Bad Business

It’s no secret. The leading cause of an agency errors and omissions claim continues to be “failure to procure coverage.” But that’s not the end of the story.

While failure to procure coverage remains the biggest area of E&O exposures, it’s not always the agent’s fault, says Colleen M. Murphy, the leader of Goldberg Segalla’s insurance agents and brokers practice within its Management and Professional Liability practice group. Murphy knows a bit about agency E&O. She has spent more than 25 years defending independent agencies against E&O allegations.

Right now, especially in a hard market, some insureds may be tight with the premium dollar, she said. “They may not really understand the value of insurance until they have a claim.” That doesn’t mean the agent didn’t offer the insured sufficient coverage. But once a claim occurs, if the agent didn’t document the file correctly, they are susceptible to an E&O lawsuit. An agent may be doing a good job in offering sufficient coverage, but if they are not documenting that the insured declined a specific amount of coverage then they are at risk, she said.

Failing to identify exposures is another area Murphy sees often in agency E&O litigation.

“It depends on what state you’re in, but in New York, there is no common law duty to advise, guide or direct anybody to obtain any particular type or amount of coverage, absent a specific request,” she said. A request for the “best coverage” or “full coverage” is considered a general request and not a specific request, which would be sufficient to trigger a duty on an agent to obtain a particular type or amount of coverage, she explained.

But in today’s sophisticated insurance market, independent agents are far more than mere order takers, she added.

While there might not be an obligation to physically examine exposures at an insured property, for example, if the agent visits a property and misses a risk, that could lead to an E&O lawsuit or claim.

“So, the idea there is to go out with a checklist, make sure if your agency is professing expertise in certain industry verticals that, that expertise is brought to bear for all of the accounts, just not the larger accounts,” she advised. “Make sure that if you have a newer producer, that the producer is going out to that account with someone else who’s more seasoned and will not miss something.” And the bottom line, document everything, 100% of the time.

But most importantly, avoid bad clients, she said. “Learn how to detect and avoid, and if necessary, get off bad business.” Bad business leads to a disproportionate amount of E&O lawsuits and claims, Murphy added. And how can an agent detect bad business? Simply look at how they operate, she said.

“How do they treat you and your staff? Are they always rushing you? Do they never have time for you? Are they literally yelling and writing nasty grams?” she asked. These are telltale signs that trouble might be on the horizon. Challenging clients often end up being bad business, she added.