Are Your Files Defensible’ A Look at E&O Risks for Agents and Brokers

By Edgar H. Lion | November 12, 2001

A short time ago, the Wall Street Journal ran an article on litigation, the caption of which read: “When all else fails, the American way is to file a lawsuit.” The article correctly pointed out that it has become a predictable way of American life that whenever a searing social question arises, after a brief discussion it heads to court.

By contrast, in the late ’40s, judges routinely threw out a high percentage of civil cases as frivolous. At that time, it was not permitted to enter into evidence the limits of liability or the name of the insurance company. How times have changed!

Now in a more litigious society, like many other professionals, insurance agents and brokers are not immune to the risk of being sued. The California Bar Association even offered a continuing legal education course on “How to Sue an Insurance Agent.” Presently, one in every three agents/brokers faces an errors and omissions (E&O) claim each year. It is estimated that within five years, three out of every four insurance agents/brokers will have a claim filed against them.

Over the past seven years, Oakland, Calif.-based Alpine Risk Management Corp. LLC has conducted Procedural Analysis Reviews for over 300 agents and brokers nationwide, detailing internal procedures and reviewing any claims they may have had. Through those reviews and in other studies of E&O claims and their causes, Alpine Risk found that 90 percent of all such claims could have been avoided by following proper procedures and by ensuring that all files were appropriately documented.

The risks of undocumented conversations
When assessing company procedures for heading off E&O claims, one important question agents and brokers should ask is: Whenever you or any member of your staff have a conversation with one of your insureds regarding their insurance policies or coverages, are adequate notes being kept of that conversation? This applies not only to telephone conversations but to personal meetings as well.

In the Procedural Analysis Reviews and through experience at trial, Alpine Risk found that in too many instances file documentation is lacking in both telephone conversations and personal meetings with the insured. While most of the procedure violators were outside producers, office staff such as CSRs have also been found to be guilty of the offense.

Cellular phones can be a source of a breakdown in documenting phone calls sufficiently. While most agencies have standardized procedures for documenting office phone calls, established procedures for documenting cellular phone calls are rare. However, the following simple but effective procedure can help keep those phone calls documented: Once you have finished your conversation on the cellular phone, call the office and leave a brief outline of the conversation in your voice mail. When you return to your office, enter the information into the insured’s file or notebook in the automated system.

Remember: conversation notes can be brief, but they must be detailed and it is essential to include both the time and date of the conversation.

‘Lion’s Law of Loss’
In interviews with agency staff members, Alpine Risk analysts were often told by the CSR or producer: “We mentioned the exclusion to the insured and he/she said they understood it,” or “I recommended Employment Practices Liability Insurance to him, but he said he didn’t want it.” When queried as to why there was no documentation in the file to support the conversation, the analysts heard: “Our client said he understood it, or didn’t need the coverage, so we felt there was no need to pull the file and write a note.”

However, when a loss occurs, plaintiffs seem to develop total amnesia. Often in court when the defense counsel interrogates the plaintiff on the witness stand, the plaintiff states, “I don’t recall,” or “I can’t remember him ever talking to me about that.” This is what is called “Lion’s Law of Loss,” or “The Larger the Loss, the Shorter the Memory.”

Case Example: An agency sold an insured earthquake insurance on the insured’s dwelling. Part of the construction was brick veneer. The policy specifically excluded damage to brick veneer. The Northridge earthquake severely damaged the dwelling, including the brick veneer. The company denied the claim for damage to brick veneer. The insured sued the agent, stating that the agent never advised him that brick veneer was excluded.

At the trial the CSR stated she told the insured in a phone conversation that brick veneer was excluded. The plaintiff swore that he never recalled any such conversation, and the CSR had no record of the conversation in the insured’s file. She also stated she couldn’t recall the date of the conversation. With absolutely no supporting documentation to substantiate her statements in the deposition, the jury believed the insured. Had the CSR kept notes of the phone conversation, the agency could have avoided a costly claim.

Run an audit of your own files. Are all personnel keeping notes of all conversations? Have conversations or discussions been entered into the automated system? If adequate records are not maintained, you may have a future problem. In the event of an E&O claim, your file becomes indefensible. Make sure you have proper documentation to be able to offer a proper defense.

E&O claims happen
In the real estate business, they say the three most important things are: “Location, location, and location.” The three most important things in E&O risk management are: “Documentation, documentation, and documentation!”

Although every agency has some form of procedure for processing business through the agency, in the majority of firms those procedures are not written down. In far too many cases, each person in the agency creates his or her own personal application to any of the developed procedures. As a result, inconsistencies creep in, the similarity of file folder organization becomes non-existent, and file documentation becomes disorganized and difficult to review.

Sloppy file organization makes it difficult for another party to follow the chronological sequence of events in any file. When the inevitable E&O claim occurs, the file is useless as a defense item.

Another potentially serious problem for agencies is that of duplicate files. The CSR will enter information into the automated system that is maintained as the master file for the insured. Meanwhile, the producer maintains his own separate file on the insured. Things he might do or say to the insured will be entered into his file, but he fails to communicate that information to the CSR for entry into the master system. Now two different, non-matching files exist on the same insured. Both files are admissible as evidence, and the fun a plaintiff’s attorney will have with two different files on his client is almost unlimited!

Such organizational problems can be avoided by establishing and maintaining standard procedures for all documentation that must be followed by everyone in the agency, without exception. Once the procedures have been committed to writing, the agency principal should hold a series of educational meetings with all staff members, including producers, to discuss each section in detail and to stress the importance of strict adherence to the established procedures. Every time a section of the manual is updated to keep it current with changes in automation, insurance codes and generally accepted agency procedural practices, staff should be similarly trained on the updates or changes.

Management must also initiate a quality control program to audit adherence to the procedures. Without a systematic quality control program, inconsistencies will creep back in, and one of the major causes of loss is inconsistency of procedures.

Case Example: A customer of an agency alleged the agency committed an error in handling their insurance. The customer retained an attorney who served a subpoena ordering the agency to relinquish possession of any or all of the agency’s customers’ files to the plaintiff’s attorney for review and examination. The attorney wanted to conduct a comparative review of the various files to see if there were any differences in the way the agency handled the insurance needs of its customers and was in any way discriminating in its treatment of its accounts. The agency had no written procedures detailing the handling and processing of business. Nor did it have a written internal audit or quality control program detailing how to monitor adherence to the established written procedures.

Under the laws of privacy, the order to furnish any information, other than that directly related to the case at hand, can be objected to as not subject to discovery on the grounds of invasion of privacy. All other files in the agency should be treated as privileged information and not subject to any type of discovery.

Without written procedures the agency was unable to file a formal objection to the subpoena. As a result, 30 separate customers’ files were handed over to the plaintiff’s attorney for review and comparison with the plaintiff’s file. The comparison revealed enough inconsistencies in the treatment of the various accounts on coverages offered and written, as well as in file organization and documentation, to demonstrate to the satisfaction of the court that the agency had discriminated against the insured and was negligent in its duty to the insured. The damages totaled $65,000!

This file review and the subsequent adverse ruling could have been avoided had the agency developed, implemented and monitored through a quality control program, written or automated office procedures detailing the processing of business in the agency. As soon as the subpoena was served, the agency could have filed a motion to have it withdrawn by introducing evidence they had a written or automated manual of procedures that was followed consistently by all personnel; that it was periodically updated; and that there was no discrimination involved in the treatment and handling of the individual customer’s accounts.

Protect your deductible
Even though you have written or automated procedures, you must be able to prove that they are followed consistently by all personnel and that you have a standard procedure for monitoring that adherence.

Subjects that could be included in a procedures manual are: binders and certificates of insurance, cash management, mail procedures, records management, suspense and telephone procedures, commercial lines, personal lines, surplus lines and claims handling procedures. In addition, the manual should contain standardized form letters and in-house forms that are regularly used by the agency.

Although they do not have to be complicated, written or automated procedures and a sound quality control program will provide you with the necessary defenses to protect the privacy of your agency files.

Edward H. Lion is the president and CEO of Alpine Risk Management Corporation LLC in Oakland, Calif. Among other things, Lion has developed a total E&O risk management loss prevention program for agents and brokers and is the author of an E&O loss prevention manual of procedures for agents.

Topics Agencies Claims Professional Liability Risk Management

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Insurance Journal West November 12, 2001
November 12, 2001
Insurance Journal West Magazine

Professional Liability