Claims-Made – do your clients know the definition of a “claim”?

For those policies written on an “occurrence” basis, it is fair to say that most clients have a good idea of the definition of a claim. However, there are several coverages written on a “claims-made” basis including professional liability, employment practices, D&O, etc. How well do your clients know what constitutes a “claim” under these policies? Probably not as well as you may want to believe.

There are some potentially significant ramifications if claims are not reported when they should be. Many of the “claims-made” forms are actually written on a “claims-made and reported” basis which requires that the claims be reported during the policy period. Failure to do so could result in a lack of coverage.

For those policies written on a “claims-made” basis, it is suggested the agency include a document with the policy that spells out that the coverage is on a “claims-made” form and the importance of being aware of what constitutes a claim. If the policies are delivered, attention should be brought to this document.

While there are some similarities to the definition of a claim, it should not be assumed that each policy has the same exact definition. In many situations, the definition includes a “written demand for money or services”. However, there are some “claims-made” forms where an oral complaint is included in the definition.

Bottom line, it is important that clients understand the differences and the agency should consider providing a document that encourages a better understanding. The document should also include a statement that advises the client that if they have any questions on this issue to contact the agency claims staff.

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Policy Delivery – what is the best way to handle?

The proper handling of policy delivery is actually an important element in an E&O loss prevention program. Because of this, insurance agencies should have a written agency procedure to follow.

For many agencies (more specifically the producers), the procedure is to deliver / mail all of the policies when they have been received and checked. While this may sound logical, in practicality, there are numerous situations where policy deliver is held up waiting for that one “straggler policy” to come in. Unfortunately, by the time that “straggler policy” comes in, is checked and prepped for delivery, you could be many months into the coverage period for that client. Meanwhile the policies could be still sitting on a desk (or on the floor) in the producer’s office.

I am certainly not suggesting that every time a policy comes in that it should be delivered after being reviewed. It does make sense to hold some of the policies and then to deliver them together. The key issue is to recognize that if there is a policy (or two) that is not going to be received for a while, the producer should deliver those policies that have been received and advise the client that the outstanding policy will be delivered when received by the agency.

Policy delivery should not go like this – “here are your policies, everything is as per our discussion”. When delivering the policies, it is suggested that the producer go thru a brief review of the policies and to point out some key issues. These could involve a Protective Safeguard Endorsement or a Classification Limitation Endorsement or the fact that the deductible applies to defense costs. Producers should look at policy delivery as the means to help the client better understand the coverage they (or don’t have). To do this, the producer should definitely prepare for the client appointment by reviewing the policies and noting any issues that they would want to consider bringing to the client’s attention. Also, during the discussion at delivery time, this presents a great opportunity to remind the client of coverages they did not buy.

Agencies should require that the agency system reflects when the policies were delivered and any discussion that developed during that meeting.

If physical delivery of the policies is not realistic (and it won’t be for all clients), the same philosophy of timing should be followed. Also, it is suggested to include a cover letter encouraging the client to read their policies and to call the agency with any questions or comments. The cover letter could play a key role in the defense of the agency should a problem develop.

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Are “Drones” an item on your Exposure Analysis Checklist?

Over the last week, I have noted many excellent articles addressing the “drone” exposure and the insurance implications. These articles have appeared in a variety of sources including industry publications, LinkedIn articles, etc.

This appears to be the latest exposure facing the insurance industry and I can state with a fair degree of certainty that this issue is going to grow in numbers and usage. In commercial lines, the uses are varied including professional photography, construction site monitoring, safety and security consulting, etc. In personal lines, drones appears to be the latest “toy” with many retailers heavily marketing purchasing a drone as a Christmas present.

When evaluating what could really go wrong, many tend to think of the bodily injury or property damage exposures. However, there are additional exposures such as invasion of privacy, cyber liability (data that is stored within the drone) or a business interruption exposure resulting in financial loss.

Bottom line, every agency has an enhanced likelihood that they have both personal and commercial clients using a drone. A key question is how are you finding out about this exposure? Are you asking the question or waiting for the client to call the agency to advise you? While hopefully clients will contact the agency, it is more likely that the agency should be asking the question. Possibly through some education of the issues by the agency, this will prompt some clients to make the call.

Some initiatives for the agency to consider:

In both personal and commercial lines, the agency should include in their exposure analysis checklists, renewal questionnaires, etc. the issue of drones. Even a basic question such as “do you have a drone” would be of benefit. Adding some language that strongly notes that the current insurance coverage may not provide sufficient coverage would be advisable.

- Education. Including an article on the agency website, newsletter or other media such as LinkedIn certainly has value. If possible, including a link to articles on the subject in agency e-mails, letters, etc. would help to get the message out.

Another key issue deals with how the various insurance policies will respond to claims. Many of the articles I reviewed spoke to serious insurance implications especially dealing with “invasion of privacy” claims. This was primarily due to the “intentional” nature that could be alleged, a typical exclusion under most insurance policies.

How are your carriers addressing this exposure? It certainly would be appropriate to ask and to the degree that coverage may apply, don’t be surprised if their position changes as carriers look to underwrite / price the exposure.

The “Drone” exposure is not going away. It is time for agencies to build into their process the identification and understanding of the exposure.

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Producers – it is important to read the policies you are selling

Today, probably more so than in years past, the various policies don’t have the same degree of consistency. In other words, a GL policy may vary from one carrier to another. The same for umbrellas, property policies, personal lines, etc. While this is especially true when comparing a policy in the standard market with one in the E&S market, there can still be differences for policies in the standard market. While umbrellas are often thought of as “follow form” over the underlying, this is certainly not always the case.

Some of the differences can be coverage grants that make the coverage more expansive. However, there is no doubt that limitations and exclusions can find their way into these policies and some of these exclusions / limitations can be extremely significant.

For producers / those in the sales side of the business, how confident are you that you know what coverage the policies you are selling / proposing are really providing? Hopefully the carrier proposal outlined any “additional” limitations / exclusions but there is certainly the possibility that the proposal did not. This is one reason why it is SOOO important for producers to read / review the policies you are selling to note the coverage provided / not provided.

Imagine the producer selling a policy that had a significant limitation / exclusion that was an additional endorsement to the policy. Let’s say that the exclusion limited the coverage to only a certain type of activity. The producer visits the location and notices the customer performing activities for which there is no coverage. A loss occurs involving one of those activities and the customer finds out there is no coverage. There is a good chance that the client would allege that the producer saw those (uncovered) activities being performed and did not say anything. How that would wind up is anyone’s guess.

Producers should take the time when proposing an account either at the time of new business or renewal to review the coverage they are proposing for any issues. Also at the time of the delivery of the policies, the producer should review them again and point out the exclusions / limitations. Certainly encouraging the client to read the policy is always suggested but it is questionable how much overall weight that will carry.

Education of the customer is always a good thing. However it is fair to say that it is better before a loss than after it.

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Don’t try to resolve E&O matters yourself

Over the last number of years, I have received frequent e-mails, phone calls, personal inquiries from agency folks concerned about a matter that has occurred in their agency. Typically, the issue involves a client that has suffered a loss for which there is either no insurance or not enough. The client is very unhappy and is making some overtures that they may pursue some form of legal proceeding.

In many of these situations, the agency staff member (oftentimes not in a managerial position) has contacted the carrier underwriter or claims person to see if they can persuade them to honor the claim and make the matter “go away”. While I understand why this approach is taken, these can be very delicate matters that really should be elevated to a higher level.

It is highly suggested that when claims of significant size are not fully paid or where the client is making some very strong statements regarding a potential lawsuit, these issues should definitely be elevated to agency management for their review and then probably to the E&O carrier for their review and guidance. A good E&O carrier wants to be a resource to help agencies deal with these types of matters and their guidance and direction are of tremendous value. So, don’t hesitate to contact the E&O carrier’s claims department. You will feel much better.

There are also other scenarios where contacting the E&O carrier makes prudent sense. The situation could involve a coverage interpretation that the carrier is making that could be challenged or at least questioned. The claims departments of E&O carriers are not just good at E&O matters; they are also usually very good at underlying coverage decisions that could influence the matter.

The one thing you don’t want to do is to try to handle the matter yourself. The “weight on your shoulders” will get pretty heavy at times goes on. By elevating the matter to agency management and the E&O carrier, the matter can be properly handled and hopefully resolved. The E&O carrier may request / allow the agency to try to resolve the matter directly with the underlying carrier but this course is normally best when the E&O carrier provides that direction.

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Attend an E&O seminar in 2017

There are a variety of opportunities to enhance the E&O culture of individuals and the agency as a whole. Most of the industry magazines have a column dedicated to the topic and with few, if any exceptions, the articles are well done and have a very specific message.

Personally, I feel that the best approach that really makes a difference involves live E&O classes, either performed at a public place, association office, at an annual conference or in the agency itself. The advantages of this approach are twofold:

The E&O issues / topics discovered are significant. While documentation is obviously going to be discussed, other issues such as renewal questionnaires, policy checking, system management, etc. will also be covered. After all, a solid E&O culture involves many different areas.

- The session is going to be interactive with the ability to ask questions or at least hear and understand the answers to questions that other folks are raising. At times, a particular issue that someone may have may not get addressed. However, most instructors are very good at encouraging additional topics either in the session or at the breaks.

A suggestion that I hope agency managers will respect: if one were to profile the attendees in an E&O class, it would be common to find that the majority are in a management / ownership position with the agency. Without a doubt, this is very important as a strong E&O culture starts at the top. However, it is heavily suggested to have the staff represented in these classes. While it will probably will not be possible to have all or even half of the staff attend, if possible, have 25% of the staff attend. They should be advised that they will be required to discuss the topics at an upcoming agency staff meeting.

Without a doubt, attendees at E&O sessions always leave these sessions with a better understanding and appreciation for the variety of issues involved in a strong E&O culture and commitment.

Now is good time to contact your state agents’ association to see what E&O classes they will be running in your area in 2017 and make it a point to have some staff attend. Many of the E&O carriers provide a credit on the E&O insurance based on a certain percentage or number of staff attending so while you are enhancing the E&O culture of the agency, you may be just saving some money.

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When buying E&O, limits should be the primary focus

Imagine the scenario, your agency has just been advised that you are being sued in an E&O matter. Would you rather have $1,000,000 limit of liability and a $1,000 deductible or a $2,000,000 limit and a $5,000 deductible? I would trust that most would prefer the higher limits but with the higher deductible. This is very sound thinking. Unfortunately, this is not always the case. In fact, if this issue were to be surveyed, I would imagine a significant percentage of respondents would choose the lower deductible as opposed to a higher limit when securing their E&O.

The advantage of focusing on the E&O limit is that this is the “unknown”. When an agency is sued, the potential dollars at stake are an unknown, more so if the underlying coverage involves liability coverage of some type. One of the more significant trends that E&O carriers are experiencing is an increase in severity which is a measure of the final settlement of the claim. Overall, Agents E&O claims are being settled for bigger dollars than in the past.

In looking at the deductible side of the equation, if one were to take a $5,000 deductible as opposed to the $1,000 (in my scenario above), the potential impact to the agency is “known”. Essentially it is a $4,000 difference. Most agencies can absorb a $4,000 difference as opposed to a $250,000 difference when they find out they did not have enough E&O limits.

A common scenario is to buy a higher deductible and “invest” the savings by securing a higher E&O limit. This issue is one that should get a lot of attention when securing your initial coverage or at renewal time. Do not hesitate to ask the underwriter / broker / association (whoever you are dealing with in the securing of coverage) for options. Look at a couple of higher limit options with some corresponding higher deductible options. This will enable you to make an educated decision.

A word of advice, especially for smaller agencies: One of the deductible options may involve going from a loss only deductible (where the agency only pays their deductible if a judgment has been made against them) to a combined deductible where the agency will now have an obligation to incur part of the defense costs. The suggested approach, once again for small to medium size agencies is to stick with the loss only deductible. You might pay a couple of dollars more but it is the more conservative approach.

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Record Retention – what’s the right number ?

How long should an agency retain their records? While this seems to be one of the most often asked questions, it is also one of the most debated. I have seen articles written expressing opinions that due to current technology, an agency should keep their records forever. More about that in a minute.

One of the key underlying issues associated with this topic is that due to the various privacy laws (among other things) and laws regarding notification in the event of a breach, it is not really possible to pick one record retention number and have that number apply to all agencies of all types. There is no “one size fits all” approach.

While many in the E&O prevention side of the business are asked the question about record retention, this is a question that is best posed to legal counsel. Each state has potentially different laws and statutes that will come into play when determining a record retention position and legal counsel should be consulted to ensure the necessary details are known and factored in.

Probably at the end of the day, the real key issue applying to this topic is that the agency develop a record retention position, implement it and stick to it. The record retention schedule should be determined and communicated to the staff. It is important the position be heavily monitored as deviations from a set record retention schedule could cause problem issues if key information / information pertinent to a potential E&O matter was destroyed prematurely. This would arise allegations of “spoliation of evidence” which is not an issue you want to be involved in.

On the issue of keeping records as long as you can, personally, I feel that this is not a prudent position to take. There are a variety of issues:

What is the credibility of a client decision made 15 years ago? The more records that an agency has in the system would probably expose that agency to more potential issues in the event of a data breach. Also is there the possibility that keeping records longer than necessary could actually damage the defense if the agency were to become involved in E&O litigation? It is important to remember that at the time of an E&O matter, all of the agency’s file information (documentation, e-mails, proposals, etc.) are now admissible and discoverable to both the attorney defending the agency but also the attorney suing the agency.

Bottom line at the end of the day – each agency should determine their record retention schedule / position and then comply with it.

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Court Finds No Coverage for Credit Card Breach under BOP

The following cited an interesting legal case that was noted in the IRMI newsletter of Nov 16th.

Demonstrating the importance of liability coverage for cyber-claims, an Alabama federal court found that a grocery store was not entitled to a defense under a businessowners policy (BOP) for a lawsuit brought by credit unions seeking costs related to a credit card breach. There, the store’s computer network was hacked, compromising credit/debit cards. The credit unions filed suit, seeking costs they incurred for fraud losses, reissuance of cards, and various administrative expenses.

The insured sought a defense under its State Farm BOP. However, State Farm denied coverage, and a lawsuit ensued [Camp’s Grocery, Inc. v. State Farm Fire & Cas. Co., No. 4:16-cv-0204-JEO, 2016 U.S. Dist. LEXIS 147361 (N.D. Ala. 2016)].

The court addressed whether a duty to defend exists under the BOP’s liability section, “Coverage L.” This section stated that State Farm owed a duty to defend the insured from damages “because of ‘bodily injury,’ ‘property damage,’ or ‘personal and advertising injury.’” Significantly, “property damage” was defined not to include “electronic data.”

The insured argued that covered “property damage” was alleged because the credit unions replaced physical debit and credit cards due to the hack. The court sided with State Farm’s argument that covered “property damage” did not exist. The court found that the insured’s lax network security “allowed the intangible electronic data contained on the cards to be compromised … causing purely economic loss flowing from the need to issue replacement cards with new electronic data.”

Editor’s Note: The credit union’s lawsuit follows the trend started by the Target data breach litigation, which allowed banks to bring lawsuits for the costs they incur. That is why it is important for insureds to obtain Insurance Services Office, Inc. (ISO), forms BP 15 04 or BP 15 05, which are designed for data breaches and would have likely afforded coverage for the store. Also, form BP 15 08 covers lawsuits by acquiring banks (i.e., Visa, MasterCard), as well as any contractual penalties in the merchant agreement.”



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Want to sell more insurance while reducing your E&O exposure?

This sounds like as close to a true “win-win” scenario as one could get. Ironically, the more focused an agency is on minimizing their E&O exposure, the more insurance they will sell. Here is an example…

When you provide your clients with a proposal, include a statement that references some exclusions for that specific line of business. For example, when you are addressing the general liability coverage, note exclusions such as employment practices liability or professional liability coverage and then bring these to the attention of the client during your proposal presentation. This is almost guaranteed to prompt some further discussion (and possibly a proposal to address the exclusion). When noting exclusions, there are a couple of key issues to note.

There should be a reference to the noted exclusions that the list of exclusions is not a total list. Thus, a statement such as “exclusions include but are not limited to the following” helps to educate the client on some of the exclusions while bringing to their attention, this is not a complete list.

- There should be a disclaimer on the proposal. An example:

“This information displayed is intended to be a brief review of limits and coverages. It is not intended to be a complete description of all coverages, exclusions, limitations, terms or conditions. Please refer to the policy for a complete explanation of the coverage provided”

To note some of the exclusions requires that the exclusions in the policy in question to be reviewed. I am not sure how many producers actually perform this type of review but it is definitely time well spent. As the exclusions are reviewed, one should be looking to determine if the exclusion is a possible potential exposure for that client.

This approach works! Among the examples I am aware of involved a wholesale food distributor account. Among the products they sold was live seafood (crabs, lobster, claims, etc.). However, in the property section of the policy is an exclusion for “live animals” that would have come into play if a loss had occurred for the live seafood. By bringing this exclusion to the client’s attention, it accomplished at least two things:

- If the client suffered a loss involving the live seafood and tried to claim that they were not aware of the exclusion, they would not have much of a case.

- The second thing it accomplished was that the agency wrote the account, taking it away from one of their competitors.

So at the end of the day, educating your client through the inclusion of some of the policy exclusions certainly helps to minimize the potential for an E&O claim. And guess what:

You might just sell more insurance !!


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