Lack of Technology Can Raise Agency E&O Concerns

September 22, 2008

The use of technology is interwoven into agency procedures and practices, says Sabrena Sally, senior vice president of commercial insurance with Westport Insurance Corp., a subsidiary of Swiss Re and one of the largest writers of insurance agents’ errors and omissions coverage.”It is more often the failure or lack of use of the technology that leads to agencies finding themselves in the unfortunate position of being unable to provide a strong defense against an (E&O) claim.”

In this interview with Christopher Boggs, associate editor of MyNewMarkets.com, Sally discusses the additional agent E&O exposures created by the use, misuse and lack of use of current technology. Sally provides insight into the agents’ E&O underwriting process as it relates to technology and the mind of the underwriter. The following is an excerpt from that conversation.

Do you look for anything specific regarding an agency’s use of technology?
Sally: If the agency is writing significant amounts of health insurance, we are interested in the security provided for HIPAA (Health Insurance Portability and Accountability Act) protected private information.

Regarding agency management systems — do underwriters prefer to see any particular system?
Sally: We have no underwriting preferences regarding which agency management system is being used. All agency management systems can be effective if used consistently.

Is the lack of an agency management system an underwriting red flag?
Sally: The lack of an agency management system leads the underwriter to look more closely at how the agency is managing the basic transactions of an agency such as expiration lists, diary and suspense systems, etc.

Are an agency’s back-up procedures reviewed and have there been any suits related to or lost due to the lack of or poor back-up?
Sally: We do not review the back-up procedures and systems utilized by agents; however, the lack of back-up systems or poor back-up systems does come into play in claims. The heart of agency E&O defense is documentation. If an agency has no back-up system, or a system that is not functioning properly, the agency could well be faced with the inability to produce the documentation that would support their defense against a claim. We have also seen where the agency kept the back-up onsite, only to have the back-up destroyed in a natural disaster along with the main system, leaving the agency with no records at all.

Should an agent ever bind a risk based on an e-mail request to bind?
Sally: A fax request to bind is preferable to e-mail as the fax machine provides date and time stamping of the incoming document. E-mail should be treated the same as voice mail, and contain a disclaimer advising that coverage cannot be bound or changed via voice mail or e-mail.

So, is an e-mail disclaimer essential or merely recommended? How should such a disclaimer be structured?
Sally: E-mail disclaimers are essential. At minimum, the disclaimer should contain a statement that coverage cannot be bound or changed without receiving formal acknowledgment from the agency.

Are facsimile signatures acceptable?
Sally: Most states allow for the use of electronic signatures and electronic records as means to satisfy the legal requirements of contracts and signatures, but not a facsimile signature. Each state determines the level of consent regarding the ratification of the signature and the electronic record.

Keep in mind that facsimile signatures are not quite the same as electronic signatures and do not, themselves, satisfy legal requirements in the same way as an electronic signature. However, a facsimile signature could be attached to an electronic record to evidence the insured’s intent to sign the electronic document.

Historically, the rules of evidence stated that the agent could use the electronic or paper file but not both. Is this still the case?
Sally: One file, whether electronic or paper, is still the rule. (Editor’s Note: As Sally stated, only one type of file will be allowed in court; if the paper file and electronic file are necessary to document the full story, the agent is likely to lose in court. Other fatal errors and omissions miscues related to electronic versus paper files include the inability to produce a document because the back-up system failed; e-mails are not automatically attaching or are not being attached to the electronic file and the agency management system [making such documentation unavailable in a dispute]; or agents not using the full capabilities of the diary system to follow-up on a customer or endorsement request.)

Which have proven to be better in court — the paper file or the computer file (which one do juries seem to believe more; and which do prosecuting attorneys have a harder time discrediting)?
Sally: We are not seeing courts or juries having reluctance to understand or accept electronic files. With the demographics of the population being that anyone under the age of 40 has grown up with computers, the Internet, texting, etc., any original concern around this issue has rapidly disappeared. One comment on this is the new federal rules around evidence that is creating some concern on how far carriers may have to go in helping an insured (the agent) recreate electronic evidence. Rule 26 of the Federal Rules of Civil Procedure was amended Dec. 1, 2006, to address the disclosure and discovery of electronically stored information (ESI). No one is quite sure yet of the impact of this, however, there is speculation it may have an effect on the cost of producing documents. (The rules can be found at www.uscourts.gov/rules/EDiscovery_w_Notes.pdf)

Agents that choose to go paperless, must move all client information into an electronic file; scanning may be utilized as the means to accomplish this conversion. Do you have any recommendations on the proper use of scanning?
Sally: If an agency is converting to electronic files, the issue of existing paper files must be addressed. Questions to consider include the cost and space needed to continue storing paper files, versus the cost of scanning the existing paper files into electronic files. What we hear most often is that agencies find it less costly and more space efficient to scan historical files. The agency should establish a procedure that addresses when documents should be scanned, how the documents are indexed into the electronic file, how long should the paper document be kept — a set time period that allows for quality control on the scanning process, then the paper document should be destroyed. The key is to have only one file, the electronic file. One word on destroying the paper document: shredding. Engaging a commercial shredding service to collect and shred the agency documents helps protect against the misuse of confidential information.

If an agent sends a virus to someone is that an E&O issue or an Internet liability coverage problem?
Sally: If an agency is negligent in sending a virus to someone, the agency E&O policy may have a duty to defend. Coverage for any ensuing loss would depend on the damages being claimed and the terms and conditions of the particular E&O policy.

If hackers access a client’s personal information, is that an E&O or Internet liability coverage issue (is the protection of information, in general, an E&O issue)?
Sally: The issue of hacking again centers around negligence. Was the agency negligent in the level of system security? Again, the E&O policy could well have a duty to defend, with coverage for any loss dependent on the alleged damages. There is not yet complete clarity around where coverage would fall between an E&O policy and Internet liability. The discussion continues in insurance circles.

Conclusion

Technology has allowed agencies to accomplish more, faster. But with such benefit comes added responsibility.

Additional errors and omissions exposures are the product of technology’s intrinsic benefits. Protecting the agency from these added E&O exposures necessitates the agents full (as necessary) and proper use of the chosen agency management system’s capabilities coupled with the installation and use of proper virus protection systems and firewalls to protect the agency’s system and computer systems outside the agency.

Improper use or underuse of the available technology has the potential to create E&O exposures and losses that did not exist just a few years ago.

Agents should make full use of the advantages of technology to avoid and even defend against E&O suits.

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