Does your customer know whether the WC policy is subject to audit?

In the majority of E&O claims, the litigation is due to an underlying bodily injury or property damage claim that was not settled to the satisfaction of the customer. However, there have been numerous E&O claims where the allegation deals with a premium issue. One of the more common involves workers compensation coverage and the issue of an audit premium adjustment.

Let’s take the scenario of the customer securing a WC policy. At the end of the policy term, the company audits the account and provides the customer with a bill for an additional premium based on the increase in payroll. What if the customer was not aware of the audit provision and the potential of an additional premium? Quite possibly, the customer thought that the “initial” premium was the “final” premium. If this is the case, based on the size of the additional premium, there is certainly the possibility that the customer will sue the agent (E&O claim) claiming that they were not aware of the audit provision. Based on the specific facts of the case, a number of these E&O claims have resulted in a judgment against the agency.

So what should the agent do to minimize the potential of this scenario occurring in their agency?

Essentially provide full disclosure. Agents should be sure to have discussion with customers on the premise of workers compensation and that the premium is based on specific payroll projections. Included within these discussions should include whether the policy is “subject to audit” and what will happen if the payrolls are higher / lower than initially projected. These discussions should obviously be well documented. In addition, any proposals / offerings of coverage should include statements detailing any audit provisions and when any additional premium payments will be due.

Another situation that has occurred from time to time involves a misclassification of the payrolls. In other words, the agent “assigns” the WC code based on their knowledge of the account and their belief of which classification is proper. If, at audit time, the auditor assigned feels that an incorrect classification was used and then subsequently assigns the payroll to a new classification (possibly with a higher rate), this could result in an additional premium. Based on the size of the AP, the customer could bring some form of litigation against the agent for the amount of the AP. This is an area where proper use of an industry exposure analysis checklist could provide the agent with the resource to determine the proper code.

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Does This Sound Like YOUR Underwriter?

Oftentimes, in any given day, agency staff are going to interact with their insurance carrier underwriters on a variety of questions and issues. It seems to be common for the agency staff to feel comfortable and confident with the answers they are getting to their questions.

As the attached excerpt from an Academy Journal Blog by Christopher J. Boggs that appeared on June 10, 2015 points out, sometimes the answers are not exactly correct. While there is certainly a degree of humor to this story, it reinforces that it is critical that when agency staff are interacting with their carrier underwriters, documentation of the conversations (in the system as well as via a memo back to the underwriter memorializing the conversation) might be in order.

“Two weeks ago we posted an article titled, “Are You One of THOSE Agents?” The article centered around some of the strange questions, comments or requests underwriters have received from their agents.

Near the end of the article we asked agents to give us some of their “THOSE Underwriters” stories – just to keep things fair. And, oh boy, did we get some emails. Below is a sampling of some of the stories agents sent.”

Continue Reading Does This Sound Like YOUR Underwriter?

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E&O Insights: When Should You Offer an Umbrella?

This is an excerpt from an Insurance Journal article that I authored in the June 15, 2015 edition.

“If one were to ask an agency how many of its personal and commercial accounts have an umbrella, most agencies should be able to determine that number without much difficulty. After all, many agency management systems have the ability to generate reports based on certain scenarios such as “how many personal lines accounts have an auto and homeowners, but no umbrella?”

If agencies have not run that number in some time, it would be interesting to calculate the number for personal lines customers and commercial accounts, and determine whether that number is rising.

A key question agencies need to answer about accounts that don’t have an umbrella is “Why?” Why don’t more accounts have this extra level of protection?”

Continue Reading E&O Insights: When Should You Offer an Umbrella?

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Is your agency a better E&O risk today compared to a year ago?

When answering this question, regardless of your position within the agency, it is crucial to be honest because there are many factors into determining this. Some key issues include:


Management must clearly and frequently demonstrate its E&O commitment by “walking the walk” and “talking the talk.” Without this commitment, it will be difficult for the staff to embrace a strong E&O culture and achieve the agency’s desired commitment level.

Staff Commitment and Education

It is very important that every staff member must perform his or her duties ethically and professionally. Technical proficiency is vital because your customers count on the staff’s expertise on a variety of insurance matters. Since an agency can be liable for what it says and what it puts in print, the manner in which the agency staff responds to customers’ questions is important. It is also important for the staff to receive the necessary training in sales, customer service and systems.

Exposure Analysis Checklists are a Must

These checklists have often been referred to as the “silver bullet” for preventing E&O claims. They are a great source of information, enabling producers and account executives to understand the various exposures of over 650 different SIC classes of business.

Educating Your Customers

There are many approaches to accomplish this, including newsletters and social media. One approach agencies use is sending a checklist each year to clients asking them to what degree their exposures have changed while bringing to clients’ attention a variety of key coverages such as umbrella, flood, earthquake, fine arts, etc.


Accurate, complete, timely and professional documentation is one of the most important, if not the most important, aspects of quality E&O loss prevention. Here are two good rules of thumb regarding documentation:

- Another staff member should be able to review the documentation and exactly know the account’s issues and open items.

- If your documentation was displayed for a jury to read, you wouldn’t cringe at the revelation of it.

Other Key Aspects to Consider

- Does your agency provide a cover letter that goes out with all policies?

- Are agency procedures documented and being followed consistently by staff?

- Does your agency have an audit program to verify your beliefs?

- Does the agency provide limit options for customers forcing them to make a decision on what limit they want and those they don’t.

- Is your agency using a standard template for the proposals you provide? Does it include explanations and definitions of key words and phrases?

- Are your producers securing sign-offs from customers for unwanted coverages?

So how did your agency measure up? One of the agency goals should be to improve your E&O prevention. If you have some work to do, now is as good a time as any.

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Do you have customers that are doing business in multiple states?

If so, are they covered by workers compensation if an employee were to get hurt?

Going back to my early years in the business (late 70’s), the common way to provide workers compensation coverage for a client was to add the Broad Form All States Endorsement. This would ensure that as that client had a workers compensation exposure in another state, they would have the necessary coverage. The Broad Form endorsement is no longer in existence.

It appears that the industry has developed a different approach to meet the needs of clients expanding their scope of operation. Whether this approach is uniform among all states in not clear in this author’s mind. Agents, especially producers, should be up to date on how their state / carriers handle this issue.

Let’s presume that you have a commercial customer that has a workers compensation policy for their current state of operation. The customer would be covered for employees working in that state. What if the employer starts operations or has locations in an additional state? Does your commercial account believe that WC coverage automatically applies to new states of operation?

Typically the requirement is that the “new state” must be reported to the WC carrier within 30 days of starting work. That state should then be listed in 3A of the WC policy.

What is Item 3C of the WC policy for? This is for those states where your business customer doesn’t have operations currently but may sometime in the future. As noted above, as the business has operations / employees working in that state, the “new” state should be listed under 3A.

Monopolistic fund states require that workers compensation coverage be purchased from the state fund. Those states / jurisdictions are: North Dakota, Ohio, Washington, Wyoming, Puerto Rico and the US Virgin Islands. These monopolistic fund states, with some exceptions (I believe that North Dakota is an exception) do not have a provision for providing an “all states” provision.

This degree of explanation is something that agents would be wise to provide annually to their commercial accounts. This could be in the form of written correspondence, included on the WC proposal or provided verbally. Obviously if the information is provided verbally, the essence of the discussion should be documented in the file along with some written communication to the customer memorializing the discussion.

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Contract / Lease reviews

For many classes of business (especially contractors), agents are often asked to review contracts / leases to determine how well the client’s insurance program meets the requirements of a proposed contract. While this type of review is one that many agents probably want to stay away from, this may not be possible especially if the agency wants to retain the client.

If an agency is going to undertake this role, it should be handled very carefully. In most cases, the agency is not going to have counsel on staff so whomever is handling the contract / lease review should do so with the proper training / knowledge.

The response to the review should be in writing with the proper disclaimers stated. The downside of providing a verbal response is that it leaves the matter to interpretation.

A typical disclaimer language reads as follows:

“We have reviewed the contract for insurance purposes only. We are not in a position to provide legal advice and thus our review is based on coverage in force at the time of the review. The comments made in this review are not intended to be a substitute for a review of the contract by your company’s legal counsel and accordingly, it is recommended that your counsel review this contract. We disclaim any and all liabilities arising from this review and any final contract language”.

So if your agency is going to handle this role:

- Probably train the individual(s) assigned this function

- Provide the response in writing

- Include a disclaimer as this ensures that your agency is not perceived  as providing legal advice.

This is not a matter to be taken lightly and all precautions should be exercised.

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When are you contacting your E&O carrier regarding claims?

Ask this question of most agency execs and it would be common to hear that the E&O carrier is contacted when the agency is served with some type of legal papers, a/k/a summons and complaint. While this is definitely a time to contact your E&O carrier, there are actually numerous other times where it is not only appropriate to contact your carrier but you may be somewhat obligated to do so.

Let’s talk a look at the following scenarios to see when it would be appropriate and beneficial to make contact with your E&O claims representative.

Let’s say a customer is irate at a member of the agency alleging that the agency did not provide the customer with the proper type / limits of insurance. They storm out of your office with comments such as “I am going to talk to my attorney.”Should the E&O carrier be notified? Even though this may not technically meet the definition of a claim under your E&O policy, there is certainly a benefit to contact the E&O carrier. By discussing the matter while it is fresh in everyone’s mind, the E&O carrier will be able to provide some guidance on what steps should next be taken, if any. In addition, virtually all E&O policies have language that provides benefit to the agency for disclosing facts or circumstances that may give rise to a claim.

How about a situation where one of the agency companies calls and indicates that they would like to come visit you to discuss a problem on a recent claim? Is the meeting essentially just a gathering of the respective parties or is there the possibility that the carrier may be looking to see to what degree your agency contributed to the problem in the claim. These occur more often than one might think. In this scenario, it is advisable to contact your E&O carrier and to seek their guidance and advice. At times, I have seen where E&O carriers have actually assigned counsel to be there with the agent to observe the line of questioning and to provide direction on how to respond to questions or request for policy information.

Another scenario might involve your agency being asked to appear before some regulatory authority. This is an area where many of the E&O carriers have expanded their coverage, essentially providing some defense coverage. The meeting with the regulatory authority may be “nothing” but getting the advice and guidance of your E&O carrier would be advised.

In these 3 scenarios, discussing the matter with your E&O carrier will give your agency some peace of mind. If the carrier feels it is appropriate, they may assign defense counsel to interact with you to get the facts and recollections of the various parties. When an agency buys E&O, they should look to utilize that E&O carrier as a resource. Don’t ever hesitate to contact your E&O carrier – a good E&O carrier will appreciate the inquiry.

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Does your client have a “professional liability” exposure

When agency producers think of professional liability (a/k/a errors and omissions), some of the more common types of risks probably come to mind. Those include lawyers, real estate agents, a host of medical professionals, accountants and others. What producers need to realize is that there are over 100 additional professional occupations that have a professional liability exposure including appraisers, engineers, pharmacists, court reporters, funeral directors, speech pathologists, consultants, therapists and teachers.

What is the best approach to determine if the account has a professional liability exposure? While the prospect can be asked, there is the possibility that they may not be aware that they have a professional liability exposure. An additional issue is that the account may believe their general liability (GL) policy affords the necessary coverage.

The best place to analyze whether a professional liability exposure exists is through the use of an industry exposure analysis checklist. Another effective approach is to ask your carrier underwriters whether they will be including a professional liability exclusion on the GL policy. This provides a good indication that there is a professional liability exposure and that the GL does not intend to cover that exposure.

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Flood Insurance Does Not Cover Debris Removal From Insureds’ Land

When floods occur, there is certainly the potential for coverage issues to come into play. As noted in the attached interesting article that appeared on on May 13, the question of coverage for the removal of sand was an issue.

This might be something to ensure that clients are aware of.

Continue Reading Flood Insurance Does Not Cover Debris Removal From Insureds’ Land

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When Dogs Bite, Home Insurers Pay Average $32,000

As you know, I have dedicated a number of articles to the subject of dog bites and the potential that when coverage is limited or not provided under the homeowners policy, E&O claims can occur.

As noted in the attached article that appeared on on May 15th, the number of claims are down but the average settlement is on the rise.

Continue Reading When Dogs Bite, Home Insurers Pay Average $32,000

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