For agencies to truly manage their agencies, it is vital that they understand the standards that the legal system in our country will hold them to. While these standards are not identical in every state, there are a significant number of similarities. In addition, the customers and clients of the agencies are held to a legal standard as well. Through awareness of these standards, agencies can more effectively develop processes and initiatives to better manage their exposure.
In the late 1980’s and early 1990’s, the frequency (how often E&O claims are made against agencies) of E&O claims was at an all time high. Many E&O carriers were reporting results of approximately 15% (15 claims for every 100 agencies insured). Although the litigiousness of our industry has increased, the E&O frequency results have fallen to the 6% – 8% range. This clearly shows that for those agencies that are committed to E&O loss prevention, good results can and do happen.
Virtually every year, the # 1 cause of E&O claims has been “Failure to provide the proper coverage”.Thus, when one of your clients has a loss and finds out that they didn’t have the coverage they thought they did or should have had, they may very well bring an E&O claim against your agency. In 2012, this accounted for 60% of the claims – up considerably from a couple of years ago.
Legal Duties of the agent
The main premise of an agent’s E&O policy is built on the concept of legal liability – in other words, the agency must be found to be legally liable for the policy to pay.
In most, if not all states, an insurance producer has a common law duty to obtain the coverage that the client specifically requests within a reasonable time or to otherwise inform the client that you are not able to do so. It is thus extremely important to listen to the request from the customer. Your duty as the agent or broker is defined by the nature of the request so listen carefully to any specifics that the client is requesting.
Absent a specific request for coverage, the producer should not be liable for failure to procure a particular type or amount of coverage.
A producer owes the client a duty of reasonable care and diligence, but absent a specific request for coverage not already in the client’s policy or the existence of a special relationship with the client, the agent/broker should have no continuing duty to advise, guide or direct a client to obtain additional coverage. This could change if it is found that the agent had a special relationship with this specific client.
While a producer owes a duty of reasonable care, an agent/broker in the basic relationship with the customer should not be held liable for failing to provide unsolicited advice after coverage is obtained regarding a client’s ever-changing insurance needs.
In many states, the concept of special relationship is being introduced and while it is still somewhat an untested concept, that this could be applied in cases where warranted. If certain exceptional or particularized situations arise, by conduct or by express or implied contract with a client, there is the potential for the concept of “special relationship” to be applied (these are in addition to those fixed at common law”).
Legal duties of the consumer
In most states, the insured has a duty to read and understand their policy. In numerous E&O cases, this has proven to be a key issue in the defense of your agency. Ignorance or failure of the insured to read their policy will not relieve them of their obligations. To reinforce this duty, it is highly recommended that when an agency sends the policy to the insured, they should include a generic cover letter that requests / urges them to read their policy and if they have any questions, to immediately contact the agency.
The insured is required to provide truthful and accurate information in the insurance application and should personally sign the application.
20 Practical Tips to Avoiding E&O Claims
When presenting proposals for property coverage with co-insurance include a claim example to educate your client or prospect how co-insurance works and the importance of insurance to value. Include definitions of key terms specific to your proposal such as Actual Cash Value and Replacement Cost. Always discuss the value of independent appraisers to establish replacement cost values. If your prospect or customer provides you with information used by your agency in estimator-type calculations of property values, include the following disclaimer on your proposal:
Property limit(s) was/were calculated based upon information provided by “Name of Prospect/Company”
Excess & Surplus Lines
When receiving General Liability proposals from your wholesaler, be on the lookout for the Classification Limitation endorsement. This endorsement is intended to restrict coverage only to the classification shown. Thus, if the client performs any other type of work, they will not have any coverage. It is critical that the client be advised of this endorsement and its implication. In addition, they should be advised of the need for them to contact your office before they begin to perform other types of work so that the proper coverage can be secured.
When providing proposals for your customers, it is recommended that you provide a series of limit options for the customer to consider with a statement noting that higher limits may be available. The goal is to help educate the customer and require that they make a decision on which option they are selecting. The proposal should reflect the options chosen and those rejected.
Include a Cover letter with policy
In the vast majority of states, the customer has a duty to read their policy. To encourage them to do so, it is highly recommended for the agency include a cover letter when sending or delivering the policy. The following is some suggested verbiage for this letter: Enclosed please find the renewal of your (type of coverage) written with (name of insurance co). You will be receiving your premium invoice shortly. It is important that you take the time to read this policy to ensure your understanding of the limits and the coverages. If there are any questions or you wish to make any changes to this policy, please contact our agency promptly. The limits of insurance have been selected by you and we can’t guarantee that the limit selected will be sufficient in the event of a major loss. Higher limits are available upon your request. Thank you for your confidence in our agency; we appreciate your business.
Documenting interactions with carriers / markets
Oftentimes, it is necessary to contact the carrier on various coverage and underwriting issues. To ensure that there is no misunderstanding on the information communicated and that there is a solid record of the conversation, take the time to document the key conversations. This documentation should not only be in the agent’s system but also with an e-mail or letter back to the carrier restating the matter and resolution. If a problem were to develop, this documentation could be instrumental in absolving your agency of any wrongdoing.
Moving coverage from one carrier to another
Are you looking to move an account to another carrier? If doing so, be sure to identify any areas where the replacement policy is inferior to the expiring policy. This could include areas such as the scope of coverage, rating of the carrier, sub-limits, exclusions and definitions. It is highly recommended that these differences be brought to the attention of the customer for their approval and sign off. This documentation should be retained in the agency file.
Require that the insured sign the app
There is tremendous power to a signed app. After the completion of an application, require the customer to review it to ensure its accuracy and then request their signature. The goal is to make sure that the agency personnel has not misstated the answers to any of the questions. By requiring the customer to sign the application, they are attesting to the accuracy of the information. Their signature on this document could play a significant role if the information is alleged to not be accurate.
Listen to what your customer is requesting
In most, if not all states, the producer is held to the duty of providing the coverage that the customer has specifically requested. If they are not able to provide that coverage, they should inform the customer accordingly. Due to this requirement, it is important that producers listen carefully to what the customer is requesting. The essence of this conversation should not only be documented in the agency file but also via some form of written communication back to the customer.
Broker of Record letters
When you take over an account by broker of record, it is important to realize your work is not done; in fact, it is actually just beginning. One of the key issues involves to what degree the current policies reflect the current exposures. It is best to treat this new customer, personal or commercial, as if they were a brand new prospect. Prove your value by conducting a comprehensive review of the file. This includes reviewing their current program, identifying their exposures and providing them with coverage options to consider. Exposure Analysis Checklists are a great tool to assist you in this regard.
Perform a policy review
Although it is generally felt that the quality of carrier issued policies has improved, mistakes certainly can and do happen. As a result, there is certainly the potential for any policy not to reflect what was ordered. It is suggested that every agency have a procedure to check the policy comparing it to what was ordered. It is best to have a form that addresses all of the potential areas to ensure consistency and thoroughness. The person performing the comparison should initial and date when this task was performed.
Hold periodic staff meetings
There is no doubt that agency staff meetings, if properly conducted, can be extremely valuable in many areas. They include: Communication – these meetings are a great way to address current issues, changes in company binding levels or new coverages; Education – if possible, have a topic established for each staff meeting. The subject may involve “Discussing the E&O exposures of each staff level” or issues centered around the specific time of the year; Confirmation of key agency practices – staff meetings present the perfect opportunity to stress key agency practices, such as the importance of thorough and timely documentation not only in the agency file but with written documentation back to the customer when appropriate. Staff meetings provide a clear and consistent message to all members of the agency.
Include definitions in your proposals
To assist customers in totally understanding your insurance proposal, include the industry definitions for many of the key terms and phrases. Not only will your client gain a better understanding of their insurance program but this education will also enhance the reputation of your agency and probably lead to increased sales. Check with your Exposure Analysis Checklist as they should have this information readily available.Also consider including claims examples where possible to show how the coverage works.
Be honest with your carriers
The basis of the relationship between the agency and the carriers it represents is heavily based on trust. When providing your carriers with submissions, there is an expectation that the application truly represents the quality of the risk. This is the only way that the carrier can truly assess their appetite and determine the proper premium for this exposure. If you were to mislead the carrier into writing a risk that they believe is better than it really is and that “error” was discovered, you will seriously damaged your reputation in the industry and also that of the agency you work for. If a loss occurred and the carrier was prompted to pay the loss that they don’t feel they should have had to, the carrier could pursue legal action against your agency.Bottom line, the relationship between your carriers and your agency is built on trust. Being totally honest is a key part of that relationship.
Use an Exposure Analysis Checklist
Effective use of an Exposure Analysis Checklists is considered by many the closest thing to a silver bullet in minimizing the potential your agency could face an E&O claim. They provide a tremendous amount of technical knowledge on over 650 SIC codes to help the producer better understand the risk. In addition, they provide a series of key questions to enable you to accurately present the risk to your carriers. In addition, if a customer does not want specific coverages, the checklists will prompt the producer to get the signature of the customer noting their rejection. This type of documentation has been shown to be a significant issue should E&O litigation develop.
Do your apps meet the 3 c’s ? (complete, current and correct)
Some solid tips to turn the power of the app in your favor: 1) Ensure that all applications are complete and there are no unanswered questions, 2) Don’t complete this year’s app using the answers from last year’s app and 3) Whenever possible, complete the application face to face with the prospect, asking them the questions exactly as they appear and accurately noting their response on the application. After completing the application, request that the prospect/customer review it to ensure you have accurately stated the exposure. Then have them sign it. By mandating and enforcing these requirements, the power of the application is now in your favor.
Documentation – keep it professional
While the phrase document, document, document is very common, there is much more required for documentation to be truly effective. The documentation should be detailed. It should include specific names and details and comments on any open items yet to be resolved. A good rule of thumb is: If the person doing the documentation in the agency system is not in the office the next day, will the person reading the documentation know exactly what was discussed and who it was discussed with. The documentation should be professional. Negative or defamatory comments in your system about your client can be very damaging to your agency’s defense if an E&O matter were to develop. The rule of thumb: Don’t put anything in the system that you wouldn’t want a jury to read.
Voice-Mail / E-mail
Since binding or modification of coverage may not be as easy as it sounds, include a statement advising your customers / prospects that “coverage cannot be bound, deleted or altered without speaking directly with a representative of the agency”. This will enable the agency to secure the necessary information and to ensure that the insured understands any insurance ramifications.
Special care and attention to detail should be the rule of thumb when issuing certificates of insurance as they have become a major E&O issue. To ensure that the certificate accurately references the coverage as provided by the policy, look to have the certificate issued by your agency management system. Also, be sure to be using only the latest certificate edition dates.
Confirm coverage discussions
To address any potential misunderstandings between the agency and its customers, discussions involving coverages, limitations, requirements to bind, etc. should be confirmed with some form of written communication (preferably e-mail or letter). The written communication should confirm the agency’s understanding of the issue with a statement that if this position is not correct, the customer should contact the agency immediately.
Be careful how you promote yourself
An Insurance Agency will be held to how they promote themselves verbally and in writing. References to the agency as an “expert” or “specialist” should be avoided as they have the potential to raise the legal standard the agency will be held to. Use of these types of words have the potential to raise the standard from that of an “order taker” to an “advisor”. This could create a “special relationship” standard.