any delay on your part in advising the carrier, which places the carrier in a less advantageous position and, perhaps jeopardizes their rights, can possibly nullify your policy.
If your policy deductible doesn’t apply to defense, placing your carrier on notice won’t cost you anything. If you’re served legal documents, notify the carrier immediately, because the time allowed for legal response to a complaint is very short.
When you notify the carrier, an adjuster and/or attorney will be assigned to you. Be prepared to provide access to your files and be available for a possible interview. Don’t discuss your case with anyone except the claim adjuster or attorney. If the plaintiff contacts you, do not discuss your case in an attempt to resolve the matter yourself, and don’t admit to any wrongdoing. This can greatly compromise your position.
The claim process can be lengthy. Stay in contact with the adjuster or attorney, and provide them with any relevant incoming documentation promptly.
“If I’m sued, do I have to consent to settle, even if I think I’ll be found innocent?”
Most policies don’t require the insured’s consent to settle. Some policies do, but the carrier won’t be responsible for any further defense costs or any damage or settlement costs in excess of their suggested settlement.
In the long run, this actually benefits the insured. To incur enormous defense costs simply to try to prove the insured’s innocence would substantially impair the program loss ratio and drive up E&O rates. Lawsuits are no fun, and the faster they can be settled, the sooner the insured can resume regular business activities and have peace of mind.
“What common exclusions should I be concerned about?”
Use due diligence when placing your client’s funds with a carrier, because an insolvency exclusion is a part of most E&O policies. This eliminates the E&O carriers from bearing the cost of bankrupt insurers, thus keeping E&O rates lower.
Punitive damages aren’t usually a covered expense. To cover them would defeat the whole purpose of assessing this type of penalty against the defendant as a deterrent to further similar misconduct. Most states don’t allow insurance companies to insure punitive damages because they’ve determined it to be against public policy.
Fraud is usually excluded if performed by the insured; however, many policies will provide a defense for allegations of fraud, and if a fraudulent act of a subproducer results in a claim, this should be a covered expense. However, this is not clear in some policies. Determine the intent of your policy, if it is not clear. If an insured employee commits fraud, this would probably not be covered. However, a Fidelity bond (for employee dishonesty), which should be a standard part of your Commercial insurance package, is designed to cover this exposure.
Hold-harmless clauses in contracts are becoming increasingly popular. Be aware that most E&O policies exclude “liability of others assumed by contract.” If you agree to hold another party harmless and indemnify them for legal costs, etc., you will have to pay these expenses out of your pocket, because the E&O underwriting process is based on the risks that are apparent on the application. Unknown liability is not an anticipated exposure and can’t be analyzed, rated, and assumed.
“What would make me an undesirable risk?”
There are reasons other than frequent claims experience for declining coverage
An E&O program should have insureds with similar exposures. Otherwise, the distribution of risk would be unequal. If your agency performs a variety of professional services, you might fall outside the underwriting guidelines, because some activities may exceed set thresholds.
Many agencies who provide auxiliary services, such as third-party claims administrations, financial planning, and pension-consulting in addition to marketing of Life, Health, and annuities, have created a separate entity to perform these services and through which they direct the revenue. Thus, when completing the application, it’s not necessary to declare the services and revenue from the other entities.
If your affiliated firms are known, the separation of activities will enable the underwriter to exclude coverage for the undesirable firms, while insuring those whose activities fit the program guidelines. It’s also important that your clients be able to clearly identify the company performing the services because if a claim is filed, this will dictate which company they name in the lawsuit. It will also facilitate claim handling if the company being sued is listed properly as a named insured on the policy and all others are excluded entities.
If you’re planning to expand your services, contact your E&O carrier, in advance to find how this will affect your eligibility, and to make sure that the services are a covered exposure.
Poor internal procedures and a sloppy application are not usually a sole reason for declination. However, if there are any questionable aspects of the risk, a neat, clear application from an agency with strong procedures and credentials, and experienced principals and staff will provide the underwriter with a greater comfort level, thus enhancing the prospect of approval.
“What can I do to protect against E&O claims?”
The most effective methods of prevention are strong in-house control procedures and training. Document, document, document, everything. Also, educate agents about new products, procedures, and changes in regulations.
Whether you or your clients complete the applications, be sure that it’s completed fully and have the client check it for accuracy.
Many claims arise due to the “post-claim underwriting” practices of carriers. Often, E&O claims could have been avoided if clients hadn’t been not led to believe they had coverage, only to have their claim denied because of something reported (or not reported) on the application, which might have been completed as long as two years before! Investigate the financial stability of the companies with whom to place business, as well as their general posture regarding payment of claims.
Conclusion
Attention to E&O details indicates caution and a sense of responsibility. It’s important for the agency to work hand-in-hand with the E&O carrier to carefully respond to any payment demand. Double-check exclusions. Determine any vulnerability on your part. And remember: strong in-house control procedures, education and training, and documentation will go far to help protect against E&O claims.
Knowledge of the E&O basics will help you intelligently purchase the significant protection that Professional Liability insurance provides — and the security of E&O will help you perform more effectively.