PLUS Convention Highlights D&O, E&O Concerns For Agents/Brokers

The Professional Liability Underwriting Society’s 16th annual convention, held Nov. 9-11 in Philadelphia, featured a broad range of discussions on timely issues facing insurers, agents, brokers and the lawyers who represent them in an expanding and high profile field.

Attendees heard presentations on directors and officers liability following the passage of the Sarbannes-Oxley (Sarbox) corporate government reform legislation. A panel of experts discussed the emerging liabilities agents and brokers face in placing coverage for their clients. Other panels reviewed the state of the “middle market, medical malpractice and the emerging perils of “cyber liability,” a vast new field, filled with both opportunities and pitfalls.

Insurers, agents and brokers are being asked to adhere to new standards of accountability and disclosure, many of which have not yet been clearly defined. They present new challenges, especially in determining risk levels, but also new opportunities. PLUS chose “Challenges and Opportunities” as the convention’s theme.

Arthur Levitt, former chairman of the Securities and Exchange Commission, kicked off the convention with an address, calling Sarbox “the biggest reform [of securities legislation] in sixty years.” In addition to “leveling the playing field” for investors, Levitt, who has been highly critical of many securities’ industry practices, said he welcomed the increased corporate responsibilities the act mandates, as they would hopefully “help restore investor confidence [in the stock markets] over time.”

A panel of industry leaders, moderated by economic commentator Todd Bucholz, followed Levitt with an overview of the current conditions in the economy, the insurance industry and the problems facing professional liability insurers. “Yields on capital are still low,” said General Re’s Chairman and CEO Joseph Brandon, adding the by now familiar call for insurers to make money from underwriting rather than relying on investments.

Chubb Vice Chairman John Degnan indicated that, while the general economy is improving, he hasn’t seen an immediate effect on insurers. “Local producers are still nervous,” he said; “over the long term the market remains volatile, and there will continue to be company failures and downgrades.” Degnan also stressed that insurers needed “to continue to rebuild their diminished reserves,” noting that as a result “the market won’t soften right away, it’ll be a year and a half or so.” Brandon stressed the need to seek strength in placing coverage, but modestly refrained from noting that Gen Re is the sole remaining triple-“A” rated reinsurer.

The increased number of lawyers at this year’s convention (roughly 7 percent out of 2,000) and their participation in most panel discussions underlines the high legal quotient inherent in underwriting professional liabilities. Directors and officers face new strictures in the wake of the Enron, Tyco and WorldCom scandals. Agents and brokers face new responsibilities and increased exposure to liability for errors and omissions.

Lawyer John F. McCarrick moderated an all legal panel, which included Robert A. Wallner, a partner in the New York City branch of Milberg, Weiss, that discussed the D&O implications of Sarbox. The lawyers stressed lawyerly concerns, concentrating on the expansion of liabilities, the lengthened statute of limitations, the importance of recording and keeping copious documentation to prove (or disprove) the reasons various actions were taken, and the fact that so far there hasn’t been a huge jump in the number of cases filed.

That may not last, however. Stephen A. Radin noted that Sarbox was “written in haste,” which means that it left a lot of questions open. “Everything has to be litigated,” he said. While the cost of settling securities cases has risen, to an average of around $25 million, there are more cases being thrown out, about 19 percent of those filed, and more are being settled, around 80 percent. Wallner, who was probably the only plaintiff’s lawyer present, observed that one impediment to settlements is the lack of incentive to do so by defense lawyers. Few panel members agreed with him.

An important panel discussion for agents and brokers took place Monday afternoon. Moderator Peter Biging, a lawyer specializing in agent/broker cases, headed a panel of experts, who repeatedly warned agents of the potential E&O liabilities they now face. While it’s not a new subject, the situations that subject them to liability exposure are expanding rapidly.

Biging indicated that, for a number of reasons, it’s no longer enough for an agent or broker to simply exercise “reasonable care and skill” in placing coverage. They are increasingly seen as advisors to their clients, rather than simple intermediaries. As such they often take on responsibilities of a fiduciary nature, frequently without even being aware of it.

He listed the following as examples of conduct that pushed agents and brokers over the line, and resulted in judgments of liability for errors and omissions:

• If they charge a premium for “extra services.”
• If they give advice on coverage issues.
• If they represent themselves as “highly skilled experts.”
• If they assume “broad discretion” in placing coverage.
• If there’s been a “course of dealing over an established period of time” that has created a “special relationship” between the agent or broker and his client.

“There’s a definite trend to make agents and brokers fiduciaries,” Biging concluded. As a result they will be expected to keep better documents and records, especially when clients have requested less expensive coverage from a carrier that has less than an “A-” rating, or they’ve requested exclusions or lower limits than the agent or broker may have recommended. Agents are also going to have to become more knowledgeable about their clients if they want to have an adequate defense against third party claims.

This puts independent agents in a particularly difficult position. In order to compete against direct writers, Internet insurance sites and huge national brokers, they must offer more individual services to their clients, but this in turn increases potential E&O liabilities. Biging offered some suggestions on how to avoid the more obvious pitfalls:

• Do the basics well, and keep organized and updated files.
• Get authorizations for any “enhanced risk” coverage in writing, especially if it’s placed with less than an “A-” rated company.
• Review coverage annually.
• Print out e-mails; it’s essential to have formal documents, not just notes and e-mails.
• Make sure to obtain all relevant information.
• Finally, be prepared to turn away “problem clients;” they may be more expensive than they’re worth.

The convention also produced interesting discussions on handling “middle market exposures” for companies ranging from small businesses to small cap public companies. While they were lumped together in the discussion, the panelists noted that there’s a world of difference between sole proprietorships, where the owner makes business decisions, medium size enterprises, where decision making authority is increasingly handled by professional managers, and small cap public companies, which have management hierarchies, frequently including a risk manager. As you move up the scale, less reliance is placed on the agent and more specialized coverages, such as D&O liability and EPLI, are required.

The session entitled the “Cyber Hurricane” concentrated on the largely uncharted territory of Internet related risks. “Although the coverage is still modest, network risks are moving mainstream,” said panel moderator Bradley Gow, VP in ACE USA’s Professional Risk division, responsible for technology E&O. “The insurance industry faces the potential of catastrophic losses without restriction,” probably within the next 5 to 10 years.

Securing “cyberspace,” i.e. protecting computers and programs from the threat of ever nastier and more sophisticated virus attacks, is one problem. Paul Nicholas of the Homeland Security Council outlined steps the government is taking in partnership with private industry to try to prevent attacks and minimize their damage. “We need to look at the problem over the long term and create a structure that can analyze and understand what they [virus attacks] are indicative of,” he said. “We need to face the risk of the ‘weaponization’ threat.”

Chicago attorney Robert W. Hammesfahr the editor of @risk Version 2.0: the Definitive Guide to Legal Issues of Insurance and Reinsurance of Internet, E-Commerce and Cyber Perils, gave an overview of the first and third party liabilities presented by the Internet, emphasizing that “these are real claims that cost real money.” Typical cases involve network, software and/or infrastructure failure, media and content liabilities, breaches of privacy and confidentiality, and claims involving virus transmissions, hacking and cyber extortion.

Another panel member, Harrison D. Oellrich, managing director of Guy Carpenter, observed that the very nature of cyber liability presents huge problems in developing enough “data to build a portfolio.” Underwriters have become increasingly reliant on risk modeling, but cyber liabilities “aren’t easy to model, and maybe they can’t be.” He’s still confident, however, that with such a great need policies will be developed and that it will be “the next major growth area.”

Former National Security Advisor, Sandy Berger, addressed PLUS on the final day, and while he didn’t say much about insurance, he certainly confirmed that it’s a new and dangerous world we live in.

Topics Cyber Carriers Agencies