Know thyself; insure thyself

E&O: an essential protection in the modern insurance agency practice

As we know, errors and omissions insurance is intended to cover professionals, including insurance brokers and agents, for their professional mistakes. Businesses that make recommendations or provide clients with solutions may be subject to liability if things go wrong. And, as we also know, things sometimes “go wrong.” To err is human, after all.

When disagreements over these often innocent errors turn to litigation, E&O insurance is intended to cover legal expenses, damages and other costs incurred as a result.

Today, most, if not all, managing general agents and carriers insist that agents (or agencies) carry a specified minimum of E&O coverage as a prerequisite to writing policies. Moreover, several industry trends serve to highlight the importance of having adequate E&O in place as a matter of course in your insurance practice. These include tighter interpretation of policy language by carriers, increasing the likelihood that an insured might become dissatisfied with a claim payout; a run of catastrophes, like the recent hurricanes, which challenge coverage definitions or easily exceed policy limits; and the emergence of novel loss categories. Examples of the latter in recent years include employment practices in the human arena or mold in the physical one.

It always takes time for underwriting savvy and the expectations of the insured to reach a common ground. In the meantime, there is greater potential for disagreements about adequacy of coverage when losses occur and, consequently, E&O claims against agents.

In the modern practice environment, agents and agencies are also adopting a greater role as risk manager for businesses by way of comprehensive evaluation of potential losses and recommended coverages. This is an excellent way to build one’s portfolio of business, and speaks well to the professional capabilities of today’s best agents.

Still, as we get closer to the kitchen stove, the heat gets greater. Consulting in this manner, as opposed to “just selling policies,” may trigger a legal duty to advise. The laws vary with each state as to this duty to advise. As such, we recommend reviewing with legal counsel how your individual insurance practice and the laws of your state may invoke this legal principle.

Agents’ E&O
Perhaps not surprisingly, the market for insurance agent E&O has made its own recognition of the issues just discussed. Loss experience has not been the best. Coverage is harder to get, especially if there is a history of claims and premiums are higher. While many agents will acquire E&O coverage through their trade associations, those who deal in more specialized lines of coverage may be falling into the specialized excess and surplus wholesale markets for their own E&O coverage. We expect issues arising out of the hurricanes of last year — which are far from being completely apparent or resolved — to only add underwriting pressure.

Avoiding the E&O claim
The best course is to adopt the same preventive posture and overall conduct we recommend to insureds. This guidance applies during your assessment of the insured’s needs, with respect to specialized coverages and policy language, and in handling claims. Even should a dispute arise, there is a mode of behavior in human affairs that tends to make things “go smoother.” With that in mind, consider the following issues.

Document, document, document. The first and most important defense against a claim of failure to act in a professional manner is proper documentation. Your internal system of documentation should note what is covered, the coverage limits, and what was advised, including when clients refuse to take on a recommended coverage or coverage limit. Phone calls? Write a short, accurate note of what was discussed. E-mails? Keep them professional and be able to retrieve them.

Timing is also important. Make sure that risks are bound at the time that coverage should be in effect; the order to bind should be in writing. Your records, whether we are speaking of written or electronic filing systems, must clearly establish a “chain of facts.” They become the final arbitrator should a dispute arise. Anyone looking at a particular file should be able to easily and readily access the chain of facts

Know the coverages you are writing. We cannot take policy coverages or policy language for granted, as there is constant change in the forms that underwriters use. Even more importantly, a specialist must possess specialist knowledge and insight. Keep abreast of trends in the industry or profession you are insuring, including new or altered areas of risk, as well as coverages that the insurance industry may have developed to cover these risks.

Be certain that policies that are written are enforceable. This refers to such issues as making sure that agents know their authority levels; that individual agents in a larger agency are properly supervised; failures to renew coverage or gaps in coverage; and understanding that more specialized or riskier business lines of coverage are intrinsically more problematic. Know what your people are capable of and what they are doing. Know what you are selling.

Keep valuations current. Whether we are talking about contents coverage for a home, floater policies, commercial property or business interruption, make sure policy limits reflect existing, realistic loss potential and/or replacement costs. If you advise a certain policy limit, but the client decides to purchase a lower value, document accordingly.

Pay attention to evolving areas of coverage.We have already touched on human behavior in the area of employment practices. Sexual harassment and wrongful discharge remain potent workplace issues. Other social and political issues, including hiring practices related to age or legality of residence, will undoubtedly continue to challenge the business and professional world and potentially trigger E&O claims. Technology also has its impact, as we grapple with assigning valuations and responsibility for loss with respect to intellectual property, databases and other files.

The best ‘defense’
Human beings do make mistakes, and the law of averages can sneak up on the best of us. The bottom lines in prevention against E&O claims and mitigation of damages, financial and otherwise are these:

• Act in an ethical, professional manner at all times;
• Document all pertinent discussions with clients, decisions made and actions taken; and
• Work hard at maintaining positive relationships with insureds, colleagues, MGAs and carriers.

Forthright, open communications with insureds will help avoid misunderstandings that may lead to claims of unprofessional conduct. At the same time, should a claim arise, it is essential that the agent, agency, legal counsel, and underwriter be on the same page in order to mount an effective defense. Finally, know well your potential E&O exposures and insure yourself adequately for them.

Ralph C. Chapa Jr. is a partner with the Farmington Hills, Mich.-based law firm Kaufman, Payton & Chapa, specializing in insurance-related matters and litigation. He can be reached at 248-626-5000 or at: rcchapa@kaufmanlaw.com. David J. Price serves as executive vice president, chief underwriting officer with Burns & Wilcox. He can be reached at 800-521-1918 or at: dprice@burns-wilcox.com.