How are you determining whether your customer needs an umbrella ?

I was recently speaking with a good friend regarding a variety of insurance coverage issues and I asked her if she had an umbrella. She said that she had asked her agent that question and the response from her agent (a direct writer) was that “she didn’t need an umbrella since she really did not have any significant assets to speak of”. There were a couple of things that struck me as “wrong” regarding that conversation….never mind the agent turning down the sale of a coverage that would help someone to better protect themselves.

One is the “perception” / “opinion” that the agent communicated that sounded like he knew completely the assets of this customer. Isn’t there the possibility that the customer could have assets that the agent was not aware of? Most definitely!

The second issue deals with how much of an issue one’s personal assets are in determining the need for an umbrella. In one of my recent classes, one of the attendees spoke of a situation that they were aware of for the benefit of the class. The real life scenario involved a young man that just graduated from college. Due to the cost of college, this young man was in debt to the tune of roughly $200,000. So what was his net worth….probably a negative number. This individual was involved in a very bad car accident where the other party suffered some significant injuries. The young man was found responsible but unfortunately did not have sufficient insurance to cover the amount of the judgment against him. In fact, he was $500,000 short. As the story was told, this young man is now going to have his wages garnished for as many years are necessary to pay for this $500,000 short fall.

What difference would an umbrella have made…a lot!

If one applies the “net worth formula” to determine whether a customer needs an umbrella, I believe that they are looking out at this the wrong way. Personally, I believe that everyone needs an umbrella. For anyone with a car, it is not difficult to imagine a claim scenario where the underlying limits will not be sufficient and an umbrella could ”save the day”. Is the amount of a loss that a customer can cause determined by the amount of their personal assets? I am confident that you know the answer to that question.

Don’t prejudge your customers or draw a perception that they really don’t need an umbrella…offer it and you just might yourself providing an additional level of protection for your customers. If they don’t buy it, that is their decision but you are at least allowing them to make the decision.

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E&O Insights: How Well Do You Know Your Workers’ Compensation Risk?

This is an excerpt from an Insurance Journal article that I authored in the September 22, 2014 edition.

“The workers’ compensation class of business results in upwards of 10 percent of all errors and omissions (E&O) claims every year. While this may not seem like a lot, it is a class agents must be sensitive to for a variety of reasons.”

Continue Reading E&O Insights: How Well Do You Know Your Workers’ Compensation Risk?

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An alarming trend in Agents E&O

As we approach the 4th and final quarter of 2014, this is a good time to look at some E&O statistics that may govern the details of your E&O purchase moving forward. It is interesting that frequency continues to be very stable in the 6% – 7% range. Essentially this means 1 claim for every 16 agencies nationally.

A recent national trade journal contained an article that had frequency pegged at 1 claim for every 5 agents. While this may be true in some states, it has been a long time (if ever) that frequency was in the 20% area on a national level. Included within the frequency numbers are a significant number of E&O claims that are getting closed for only some defense costs. Some E&O carriers are reporting this “closed for no pay” number to be in the 60-65% area, a very impressive statistic. This shows that the solid E&O practices that agents are implementing in their agencies are translating into a solid defense of the agency.

The statistic that E&O carriers are definitely concerned deals with severity, the eventual judgment cost of an E&O claim. The number has been ticking up for the last number of years and while the average is still in the $60,000 area, it is important to remember that this is an average. While E&O claims in the $1,000,000 have been occurring for some time, they were really not that numerous. There is no doubt that claims over $1,000,000 and in some cases over $5,000,000 are happening with greater frequency. This level of severity is catching the attention of E&O carriers including some long time players. In most cases, these “larger” claims involve commercial lines accounts where property and liability limits tend to be larger.

What does this mean for agents? It means that agents should be looking seriously at their limits and looking to get some higher limit options to consider. If dollars are tight, consider taking a higher deductible and using the savings from that initiative to “pay for” a higher limit. Your E&O is one of the most important coverages that you will purchase. Be sure to give it the attention it deserves.


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Which valuation # should you pick?

It is amazing that if you pick a homeowners account and run the valuation #s for that one risk for 4 of your companies (that use the same valuation program), you will find yourself with 4 different numbers. It appears that this is because of some “behind the scenes” factors that those carriers build into the calculation. Many agents have commented that the differences can be as much as 25%, So which one is right? That is a question that is difficult, if not seemingly impossible to answer.

Probably the more appropriate question is which valuation # do you go with? If you think about the purpose of performing the valuation, one of the objectives is to arrive at a number that in the event of a total loss, the company will agree to pay that number. For this reason, the logical approach is to go with the valuation number determined by the company you will be writing the risk with. If the valuation “estimator” for that company came up at $280,000, then the $280,000 number should be the number you go with. To use another company’s “estimator” number could certainly result in your customer not receiving the proper settlement at the time of a major loss. After all, if the company you are binding the risk with determined the proper valuation, they certainly should not be in a position to dispute it.

This assumes obviously that the proper “inputs” were used. That is a topic for another day.



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Some keys involving professional liability

Professional liability / errors and omissions, is a very unique line of business with very unique terms. When you add the fact that no two policies are the same, it is no wonder that this line of business  has resulted in a fair number of E&O claims against agents.

Some of the key issues:

Typically a new app every year – For your professional liability accounts, it is essential to factor in the possibility of a renewal app into their renewal process. Producers should determine this possibility early on and make sure that they know exactly what app is required.

Give your carriers sufficient time to underwrite the account - Most professional liability carriers will request the app 30 – 45 days before the expiration date so the agency producer should look to meet with the customer approximately 60 prior days prior to the expiration date to complete the necessary applications.

Don’t expect that your account looks the same today as last year – One of the reasons that carriers want a new app on a frequent basis is to make sure that the carrier is aware of any changes in the exposure and they are comfortable with these changes. The E&O carrier may not feel comfortable with the new exposure or may decide to change the pricing and other terms and conditions.

Do not complete the application for the customer – While producers may want to make it “easy” for their customers to renew with them, they should not take on the duty of completing the application for the customer. Requiring the customer to complete the application is really the best way to secure the “true nature of the risk” and to enhance the agency defense should a problem develop alleging application inaccuracies.

Just because the professional activity is noted on the app does not mean that it is covered – Professional liability carriers will typically exclude exposures / activities that they are not comfortable with. This speaks to the value and benefit of the customer reviewing the policy in total to determine what activities are covered and which activities are not.

Review the policy – There have been many E&O claims against agents where the professional liability coverage policy contained a “current” retro date when the customer fully needed and was expecting full prior acts coverage. The producer should review the policy to ensure that it reflects what was ordered. The customer should also be requested to review the policy.

Professional liability is serious stuff and due to its uniqueness should be treated as such. Anything less has the potential to cause some major E&O issues.

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Do you wait to deliver all of your policies at once?

Based on the type of coverage you are providing for your clients, the timeliness of policy issuance can vary greatly. You may be able to print off some policies right from the carrier system while other policies may take a while especially if they are coming from the E&S market which is pretty busy right now.

Most agencies probably want to deliver all of the policies at once and this is okay provided that they are done so in a prompt manner. If you have the package, auto, and workers comp but are waiting for the umbrella (which should be here next week), there is probably no problem in waiting a few days before delivering the policies. However, if one of the policies is probably not going to be issued for a month or so, it is certainly suggested that you deliver what policies you have and then deliver the one late issued policy when it arrives.

One of the reasons why this is so important is that in most states, there is a duty for the customer to read their policy. However, for them to read the policy, they need to have received their policy. There have been a number of claims that at the time of the loss, the policy was still in the producer’s car or on the producer’s desk. So prompt delivery is extremely important. If there are some errors on the policies, and you have asked the company for an endorsement, it is still recommended to deliver the policies but advise the customer of the error and that you have requested a correction.

If you are electronically delivering the policy which is becoming more common, be certain that you know that the policy was in fact received by the customer. There is the possibility that your e-mail (containing the policy) was caught by the spam filter and never actually seen by your customer. One suggestion is to include a statement on the e-mail asking them to advise you that they have received the policy is appropriate and suggested. This is very easy to do and amazingly effective.


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WC – Is the standard different because the coverage is compulsory?

Each and every year, the workers’ compensation class of business results in upwards of 10% of all E&O claims. While this may not seem like a lot, it is a class of business that agents need to be sensitive to for a variety of reasons.

In most, if not all states, the legal standard of an agent is to provide the coverage that the client specifically asked for. When dealing with the issue of workers’ compensation, there was a court case in Massachusetts back in the 80’s that seemed to put a slightly different spin on this. The case was called Rae vs. Air Speed.

This case involved the death of an agency customer’s employee and a resultant claim for workers’ compensation benefits. The problem was that there was no workers compensation coverage in effect. The estate of the deceased made a claim against the agent for failing to procure the workers’ compensation coverage for the agency customer. Back in the 80’s, there were some significant legal questions whether an estate could bring this type of legal action as it was felt that the agency technically owed no legal duty to the estate. Their legal duty was only to the agency business customer.

When the Estate attempted to make a claim directly against the agency, pursuing claims in negligence and breach of contract, the trial court dismissed the claim on the grounds of “lack of legal duty”. This case was then appealed to the Massachusetts Supreme Judicial Court who reversed the decision, setting forth two critical rulings.

1) that the Estate could bring a direct action in contract against the agency as a third-party beneficiary of the agreement between the agency and its customer to procure workers’ compensation coverage; and

2) that the Estate could also bring an action in tort, because of the mandatory nature of workers’ compensation

While this case was in Massachusetts, it no doubt has been referenced in court decisions in other states. Thus, the essence of this case is that if the coverage at issue is compulsory, an injured third party can assert a negligence claim against the tortfeasor’s agent.

What does this mean for insurance agents? Probably that the agent should know the customer that they are dealing with (or looking to deal with) and whether there is a workers’ compensation exposure that needs to be addressed.


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Agency producers – how “good” is the documentation of your client discussions?

In reviewing a number of E&O claims, it certainly seems that the notes detailing the discussion of the various producer / client meetings could use some improvement. It is important to realize that when an E&O claim develops, all file notes / e-mails / proposals, etc. will come into play. Whether these documents help or hurt the agency’s defense is up to the agency and their staff of producers.

Obviously producers play a very key role in the agency and in its future success. Their efforts on new business, client retention, exposure analysis all are very important. The manner in which they handle these various roles will also heavily determine the E&O exposure the agency faces. For at least the last 25 years, producers have generated the majority of E&O claims.

Take the scenario of a producer out in the field discussing various issues with a customer. The discussion could involve desired coverages, coverages rejected, various coverage questions, etc. It is important that these conversations be documented sufficiently to ensure that the potential for any misunderstandings has been eliminated or at least reduced.

There are a number of ways to address this. One that some producers use involves trusting their memory. Trusting that when they get back to the office, they will remember to handle the issue that the client requested. This is certainly not a recommended approach.

Obviously a producer can take notes when the client is communicating and then review those notes and handle any tasks that need to be performed when they get back to the office. This is a good approach but one that some producers feel is especially time consuming. Another approach is to take some brief notes but then ensure that those topics are fully detailed to avoid missing any topics. Since most agency producers probably have a smart phone, consider using your phone when you get in your car to record the details of the discussion. Most phones have this capability or there are free apps to handle this. This recording can then get posted to the agency file or transcribed.  This recording should take place immediately when getting in the car and before moving on to the next stop. There is nothing like the present to ensure an accurate detailing of the conversation.

It is still suggested that the essence of the conversation be communicated back to the client. This can be handled by e-mailing a copy of the recording to the client and advising them to contact you if there are any questions or incorrect statements in the recording. Another approach is to address the conversation in some form of written communication (letter / e-mail, etc.).

These producer / client meetings are extremely important. They typically involve key decisions by the client on their insurance program or key questions to help them understand how their insurance works. Unfortunately, there is also tremendous potential for misunderstandings of these discussions and details. Ensuring that the discussions are well documented is a must for every producer.

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