Improve your odds of winning an E&O lawsuit by following these preventative measures.
A report issued in 2006 by Marsh & McLennan warned of a growing gap between the liability risk of insureds and their corresponding levels of insurance coverage. An article in the Sept. 8, 2003, issue of Insurance Day stated, “According to the report, companies covered in the survey reduced insurance limits by an average of 9.4% over a 12-month period ending in January 2003.”
Since the number and size of claims don’t appear to be decreasing, companies that reduce limits are taking a gamble. Some will win. Others will roll snake eyes. In the latter case, it’s not just the companies who lose; many agencies will inherit problems and incur E&O claims as a result. Firms that gamble, lose, and end up with uncovered claims might look for someone to bail them out and decide to sue their insurance agents. After all, they have nothing to lose by doing so.
You might not be able to prevent lawsuits from occurring, but you can improve your odds of winning with good E&O preventive measures.
Here are a few recommendations:
- When a prospect doesn’t accept your proposal, send a letter stating that your agency has not placed the coverage per the prospect’s request. This prevents the prospect from later claiming that it asked the agency to arrange certain coverage, but the agency failed to do so. Such a scenario might seem far fetched, but it has happened.
- Never accept an oral request to decrease coverage. Insist that all such requests be submitted in writing. E-mail will suffice.
- Review exposures regularly. Don’t depend on clients to give you accurate values or schedules.
- Last, and most important, use coverage checklists to ascertain which coverages a client needs, and have the client sign the checklist. This measure places responsibility on the client, rather than the agency, for accepting or declining recommended coverages.
Coverage checklists are great tools for decreasing E&O exposures, but few producers use them. Risking E&O claims by shunning coverage checklists is like walking into a burning building without a fire suit even though one is readily available.
One reason that agents might choose to face the flames unprotected is that they perceive their risk to be low. A producer might experience an E&O claim only once or twice, if ever, and thus might reason that the slight risk involved doesn’t warrant the time it takes to complete a coverage checklist — especially since their employer, rather than the producer, is responsible for paying any claims that might arise.
When interviewed, many producers say they fear that clients will refuse to take the time to complete a coverage checklist. Although this might hold true for some clients, surveys indicate that the majority of Commercial Lines clients will give producers the time to go through a checklist. In fact, most insureds consider this time well spent and appreciate the agent’s added-value service. Also, since it’s in a client’s best interest to carefully review its coverages and assess its insurance needs, a producer should think twice about continuing to solicit clients who refuse to do so. A coverage checklist signed by a client can help stave off future E&O claims — as can walking away from a prospect who won’t complete one.
Some producers don’t use coverage checklists because they fear that the documents will prompt clients to ask coverage questions that they can’t answer. Insurance is a complex subject, and few agents have in-depth knowledge of all available coverages. Instead of hiding from this fact, when faced with a question to which you don’t know the answer, just say, “That’s an excellent question. I’ll research how it might affect your situation and get back to you.”
Using coverage checklists is a win-win solution for both clients and producers. It helps ensure that clients obtain the coverages they need and allows producers to minimize their E&O exposure and often to sell more insurance. When insureds are asked to sign statements acknowledging that they’ve declined certain coverages, they often realize how important the coverages must be and decide to buy them after all. Remember the Marsh & McLennan study showing that insureds aren’t buying as much coverage as they need?
Unless clients are presented with coverage checklists and asked to sign off when declining coverages that their agents recommend, they might feel, consciously or subconsciously, that if they suffer an uninsured or underinsured loss, they can always sue their agents. On the other hand, a coverage checklist makes them face the fact that the responsibility for buying all the coverages they need is theirs, and that they need to protect themselves.
Let’s face it. Losses occur whether or not your insureds are covered. As long as insureds resist buying all the coverages they need, your E&O exposures will continue to increase. But if you take preventive measures to protect yourself and your clients, you can avoid getting burned.