The Funnel of Agency E&O Claims

This industry is filled with confusing and often contradictory recommendations regarding how to avoid E&O claims. This is frustrating for me, so I know it is frustrating for agents. I believe the source of the confusion is due to the different perspectives of the people supplying the advice.

E&O claims flow through a funnel like the picture below. At the top of the funnel are all policies and within those policies, there are potential claims waiting for an uninsured or underinsured event. At the bottom of the funnel are the few claims that flow all the way through to be tried in court. A person who is only seeing the end of the funnel with a steady drip of bad cases is bound to have a different perspective than a person seeing all the potential E&O cases at the funnel’s top.

When viewed from this perspective, I can more easily see why advice might be contradictory. Good advice at the top of the funnel might be poor advice at the bottom, and vice verse. For example, having solid procedures at the top of the funnel is great advice. Having procedures that might be missing a step or are not followed might be considered worse than having no procedures by a defense attorney working near the bottom of the funnel.

Another example is coverage checklists. I have heard many people working at the bottom of the funnel advise agents not use coverage checklists because it is impossible to list every coverage. When viewed from the bottom of the funnel, I see their point. But the bottom of the funnel is tiny compared to the top of the funnel. The defense attorneys see few of the truly potential claims. They don’t even see all the actual claims that are filed for a variety of reasons. When looking at the entire picture then, isn’t it better to decrease the number of potential claims filtering down into the funnel?

Consider the funnel again, this time with percentages. (NOTE: these percentages are for example purposes only and do not represent actual, known results.)

Coverage checklists reduce the amount of potential claims going into the funnel. When used correctly, 100 percent of customers are offered the right coverages. These customers have either purchased those coverages and therefore, will not have an uncovered claim or they have acknowledged in writing that they rejected the coverage.

One E&O carrier analyzed the potential impact of universal coverage checklists in the wake of Hurricane Katrina and concluded that 50 percent of all those E&O claims would have been avoided if agencies had used coverage checklists. This is a huge difference.

Good procedures also decrease the number of potential claims. Just processing certificates correctly may decrease potential claims by 10 percent or 20 percent. Handling late pays consistently, working renewals proactively, writing proper proposals, having adequate coverage knowledge, talking to clients at renewal about changes in exposure, proper staff training, and good documentation all significantly reduce the number of potential claims an agency might incur.

Let’s look at the funnel again when an agency is operating at top form (again, these percentages are based on my experience and not any kind of analysis of E&O claims):

An agency might lose more claims in court than they win, but the result is still better for the agency. To a defense attorney, such results are horrible because they lose more than they win and most lawyers are primarily concerned with not losing in court.

I recently heard a defense attorney tell an agency to never have procedures because he could win cases more easily. From that perspective, I am sure he’s right, but the advice is atrocious for the agency. Agencies need to do what is best for them — not what is best for the defense attorney.

Whenever a claim is filed, the agency loses even if they win in court. All that is left to determine is how much the agency loses. For example, if an agency incurs three claims and wins all three, the agency is still batting 0 percent, not 100 percent. The agency still has to pay for hours and hours of attorney’s fees, deductibles and higher premiums. The agency still has to endure higher levels of stress, lost opportunities and possibly reputational damage. How is this winning? Wouldn’t it be better to institute good procedures and sell clients more coverage so the agency does not incur as many claims?

Being in different positions in the funnel gives rise to different perspectives. Don’t let consultants and attorneys sitting on the bottom of the funnel dictate what goes into the funnel. If you adopt and enforce good procedures now, your agency will make more money, the risk of damaging your agency’s reputation and future will decrease and your clients will prosper with your agency!