A Winning E&O Defensive Strategy

How Agents Block Claims

In sports, the best offense is a great defense, right? When it comes to preventing errors and omissions claims defensive measures are also the best offense in protecting an insurance agency. Defensive strategies, or risk management practices, that can give an agency a significant advantage on the E&O playing field include having standard agency procedures in place, documenting everything and following through on customers’ requests.

The majority of claims filed against agents stem from the failure to place coverage that was requested by a customer, according to Sabrena Sally, senior vice president and underwriting leader for Swiss Re’s U.S. Insurance Agency E&O unit. The next most common source of claims is when an agent has placed coverage for a customer and that customer suffers a loss, he or she alleges the limit of liability wasn’t high enough to cover the loss and blames the agent.

“You’ve probably heard this before many times that it comes down to the basics of E&O prevention. … Have a standard process in the agency for every procedure, whether it’s issuing a quote, or a binder, or handling a mid-term change. And document that process each step of the way,” said Sally. Put procedures in writing and audit staff periodically to make sure those procedures are being followed.

It’s also important to update those procedures on a regular basis, she said. “This is a rapidly changing industry and what might have been an excellent procedure five years ago, with the way automation has changed or a practice of carriers might change, an agency’s procedures need to be updated to reflect that to remain current.”

“It’s when you forget to write down the telephone calls, when you forget to put it in the system that’s what gets you in trouble,” says Christopher Boggs, associate editor for Insurance Journal’s MyNewMarkets.com, and a former insurance agent and insurance educator. “They’re going to say, ‘I called you that day and asked you to do that.’ … Agents hear about documenting all the time, but the biggest thing I’d see in agencies when I used to teach E&O coverage, and as an agent I fell into this every once in a while myself … is lack of follow up with a carrier.”

“Failure to procure” is the number one cause of loss for agents, agreed agency risk management consultant Eric Moberg, president and CEO of the Moberg Group. But, he asked, “What does that really mean? Failure to procure could be, ‘I didn’t even know you had that exposure, so obviously I didn’t advise you that you needed the coverage.'”

Producers and customer service representatives (CSRs) can get into serious foul trouble if they don’t take the time to assess all of a customer’s risk, Moberg said. “Do they understand all of the exposures that exist? Without knowing that, how can you procure or recommend all the coverages to the client?”

The number one recommendation he makes to agencies is that the person performing the initial evaluation of the risk, whether it’s a CSR or a producer, perform “a thorough evaluation of all the exposures, even outside of the line of business they may be initially talking to the client about.”

Technology can be a huge advantage in keeping an agency at the top of its game, according to Moberg. “The better the agency uses technology, normally the better the documentation that I see in an agency,” Moberg said. “The better the use of confirmation letters to the client, the better the use of activities for making notes in the system. The better the technology, the better the agency is going to be able to defend themselves down the road with more credible evidence that they documented their files.”

Boggs agreed. “Agents who don’t make full use of technology or proper use of technology are going to have a real problem. Because you can’t use paper files and computer files in court. You have to use one or the other. And if they support each other, that’s a problem,” Boggs said. If the information in an agency’s paper file supplements what’s in the computer file, and only one or the other can be used in court, it’s not going to look good for the agent because it will look like there are gaps in the documentation, he explained.

Carrier Claims

While the bulk of E&O claims come from customers, Sally says she’s seen in the last three to five years an uptick in claims coming from carriers. Moberg agreed that suits against agents generated by carriers don’t often happen, but they do occur. “I have to point that out to a lot of my clients — you potentially have two adversaries if you make a mistake. The client, if it’s a direct loss that’s denied by the carrier. But if a carrier has to claim on behalf of a client because of something an agency did that they shouldn’t have done, then [the carrier] can come back and subrogate against the agent as well,” he said.

It’s important for agencies to “make sure that everyone in their agency understands binding authority,” Moberg said. “And keep a log of binding authority current so that everyone is aware of it. So they don’t bind coverage for something they don’t have authority to do, or change a policy in a way that would expose the carrier to something that the agent doesn’t have the authority to do.”

Boggs says agencies can get into a lot of trouble with certificates of insurance, especially if they insert wording on a certificate that’s not allowed by the insurer. “Certificates have been and always will be a major E&O exposure for agents,” he said. If a client requests to change a certificate of insurance to include coverage unintended by the insurer and the agent complies with that request, the agent is responsible and open to lawsuits generated not only by the client but by the carrier as well. “Because you’ve promised things that the company’s not going to deliver on because they can’t,” Boggs said.

Future Risks

Moberg and Sally both commented that the current financial environment could place agents at risk for E&O claims. In a precarious economy, many insureds may be “reducing coverages or eliminating some of their coverages to try and save some money,” Moberg said. “I think that does pose a large risk to some of the agencies, especially some of those that are not good at documenting change. So, documentation of change becomes even more relevant than ever.”

Sally pointed out the possibility that some carriers’ A.M. Best ratings could change as a result of recent events in the financial markets. The situation creates more pressure on agents to keep current on “the financial conditions of their carriers and, as appropriate, communicate those conditions to those customers,” she said. Sally warned, however, that agents should be careful not to communicate “any undue concerns to their customers about any particular carrier.”

To increase revenues and add value for their customers, agencies may be expanding into new ventures, such as risk management and loss control consulting services. Boggs says he sees potential problems with that, especially if the agent is not qualified to offer such services. “If I don’t have those qualifications, and I make recommendations and my E&O carrier has a problem with the fact that I made recommendations, and something happens and my insured comes back and says, ‘well you made these recommendations,’ I just think there’s going to be a problem with E&O,” he said.

“I would recommend to an agency, if you’re doing consulting, whether it’s on a fee basis or included in your servicing of an account, certainly look at the definition of professional services in your E&O policy and see if that’s addressed,” said Swiss Re’s Sally. “And the same would apply with loss control and risk management. That could range from something as simple as going to do the onsite visits, commenting on general loss control to more complex risk management” services.

“If they have any question about what they are doing and whether it’s covered, then go back to their carrier and have a dialogue about that,” Sally added.

Still, Moberg says he sees more problems with the other side of the coin — when the producer does an inadequate job of risk evaluation. “This will offend many producers but I’ve seen so many of them doing it in a competitive environment especially in the soft market, trying to beat the price rather than the quality of the assessment,” he said. “Rather than taking the time to go out and evaluate all of the exposures and making recommendations for coverage that takes care of all of the exposures rather than just an effort to beat the price. I think that’s an area that is lacking in most agencies that I visit.”

Topics Carriers Agencies Claims Tech Risk Management