I have often been asked why procedural consistency is important for reducing errors and omissions (E&O) exposures. Another way of asking the question is, “Why is inconsistency an issue?”
Let’s first consider the strict legal perspective. The most applicable case law is titled “The Invariable Practice Rule.” An invariable practice is done “one way, all the time, by everyone.” This rule is based on a Florida statute which states that the demonstration of an invariable practice is considered equivalent to documentation that something was done.
Does this rule work as a defense for agencies that process business consistently? Excluding situations with clear extenuating circumstances, my experience is that it has worked every time. Furthermore, I have seen it work with regulators too. This is an extremely powerful reason to be consistent.
Conversely, I have heard many defense attorneys argue that inconsistency can be used as a defense. Their argument goes something like this, “If you’re inconsistent all the time and have not given the insured any reason to believe you are consistent, then inconsistency is a great defense.” Given this argument, I could agree with those agency owners and producers that do not believe consistency is important, provided the agency is always inconsistent. However, I’m really not sure how an agency would advertise the advantages and benefits of being consistently inconsistent. Maybe: “You can count on us to be so inconsistent that you’ll always be surprised by what coverage you really have!” Who knows? Some client might find total inconsistency appealing.
Now let’s consider the E&O perspective. Consistency provides a great defense against E&O claims, but does inconsistency really create E&O exposures? I argue that inconsistency does create exposures because if business is inconsistently processed, the odds of a mistake occurring resulting in an insured having an uncovered claim are higher. Consistency, by its nature, provides checks and balances that prevent and catch mistakes. The result is fewer E&O exposures and a higher quality of service.
Before the industry began emphasizing cross-selling, consistency was fairly straightforward. Cross-selling can be a great strategy for improving profits and I thoroughly support it. However, it adds an extra level of complexity. Cross-selling is not the risk-free panacea or the pure profit strategy that a number of industry consultants paint. Like everything in life, cross-selling carries a price.
One part of that price is higher E&O exposures. If a commercial client is sold a personal lines policy, do they have the right to expect the same level of consistency/quality in both lines? I believe a reasonable argument, though I doubt a winning argument, can be made that just because an agency processes commercial lines consistently, personal lines customers should not expect the same. However, why should a customer that purchases both commercial and personal lines not have the right to expect the same standard applied to both? I have seen cases lost in courts because the agency applied different standards and consistency to personal lines versus commercial lines for the same client.
I see this exposure today even more often between group health and commercial lines. Too few agencies have made the effort to integrate similar procedures for mutual issues between these departments.
Another level of complexity was added when the industry began differentiating service levels between small accounts and large accounts. Economically, this makes sense. However, from an E&O perspective, is the E&O claim of a client paying a $500 commission materially less than that of a client paying a $10,000 commission? If not, then most small business units need a redo.
Complexity is also added when agencies use outside service centers. The initial concern is usually whether these providers, usually companies, will cover E&O mistakes their own people make. Most contracts state the servicing company will be responsible for such claims provided the agency did not touch the file. Somewhere between 98 percent and 100 percent of agencies ignore this clause.
However, this may be a minor exposure when using outside service centers. The real exposure arises from the difference in consistency. Most service centers have a far higher consistency level than their client agencies. So what happens when an agency incurs an E&O claim involving inconsistency as either the cause or the defense?
For example, an agency is sued for a certificate of insurance. The agency cannot use consistency as its defense because a quick review of other certificates shows too much inconsistency. Furthermore, the plaintiff’s attorney learns that the service center is more consistent and that the agency had the option of placing that insured in the service center, but did not so they could supposedly provide better service. Is the agency’s case better or worse by having a service center? The suit would likely exist either way, but the defense would likely be different. In fact, there is no way the agency can use the “but we’re always inconsistent” defense when using a service center for similar accounts.
If the service center is consistent, and since most agencies service some parts of service center accounts in-house, then doesn’t this raise the bar for the in-house servicing?
For example, a service center has 99.9 percent accuracy and consistency in processing endorsements. A mistake or accusation of a mistake is made regarding an endorsement processed by the agency. What is the agency’s defense? It cannot claim “one way, all the time, by everyone” on the business processed in-house. Furthermore, the plaintiff’s attorney can show an option existed to have it processed correctly. The plaintiff’s attorney can even show that the agency knows consistency is important and can be achieved (because this is a reason for hiring a service center — after all, who would hire a service center that was inconsistent?). Where does this leave the agency’s defense?
I am not suggesting the use of service centers increase E&O exposures. I am arguing that the use of service centers decrease an agency’s defense because inconsistency becomes more stark.
Consistency Increases Profits
The solution? Consistency throughout the organization. Aside from the fact that consistency creates accountability and many people consciously and subconsciously deplore accountability, consistency is relatively easy to achieve. It takes good procedures, education, some thought, and usually auditing whether everyone (including producers) is following procedures.
The best result is that consistency increases profits and morale for all willing to be held accountable. For those that cannot stand accountability, I believe this industry is quickly passing them by. If an agency employs such people, management has an important decision to make. Will management appease people that deplore accountability or will management put their agency on the path to success with reduced E&O exposures, better quality of service, and a far better defense when an E&O claim does arise?
Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. E-mail: firstname.lastname@example.org.
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