How to Conduct an E&O Self Audit

By and | February 18, 2019

Mistakes happen. After all, we are human. That is why insurance agencies have agency errors and omissions (E&O) coverage.

Even with the support of E&O coverage, an E&O claim can take its toll on the people involved and the agency. Dealing with an E&O claim will take weeks to collect the information, meetings with lawyers, days of depositions, weeks of court time and perhaps a year or two of calendar time.

The financial burden can also be a huge blow to the health of the agency. Individuals involved will face tremendous stress, which can impact the morale of the agency.

That is why it is imperative for agencies to perform their best to avoid the devastation of an E&O claim. But how does an agency know if it is performing well? The best approach is to hire an outside consultant to conduct an E&O audit of the agency.

Some E&O carriers will provide a 5 percent to 10 percent premium discount for a few years to agencies that perform such an audit.

A consultant performing an effective audit will dive deep into the current agency procedures, culture, work habits and results to determine the relative E&O risk exposure for the agency. This audit could include benchmarking and recommendations for improvement. A good audit will not only be helpful to determine E&O risk exposure, but also provide insight to agency operations and industry standards so the agency can become a better business.

Perform a Self-Audit

The next best approach is to conduct a self-audit. This should be done annually and can be a supplement to hiring an outside consultant. The agency would follow some of the major steps an outside auditor would perform. The downside with a self-audit is it loses an outside perspective as well as the tendency to overlook some bad habits because “that is the way we always do it here.”

The first step to a self-audit is to discuss the plan with the employees. They must be fully engaged and understand the importance of transparency. Let them know the purpose is to discover the good, the bad and the ugly. It is both an E&O audit, as well as a review to improve agency performance.

Next, have all of the employees fill out an audit questionnaire, which asks questions to understand the employees’ perception of workflow, procedures, documentation and communication. The results will show the agency culture toward risk avoidance, as well as what the agency does well and what it does poorly.

Next, perform a random audit on client files, proposals and company correspondence. There are a few ways to do this part. One can follow the documentation trail from the initial risk assessment phase, through the quoting and proposal phase into the binding of coverage, client service, policy changes and then renewal.

Another approach is to just audit random files for each of the phases of the client life cycle.

Audit Questions

The audit is to find that proper documentation occurred, communications were recorded and the procedure is consistent within the agency as well as industry standards. Questions during the audit should include:

  • Did the producer use a checklist with the client, which includes coverage offered and what was declined?
  • Did the client sign the checklist?
  • Does it appear the producer offered the correct coverage based on the client’s needs? Who completed the application and was it filled out correctly?
  • Did the client sign the application?
  • What markets were approached for insurance coverage and was that per agency procedures?
  • When was the policy issued and when was it sent to the client?
  • Were all communications with the client recorded? Were the proper codes used in the agency management system to record the communications.
  • How was the renewal process handled? Was the client consulted or was it renewed without discussing any changes?
  • When a claim is made, how did the agency handle it? Who contacted the insurance company? Was a suspense created for follow up? What were the communications?
  • Are clients that get notices of cancellation from direct bill carriers also notified by the agency? If so, is that everyone, all the time, or just select customers?
  • How are policy changes recorded?Are they confirmed in writing from the customer?
  • Does the agency make changes to certificates to meet the client’s request? (Don’t do that)
  • Are policies always reviewed and verified against the application? Is a checklist used?
  • Is the agency in compliance with regulatory bodies and insurance company expectations?

Once an audit is complete, everyone must review the results and discuss how to improve workflow and steps to improve risk avoidance. The agency procedures should then be revised to incorporate the changes.

Performing an in-house self-audit is helpful to agency owners and managers to get a better feel for what is happening in the trenches. Backlogs, time constraints and organizational structure are often at the root cause of E&O claims. There will be problems, so approach them as a learning experience. This is an exercise to improve the agency.


Be open to new ideas. Use outside resources to improve operations and risk avoidance. For example, IRMI has software to help evaluate a client’s gaps as well as checklists for producers. Contact Oak & Associates for a self-audit checklist for a nominal fee. Chrysalis Advisory Group can also perform an in-depth onsite E&O audit and provide an analysis that may allow a discount on your E&O premium.

Oak is the founder of Oak & Associates and Schoeffler is an associate of the firm. The firm has offices in Bend, Ore., and Sonoma, Calif., and specializes in financial and management consulting for independent insurance agencies, including valuations, mergers acquisitions, clusters, sales and marketing planning as well as perpetuation planning. Phone: 707-935-6565. Email:

About Bill Schoeffler

More from Bill Schoeffler

About Catherine Oak

Oak is the founder of the consulting firm, Oak & Associates, based in Northern California and Central Oregon. Oak & Associates. Phone: 707-935-6565. Email: More from Catherine Oak

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