An Estimated 30% of All Agency E&O Claims Arise from Handling Auto and Homeowners Business
When dissecting Errors & Omissions claims frequency, it is apparent there is real E&O exposure for agencies writing personal auto and/or homeowners coverage. The latest reports show that 25 percent to 30 percent of all E&O claims arise from these two lines of business, with E&O claims from homeowners outpacing personal auto. Statistics from 2010 show that homeowners is one of the top lines of business involved in E&O claims. While there are several reasons for the overall claims frequency results, there is no doubt this segment generates significant transaction activity. Moreover, the sophistication level of customers can vary greatly.
Regarding severity (average settlement dollars), this number is typically less in personal lines compared to commercial lines. With an average severity of $40,000+ for all E&O claims, the average homeowners claim is around $30,000, while for personal auto it is slightly lower, averaging around $25,000.
Common Homeowners Errors
1. One of the bigger issues involves valuation determining the proper property limit. While it is common for agents to use estimating tools provided by their carriers, the quality of the output is typically directly attributable to the quality of the input. In addition, regarding questions subject to judgment (standard or customized, etc.), do not guess at the answer. Verify this information directly with your customer.
2. Incorrect information on the application. It is highly recommended having your customer review the application before signing it. This will be a solid defense should any of the information later be determined inaccurate. With more applications now being uploaded to the carrier, it is suggested that after uploading the application, you print a copy from your system and have the insured sign it.
3. Agents failing to advise the carrier of issues pertaining to the risk. These issues might be dogs, prior cancellations for non-pay, type of construction, wood stoves, loss history, etc. In addition, properly documenting issues on questions with your customers regarding dogs is extremely important. If your customer indicates they will be buying a “mixed breed,” it is prudent to advise them that carriers have significant concerns on certain breeds. It is probably only a matter of time before homeowners carriers add an endorsement clearly excluding liability from various pets (dogs, snakes, monkeys, etc.).
4. Determining when to switch from a builders risk to a homeowners policy. Check with your carrier for their guidelines. Don’t wait for a loss to occur before the house is complete to find out who, if anyone, was covering the exposure.
Common Personal Auto Error
5. Issuing an ID card or some type of evidence of coverage for a cancelled risk. This is where training for your receptionist might be in order. Whether it’s the issuance of an ID card or the taking of premium for a direct-bill account, it should be mandatory that the account be checked to confirm its current status.
6. Failing to adequately document discussions regarding limits. Be certain any discussions regarding limits are properly documented. The customer should be clearly shown the options available (with a statement noting that even higher limits are available) and asked to indicate in writing which option they want. E&O claims resulting from poor documentation regarding limits are extremely common.
7. Uninsured Motorist (UM) and Underinsured Motorist (UIM) — getting the proper forms completed from all named insureds. Do it. Plus, it is prudent to provide the customer with verbal and written explanations of these coverages to ensure a solid understanding.
8. Adding or deleting the wrong vehicle. Do you take direction from a car dealer? Don’t. They are not a party to the contract. While you may take the information from the dealership, a discussion on coverages, the removal of any vehicles, etc., should only be done with the named insured.
9. Failing to maintain limits that satisfy the minimum required by an umbrella carrier (thus causing a gap in coverage). If insureds are looking to drop their limits to save money, check whether there is an Umbrella in effect where certain minimum limits must be maintained.
With virtually all coverages, when you move an account from one carrier to another, it is critical to notify the customer of any areas where the new coverage is less than the expiring. As noted by the following claim, this lack of scrutiny contributed to this sizeable E&O settlement:
The agency switched policies, on renewal, covering an expensive home for the client. The old policy had a guaranteed replacement cost provision, but the new policy had restrictions on guaranteed replacement cost. The amount of coverage sought by the agent was determined by the agent’s use of outdated estimator software, and incorrect (too low) coverage was placed. Following a fire, it was determined the shortfall between what the client could collect under the new policy compared to the old policy was in the range of $357,000 to $407,000. The loss was settled for $270,000.
Completion of the application. Did you review each question with the customer? Did you have the customer review the application completely before signing?
Both your staff and your customers benefit from eduction and training. The goal is to ensure the staff understands all the coverages and how they apply. Suppose a customer asks, “Do I need to tell the carrier when my son has the car at college?” Are you confident your staff will communicate the correct information?
Your staff should know that E&O claims arising out of homeowners and personal auto do happen but that with their input and some new initiatives, the E&O claims potential can be reduced.