Errors & Omissions

Property casualty insurance agents and brokers are being exposed to more lawsuits as they move into unfamiliar products, states and technologies and as their own clients do the same. In the eyes of customers and juries, the agents and brokers are the experts who should be held responsible if any mistakes occur.

“There is increased pressure to be an answer or expert to the evolving risks that change with companies as they grow and become diverse,” notes Mark Ruggles of Calsurance.

Ruggles moderated a panel on the evolving role of property casualty agents at the Professional Liability Underwriting Society’s 2005 International Conference in Boston.

Liability issues arise where property casualty agencies decide to broaden their services by offering long-term care, disability, annuities and investment products and become “one-stop” shopping centers for their clients.

“We see this a lot,” said Philadelphia attorney Andrew Davitt, with Marshall, Dennehy, Coleman, Warner & Goggin, who represents agents and brokers.

Adequacy of training

The problem is that some agents do not fully educate themselves on these financial products and how they meet their customers’ needs. While they pass the exams to get licensed and take cram classes to maintain their continuing education requirements, they do little else, Davitt has found.

“We’re seeing this more and more in some of the smaller P/C agencies where they are trying to get into other lines. It’s strictly a commission business. They don’t have the time because they have to pay the bills,” agreed Ruggles.

As the “one-stop shopping” trend continues, underwriters of agents’ errors and omissions coverage have it on their radar.

Sally Combs, who manages producer E&O claims for Fireman’s Fund, questioned if an agency’s size might have some bearing on how successfully and safely it can diversify.

Aon’s Mary Pat Fisher noted that a larger agency or a career agency with a company is more apt to have a specialist on board whereas a smaller agency might be hard-pressed to have the expertise for “one-stop” shopping.

“There’s probably a big difference between your really large career agency shops versus your smaller agencies,” Fisher said.

Davitt agreed that diversification might be a safer route for larger agencies since they might have more experienced people to help junior producers.

E&O underwriters do consider the quality of the training available to agents, according to Frank Frieri, Arch Capital. He said the quality could depend on the insurance or investment companies being represented. Some are better than others at training both after licensing and when they introduce new products. “Underwriters need to look at this,” Frieri said.

Clients’ business climate

An agency becomes vulnerable to new E&O exposures not only when it expands into new fields, but also when its clients do.

“The business climate for their insureds is changing and are agents keeping up with that?” Ruggles asked. “Are they doing their due diligence and researching what the needs of their clients are.”

Clients are increasingly multi-jurisdictional and their businesses and transactions are becoming more and more complex.

“The issue for the producer is not only staying on top of what their clients are doing in terms of where they are operating but also understanding the implications of that environment and those jurisdictions,” advised Combs, who has seen this arise in the area of workers’ compensation.

She pointed out a situation where an agent may write a policy for a client headquartered in his own state and assume any employees the client has in other states were sent there temporarily. The agent assumes the “all states” endorsement will suffice. However, if those employees are hired and domiciled in other states, this endorsement does not apply.

She warned also that too many agents assume that employer’s liability protection is automatically included in statutory workers’ compensation policies in all states but there are states where it needs to be purchased separately. “Don’t assume employer liability is included,” she advised.

Panelists urged agents to meet at least semi-annually with clients to review their businesses and learn what they are doing and where. Agents should ask in what states and countries business is being transacted. They must keep up with the regulations and liability climates in those jurisdictions.

“You need to really know your clients,” Fisher said.

Using the Internet raises insurance issues about advertising injury, security and privacy for agents as well as their clients.

For example, a carrier may no longer mail policies to its producers but instead put them on the Web for agents to download. Does the policy reflect what the client and agent agreed upon? Is there an exclusion the agent didn’t tell the client about?

“Downloading the policy puts more burden on the agent to deliver it to the client,” noted Combs.

Agents were advised to be careful if filling out an application for a client. “It’s a good idea to send a copy to the client for review,” Combs said.

Also, while a client has a duty to read a policy, this is difficult to argue in those cases where the agent himself did not read the policy.

Who sues agents?

Panelists maintained that claims against agents and brokers are increasing.

“One that we’re seeing more and more pop up is for breach of fiduciary duty and always thrown in there is a negligence claim,” said Davitt. He suggested that there are “a lot of potential claims out there.” While the agent community has not been the focus of the trial bar in the recent past, that could be changing. “The plaintiff bar is very creative,” he warned.

Combs noted that when investors lose money, the agent or registered representative becomes their “number one target” to recoup, regardless of fault.

Also, children of clients have been known to sue if they are disappointed in what they receive from their parents’ investments.

Clients may blame the agent for any misrepresentation and won’t accept any responsibility. “The client says, ‘I did what you told me to do. You’re the expert,'” according to Davitt, who added that “it is not that hard” to pursue actions against producers who hold themselves out as experts.

It’s not only customers who sue agents. Combs said her department has seen a rise in claims brought by carriers against agents, often for misrepresentation on an application as to the nature of a risk. Frieri noted that this type of claim is often a product of how good a relationship the agent has with the carrier or client. “If the agent has a good relationship with the client, the client will sue the company rather than the agent.”

The most important thing an agency can do to defend itself against lawsuits is to document everything. Agents should maintain a paper trail of transactions and communications; even go so far as to print out e-mails.

“An agency without documentation is at a severe disadvantage,” stressed attorney Davitt.

“A jury perceives the client as a victim. They could be lying through their teeth but it doesn’t matter,” said Combs, agreeing that documentation is critical.

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