I have been an insurance broker since 1974. However, my principal occupation is attorney, practicing in the field of insurance law. I have had many conversations with insurance agency managers, insurance agents and customer service representatives (CSRs) regarding their many roles in the purchase and delivery of insurance. When asked what specific procedures they utilize to reduce E&O claims, they often tell me that they strive to remain alert to possible E&O problems but that they have no systematic approach to managing the risk. In essence, the default management approach is to be reminded of the risk frequently in the hopes that such reminders can help prevent problems regarding matters currently on the producer’s or CSR’s desk. This article is another one of those reminders.
Miscommunications or incomplete transactions between agency staff members regarding a client’s insurance result in significant E&O exposures. The risk increases depending upon the number of people involved in a transaction. Agencies must find ways to handle transactions from start to finish through as few personnel as possible, preferably one individual. A lack of uniform practices and procedures complicates this process. One methodology is to adopt an agency procedures manual.
Inadequate training oftentimes results in a lack of understanding of the client risk analysis process, inadequate product knowledge and even unfamiliarity with agency management systems. One way to minimize this risk to have an agency mentor system.
Typical agent E&O claims involve the failures to: procure insurance; adequately explain policy provisions; adequately identify exposures; recommend specific coverage types; provide timely notice of claims to the insurance carrier; add additional insureds and loss payees; duplicate prior coverages; recommend adequate value/limits; and notify customers regarding policy cancellations. Other claims involve misrepresentations and inaccuracies in information provided to the insurance company.
According to the Independent Insurance Agents and Brokers of America, the five most common E&O problems from most frequent to least frequent are: 1. recommendations made to clients; 2. policy change errors; 3. policy application errors; 4. policy renewal errors, and 5. risk assessment errors. Further down the spectrum are policy interpretation errors, policy replacement errors, errors involving certificates of insurance, and errors involving issuance of binders.
Failure to recommend errors commonly involve coverage type; values and limits; coverage procurement; policy explanation, and misrepresentation.
The largest risk assessment error involves adequate identification of exposures. Having agency guidelines regarding limits can minimize this error. For example, with automobile insurance, many states permit insureds to purchase uninsured and underinsured motorist coverage up to the amount of liability limits of the policy. Problems arise when prospects purchase only minimum limits of UM/UIM while their liability limits are much higher. This differential results in many E&O claims. An agency practice that only permits policies with identical liability and UM/UIM limits can avoid this potential problem.
Agents should avoid using terms like “all risk,” “full coverage” or “comprehensive coverage” because they tend to imply that coverage is broader than actually may be the case. Agents should explain carefully that while they can identify the type of risk offering, the insured must decide the value of the coverage. The proposal should not only identify what has been considered, but also as any areas of the prospect’s operations that were not reviewed. Coverage refusals should be documented. If the prospect must complete certain activities, then the proposal should identify the steps that are necessary before coverage will be effective.
Prospects should be required to identify either by initialing or signing off on coverage that was recommended but rejected. Where coverage could not be acquired, the proposal should identify why the coverage could not be placed.
New business transactions account for many E&O claims, whether involving new clients or replacing coverage for an existing customer. For new business the E&O concerns are failures to process applications that are accurate and timely; the failure to procure requested coverages; the failure to identify and advise about coverage exposures, coverage gaps, limitations and restrictions: the failure to identify additional insureds or loss payees, and the failure to notify the insurance company when coverage has been bound in a timely manner. Typically, the processing of applications and related activities are performed by a CSR.
Agency checklists are helpful with routine application processing. There are two checklists that are essential. The first is a process checklist for the specific purchase transaction. This checklist needs to include contacts with the insured during the processing of the application. The specific dates of each contact should be filled in. If missing information was sought, this should be documented. The form should identify when the application was submitted to the insurance company and it should have suspense dates for follow up on the policy issuance.
A second key checklist involves standard form coverages i.e., auto, homeowners, CGL. The “coverage” checklist should be filled out by the producer and confirmed by the CSR when the policy is received. As part of the procedure, both the CSR and the producer should review the policy against the proposal. The “coverage” checklist can be filled out by the producer or CSR (where a potential customer has called in). It performs as a prompt to the CSR/producer on what should be discussed during the application process regarding the coverages sought. The coverage checklist should have space to fill in the amounts of coverages for each category. As an example, on a homeowners policy the form can have a category for “scheduled property” with a listing for jewelry, furs, fine arts, cameras and other items. Properly filled out, the form can also become the proposal itself by being faxed or emailed to the customer for approval.
CSRs should be given guidance through periodic audits of their workload including suspense items for transactions that have not been completed. The agency should develop service targets of the number of days for processing items that are received, i.e., returning phone calls, claims reporting, etc. Agencies should also adopt a system of periodic follow-ups. This can involve a random sampling of a particular CSR’s case load. Just the idea that there will be a random review of accounts creates an incentive to meet agency processing guidelines. The guidelines coupled with a random monitoring process can be utilized in the annual reviews of personnel and linked to compensation.
Policies should be delivered in a timely manner and delivery attempts should be documented. It is preferable to have an in-person delivery where a review of the policy takes place. The producer should have already reviewed the policy and be prepared to identify unusual exclusions, restrictions or limitations in the policy. This discussion should be confirmed in writing to the client.
There should be a procedure to have the prospect sign all applications as well as initial each page, which helps document that the prospect has been instructed to review every question, not just those highlighted or pointed out. Coverage rejections should be documented by sending a confirming letter. Completed policy applications should be transmitted to the insurance company on the same business day they are received. Create a suspense system for receipt of the policy from the insurance company.
Agents should not act upon instructions for policy changes by third parties (mortgage companies, auto dealerships, etc.) and any change to a policy should be confirmed with the named insured, in writing. When the insured asks that coverage be deleted or reduced, the agent should advise of the consequences and, if possible, propose other options and document the file accordingly. One approach would be to require insureds to make requests for reductions or deletions in writing. The client should be told that the changes are not effective until received in writing.
In the renewal process, a significant number of E&O claims center upon the failure to adequately identify and secure coverage for new exposures or the alleged failure to recommend adequate value/limits. On smaller accounts or accounts where renewal is automatically performed by the insurance company, the producer has limited involvement. To the extent the producer is involved in the renewal process, he or she should set an appointment with the client to review the account 90 days before renewal. The opportunity for increased limits should be discussed. However, agents should clearly communicate that only the client can select the amount of coverage to be purchased. Customers whose policies will not be renewed should be promptly notified with sufficient time to allow them to seek other coverage. The file should be documented.
Plitt is a licensed insurance agent and an attorney with the Phoenix law firm of Kunz Plitt Hyland Demlong & Kleifield practicing in the field of insurance law. Tel: 602-331-4600. His column, Essentials, appears from time to time on www.ClaimsJournal.com and www.InsuranceJournal.com.For other articles by Plitt, see:
Essentials: Biomechanical Engineering in Low-Speed Rear End Collisions
Was this article valuable?
Here are more articles you may enjoy.