Mediation might — or might not — be an effective way of settling E&O claims.
Most Errors and Omissions (E&O) claims arise when a client has a claim denied. The old saying that “perception is reality” applies here — if your client perceives wrongdoing, their attorney will do everything possible to make it appear so.
Here are just a few of the unpleasant ways that you might find out about a problem with a claim:
- A client writes or calls the agency to complain about the handling or denial of a claim.
- The client visits the agency to vent over the way a claim was resolved.
- A company adjuster calls to tell you about a dissatisfied client and a problem on a claim.
- Your client’s attorney requests a response from you over the phone or in writing.
- The attorney files a complaint against the agency and/or the company.
- An insurance company files a complaint against the agency after it pays a claim or is sued by a policyholder.
When you receive the unpleasant news, stay calm and rational, remain objective, and don’t get defensive. Instead, focus on getting to the bottom of what happened. Ask yourself these questions:
- Can I put myself in the client’s shoes and see the situation from another perspective?
- Did the agency contribute to the problem, even in a minor way?
- Am I reacting to the situation with anger, resentment, or hostility toward the client or their attorney?
- Am I accepting responsibility for what happened?
- Does the client seem to be looking for a “deep pocket” to raid after failing to spend the money for the proper coverage in the first place?
- How can I turn the situation into something positive?
Don’t ignore the situation because you think the client’s case is frivolous. Frankly, there are few E&O situations in which there isn’t something, even quite minor, that the agency could have done better. When push comes to shove, your client’s attorney must have seen some kind of case in order to pursue it
The worst thing you can do is turn the case over to your E&O carrier, have them assign an attorney, let them take the initiative and forget it. The attorney will probably mediate the case on behalf of the E&O carrier, with your interests playing a small role. Most attorneys know little about the insurance industry and agency practices. But they do know who is paying their bill — the E&O carrier — and they sometimes assume that what’s good for the E&O carrier is good for you.
You or your consultant will have a big job getting the attorney to understand your situation and become your advocate. After that, you’ll be ready to tackle your defense and proceed in earnest with the discovery process.
Your next step is to decide whether to take your chances in court or settle the case. Keep your options open and follow the direction of your attorney and your E&O carrier. In our legal system, a trial should be the last resort. The odds aren’t good that you’ll get an informed, objective jury. They’re often made up of people who don’t like insurance companies and don’t differentiate between companies and agents. Even a trivial error in handling a client could balloon out of proportion during a trial.
MEDIATION: THE PROS
A trial is expensive and time consuming. Mediation, on the other hand, is a relatively risk-free way for attorneys to hear their opponents’ general case strategy. If both sides come to an agreement, the agency avoids the stigma of a judgment, and the client gets some satisfaction.
The incentive to mediate is greater when plaintiffs allege unfair trade practices and other Insurance Code violations. The client’s attorney might be making these allegations only to force mediation. But that might not be a risk you want to take. If you lose in court, your E&O carrier could enforce a probable exclusion of coverage in the Property/Casualty contract because of violations of the Insurance Code and illegal acts, including unfair trade practices.
MEDIATION: THE CONS
For one thing, it’s almost a foregone conclusion that you’ll pay something. During mediation, you might find that the plaintiff has a far better case than you originally thought. Once they have a general understanding of your case, they might want to settle on terms that are unacceptable to you, forcing you into a trial. Just to avoid a trial, you might end up paying something when you really shouldn’t be giving a dime to someone who doesn’t deserve it. If the case is high profile, it could attract media attention. (The mediation agreement can include non-disclosure provisions.)
There’s still another side to the situation. What happens when the alleged damage to your client is below the amount of your E&O deductible? If you’ve had at least a small degree of responsibility for the client’s problem, you might want to negotiate a direct settlement. This form of mediation can keep the client happy, avoid the legal process, and demonstrate to your E&O carrier that you have a responsible and professional approach to business.
The key is to get it done as quickly as possible. Once an agreement is negotiated, get the client to sign a release. We suggest that you have your attorney prepare it. You could also get the release from one of your carrier’s claim departments.
A word of caution: If there’s any third-party-liability, get your attorney involved. Tell your E&O carrier what course of action you’re considering and get the claim on record with respect to policy reporting provisions. The carrier might require you to file a report, handle the claim through them, or use another attorney. Try to get them to understand that you can resolve the issue quickly at your expense (within your deductible). They might be willing to leave it to you to handle a cut-and-dried claim that you and your attorney can get settled quickly.