I’ve sat in classes taught by Jim Harrison (insert two dozen professional designations here), one of the best insurance educators in the country. He has this little shtick that wakes up the class. He tells an ugly commercial liability claim story and asks where the insured’s lawyer would find coverage. The class is confused; there is no apparent coverage. Finally, a veteran agent looks up from his newspaper and proclaims, “Ain’t none.”
“Yes, there is,” Harrison says.
“Where?” the agent demands.
“The agent’s E&O policy.”
Ha-ha, very funny. Well, not really that funny when you’re on the wrong end of an errors and omissions claim. Sources say in recent years the frequency of E&O claims against agents has held steady-and there is a trend toward larger claims.
Bonehead move #1 by agencies is failing to document communications with customers on a routine, day-to-day basis, said Bill Wilson, director of IIAA’s Virtual University. “A guy claims he called to make a coverage change, then an uncovered loss happens. The insured says he wanted one thing, but got another and there’s no documentation. If a claim or suit boils down to a ‘he said/she said’ argument, the agent is going to lose most of the time.”
Problem #2 is incomplete or delayed communications-not procuring the coverage the insured wants or needs, or delays in advising the customer of a lack of coverage or coverage restrictions, Wilson said. “This is usually due to a lack of technical expertise or poor personal management skills.”
Scary things turn up when we dig into the E&O claim files. Here’s some true tales to make your skin crawl:
• Following a lengthy feud, an insured’s next-door neighbor called the insured’s agent and cancelled his homeowners insurance. The agency CSR accepted the cancellation over the phone. Subsequently, the neighbor went to the insured’s house and faked a back injury accident and filed suit.
• Prior to renewal, an agency file clerk inadvertently placed an active file into dead file storage. The missed renewal caused a homeowner to be inadequately insured for a $17,000 fire loss. The agency did have binding authority with the carrier and, prior to the loss, the carrier had indicated a willingness to renew.
• An agent, while visiting an insured, was asked to add property coverage for an additional location. The agent agreed to do so. A week later, a fire occurred at the additional location. The agent apparently had forgotten to add the location. The insurer denied coverage and the agent was held liable.
Betty Ann Olmsted, an attorney and loss control officer for big E&O player GE Westport, said these claims involve more than money for defense or loss payments. “Regardless of the outcome, E&O claims consume valuable time [for] discovery and can devastate an agency’s reputation in the community it serves,” she said.
The two areas generating the most frequent and largest claims are misrepresentation and inadequate coverage, Olmsted noted. Misrepresentation claims allege a failure to adequately explain coverage and exclusions, as well as a failure to inform the client of changes affecting coverage. Example:
• An agent wrote coverage on farming operations owned by a man and his son. When the agent inspected the farm site in early September prior to the policy renewal date of Oct. 22, the son requested that coverage on one barn be increased from $50,000 to $100,000, and that the barn contents be insured for $25,000. The son claims the agent stated that the increased coverage would be effective immediately; the agent denies making such a statement. On Oct. 11, the barn was destroyed by fire. The carrier paid only $50,000, claiming the coverage increases didn’t become effective until the renewal date of Oct. 22. The man and his son sued the agent for misrepresentation.
“When two parties tell different versions of the same facts, a court must determine which party is more credible,” Olmsted said. “Had the agent followed up on his conversation with the son, confirming that the increased coverages would be put in place at renewal, this claim might have been avoided entirely. File documentation takes a lot of time and discipline, but it can really pay off in reducing the likelihood of E&O claims.”
Inadequate coverage claims involve inadequate limits, the wrong type of coverage, or gaps between primary and excess coverage. Example:
• An agency agreed to write a commercial policy on an insured’s three buildings that housed various businesses associated with repairing cars and selling auto parts. The declarations page of the policy issued by the carrier described the insured’s premises as “Automobile Repair.” The agent and the insured didn’t notice this erroneous description, which failed to include the retail auto parts operations. Following a total-more than $260,000-fire loss to the contents of one of the buildings housing the retail auto parts store, the carrier denied payment, asserting that its policy covered only the car repair operations. The insured sued the carrier and his agent, claiming that the agent failed to procure coverage on his full operations.
Even recommending a “super-duper product won’t stop all claims,” Wilson pointed out. “I remember a condo claim where the agent insured the unit owner with a ‘deluxe’ company-specific form with all kinds of bells and whistles. As luck would have it, he had a water damage claim that arose from a burst pipe in an unoccupied upstairs condo. This policy had an exclusion for water-line breaks that occur outside the residence premises. His residence premises were defined as his unit only.”
But if the agent had used the plain-vanilla ISO form, which excludes water-line breaks that occur outside the building, the $15,000 in damage would have been covered, Wilson said. So, while the super-duper form provided much broader coverage in general, there was a significant coverage gap that came back to bite the agent.
Scary? Yes, but don’t be too frightened. “When you get down to it, unless you make every conceivable comparison between forms, [a gap] is always a possibility. So I’d say this exposure falls into the 20 percent of potential E&O claims that perhaps aren’t preventable or defensible. That’s why you have E&O insurance.”
Peter van Aartrijk owns a communications firm specializing in the independent agent distribution channel. To comment, send e-mail to firstname.lastname@example.org.
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