Today’s soft insurance market, reduced commissions and a tough economy for agency owners and their clients might be adding to agency errors and omissions (E&O) exposures. But agency owners are not the only ones in an agency who should be concerned over E&O exposures. Employees involved with past E&O incidents might be placing their future careers in jeopardy, according to an exclusive survey from Insurance Journal.
Some 14.4 percent of those responding to Insurance Journal’s 2010 Agency E&O Survey revealed that their agency would refuse to hire an otherwise qualified employee, if that employee had been responsible for an E&O claim in the past. Another 64.2 percent said they would “perhaps” refuse to hire the employee responsible for a claim.
Of course, most agencies typically will hire or not hire based on the employee’s skill set and experience rather than on their previous history with agency E&O claims alone. But hiring decisions may depend on whether the employee did anything wrong or has learned from the claims experience.
“It is very difficult to separate people with an E&O history into those whose practices cause E&O exposure and those who made an unfortunate error that turned into a claim,” said Al Diamond, president of Agency Consulting Group Inc. “Agencies are much more likely to hire people for their experience than not hire them because an E&O claim occurred.”
According to Curtis Pearsall, president of Pearsall Associates Inc. and a special consultant to the Utica National Agents E&O program, employers should carefully evaluate the circumstances of the past E&O claim. “You don’t have to do anything wrong to be sued,” he said.
“Sometimes, unfortunately, customers may not take total responsibility and accountability for their buying decision, and if they have a claim that is not covered then they go and sue the agent,” Pearsall said. “The agent potentially didn’t do anything wrong, but they still could get sued.”
But if the E&O incident arose from a blatant dishonest act and the agent misguided the customer intentionally that might not bode well for the prospective employee, Pearsall said.
On the other hand, an employee could possibly turn an E&O experience into an advantage. Pearsall recommends that agencies should consider that someone who faced an E&O claim where they didn’t do anything wrong but yet learned from the experience might make for a good employee. “I think that potentially they are a better person, a better employee, maybe after the claim than they were before,” Pearsall said.
The truth is that many employees don’t think about how an E&O claim might impact their future work opportunities, according to Pearsall. “Most producers understand what their exposures are, and maybe CSRs understand what their exposures are, but I do think that there are people at the agency side of the business that really don’t understand their E&O exposure,” he said. “There is no one in an agency that is immune from potentially having a claim.”
Claims on the Rise
Both Pearsall and Diamond agree that while an E&O claim history might not be a deal-breaker for new employment, everyone working in an agency is facing increased odds of being involved in an E&O situation given today’s tough times. According to IJ’s Agency E&O Survey results, E&O claims are on the rise.
“Last year 56.3 percent of survey respondents never had a claim,” said Paul Osborne, a senior consultant with the actuarial, rating and consulting firm Demotech Inc., IJ’s official research partner. Osborne, who helped with the analysis of the survey results, said the number of survey respondents who have never had an E&O claim is down to 48.1 percent.
The results show a corresponding rise in recent claims as well. In 2009, just 22.8 percent of respondents said they had an E&O in the past five years, but in 2010, 28.4 percent of respondents admitted to having a claim in the past five years, Osborne said.
“Even the best trained agency staff will be more prone to errors when faced with ever-increasing workloads,” Diamond said. “And the carriers’ habits of requiring more work effort on the agency in the input of data to the company systems add to the risk of both commission and omission-type errors.”
Pearsall says agency cutbacks on staff combined with soft market conditions have meant agencies are busier than ever.
“There’s a lot more pressure on the agents, on the staff, to get the job done,” Pearsall said. “I think there’s a lot more company expectations of agents, passing on different responsibilities, etc., (and) certainly, the condition of the economy now” also adds more pressure on agencies and may increase E&O exposure.
According to Pearsall, Utica’s own E&O claim frequency is in good shape right now, down from what it was back in the mid-’90s. “At a national level E&O claim frequency went up just ever so slightly from 2008 to 2009, but now it is back down in 2010. And all of the numbers over the last number of years, the Utica program has enjoyed a very solid E&O claim frequency.”
Despite heavier workloads and economic factors beyond agencies’ control, a big majority (74.6 percent) of respondents to the survey said they are not worried about more errors in their agencies due to staff reductions in the past year.
But according to Diamond, perhaps they should be more worried about how cutbacks invite mistakes. “Is the risk real? Of course,” he said.
“In these difficult times fewer agencies are spending the time necessary on proper training, documentation and processing oversight. Pragmatically, the agency’s time is spent getting and keeping clients. I trust that either when the economy turns or when E&O problems arise, the agencies will react by implementing the training, documentation and audit trail that double-checks and avoids E&O exposure. Until then, they will continue to do more with less, hoping that no E&O exposures occur,” said Diamond.
Reduced Coverage Risk
Just as agencies are looking to cut expenses in today’s economy, so, too, are their customers, a situation that often translates into their pressing for lower premiums. According to Pearsall, as customers seek to reduce their premiums, and agents look for new carriers to lower those premiums, there is the potential for coverage differences and gaps that could in turn lead to an E&O exposure.
“One of the concerns that Utica has had, and that I have had, is to make sure that when a customer, because of the economic conditions, looks to reduce their coverage, whether they are dropping coverage, whether they are reducing the limits, agents are taking some action to make sure they get those requests in writing from the customer,” Pearsall said. “Because if you don’t bring it to their attention and there is a claim down the road, they could come back against the agent for failure to notify them of the differences.”
Pearsall advises agents to do a “mirror test,” or an analysis of coverage on both commercial and personal policies when they move an account from one company to another, to identify the differences and bring those differences to the customer’s attention. “The number one cause of claims continues to be, year after year after year, failure to provide the proper coverage.”
Pearsall also predicts over the next few years agency use of social media will become an issue that E&O carriers will have to address. “I think there are some questions and issues with social media E&O exposures,” Pearsall said. “I think there are some things that are covered, and some things that are not covered,” Pearsall said, adding that coverage depends on how the social media is utilized in the agency.
“I think it’s going to be incumbent upon the E&O carriers to be able to address that in some form or another,” Pearsall added. “It’s very important for agents to recognize that no two E&O policies are the same.” Agencies should take the necessary steps to educate their customers, educate their staff and document properly, Pearsall says.
The Agency E&O Survey asked agents what areas of operations and practices they worry about as being the most vulnerable to an E&O claim. Common concerns expressed included: inadequate coverage; failure to issue certificates; failure to process changes; failure to offer options; and misrepresentation of services or claims.
About the Survey
Insurance Journal’s Agency E&O survey for 2010, conducted Oct. 6, 2010, through Oct. 16, 2010, drew 662 respondents from 46 states and the District of Columbia. Columbus, Ohio-based Demotech Inc. provided analysis and input for the Agency E&O survey. Demotech serves as Insurance Journal’s official research partner.
There were no respondents from Alaska, Nebraska, Nevada and Wyoming. The five states with the highest percentage of respondents were California (15.4 percent), Florida (8.2 percent), Illinois (6.5 percent), New York (6.3 percent) and Texas (9.4 percent).
Total property/casualty premium volume in 2009 was less than $5 million for 44.5 percent of responding agencies; 16.7 percent said their agency’s P/C premium volume was between $5 million and $10 million; and 15.8 percent had P/C premium between $11 million and $25 million. Some 17.8 percent said P/C premium was between $26 million and $200 while 5.3 percent reported it as more than $200 million.
Most agencies responding to the survey (57.1 percent) had between 1-10 full time employees; 14.2 percent had between 11-20 employees; 6.3 percent had between 21-30 employees; 6.4 percent had between 31-50 employees and 51-100 employees, respectively; while 9.5 percent had more than 100 employees.
The average premium volume for all responding agencies increased from $29 million in 2008 to almost $35 million in 2009.
The average E&O premium reported was $19,622 in 2010, which was unchanged from the prior year.
Despite the fact that E&O premiums were largely flat, the number one reason respondents wrote as why they would change E&O carriers was price.
Agents reported seeking the following improvements to their E&O coverage in the survey: Better Service, 8.6 percent; Broader Coverage, 26.9 percent; Lower Cost, 51.6 percent; Increased Competition, 7.5 percent; More Ratings / Agencies Allowed 5.4 percent. Cyber liability or digital exposure coverage was also often mentioned as a sought after improvement.
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