Most agents’ errors and omissions (E&O) carriers report that commercial lines generates the majority of E&O claims. However, a significant number of E&O claims arise from the sale and service of personal lines. For agents selling personal lines, understanding the risks and knowing how to minimize the potential of an E&O claim are vital.
On average, when an E&O claim involving personal lines occurs, the severity (size of the claim) is much less than the commercial lines counterpart. However, depending on the agency’s clientele, E&O claims involving personal lines can easily reach the $1 million-plus level.
In personal lines, three lines of business typically generate the bulk of the activity: homeowners, auto and umbrella.
With homeowners, one of the more significant issues involves valuation. While many agencies use a cost/quality estimator, these are not perfect. In many cases, the quality of the output is directly attributable to the quality of the input. Be cautious in securing the various inputs and be certain to verify the accuracy of the data.
For example, some websites may not include an indicator that an addition has been put on the house. It is best to ask the customer additional questions to determine if changes occurred. When quoting a new business account, don’t presume the limit shown on the current policy is accurate.
Other issues involving homeowners include:
- Various limitations contained within the policy.Make the customer aware of these limitations in writing;
- The carrier’s underwriting guidelines. Carriers have been known to sue agents, when the agency bound the carrier on a risk prohibited by the underwriting guidelines; and
- Vacancy and ordinance or law coverage. Agents would be wise to educate customers on these two key coverage matters.
A central issue with personal auto is limits. Customers do not expect to get into a crash and many do not fully comprehend what can happen when their 3,000-pound vehicle hits something or someone. This is an area where $1 million losses can occur and, when the customer realizes he or she does not have sufficient coverage, there is greater potential for E&O litigation. In all situations, provide the customer with limit options from which to choose.
Surprisingly, there have been E&O claims where the customer moved to a new location, but never notified the agency. When the vehicle was stolen, the carrier denied the claim citing it was unaware of the new garaging location of the vehicle.
In addition, a child taking a car to college raises significant insurance issues. Once again, agents would be wise to educate customers on these matters.
Uninsured/underinsured motorist (UM/UIM) coverage also continues to be an issue. When quoting personal auto, quote UM/UIM limits equal to the bodily injury (BI) and property damage (PD) limits.
How many of your personal lines customers have an umbrella? An E&O claim can develop when a customer is involved in a significant claim – involving their homeowners, personal auto, watercraft or other liability exposure – and faces a significant uninsured exposure because they allege your error in not providing this coverage.
Find a way to offer an umbrella policy to all customers that have the necessary underlying limits. Most agency management systems can identify customers that don’t carry an umbrella.
There are also instances where the customer has an umbrella but, for some reason, the underlying limits are not at the proper level. Every year at renewal you must verify that policies covered by the umbrella have the necessary underlying limits. When they don’t and a gap occurs, agents frequently face E&O litigation.
Documentation of Discussions
Agents can benefit greatly by educating their customers on coverages the customers have and coverages and limits they should have to avoid uninsured gaps. Each file should reflect discussions with clients and, where necessary and appropriate, the agency should send the client a written communication memorializing any discussions.
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