Exposure Analysis Checklists in Commercial Lines

This is an excerpt from an Insurance Journal article that I authored in the October 20, 2014 edition.

“For the last 25-plus years, the No. 1 cause of errors and omissions (E&O) claims has been “failure to provide the proper coverage.” In 2013, many E&O carriers reported that this accounted for more than half of their E&O claims. Typically, when your insured suffers a loss that is either not completely covered or not covered at all, the customer may consider bringing an E&O claim if he or she believes your agency was negligent. The most effective way for your agency to address this issue is through the use of an exposure analysis checklist.”

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High-Tide Floods to Triple for Some East Coast Cities, Study Finds

The following is an excerpt from a very interesting article that appeared on insurancejournal.com on October 8.

“Flooding during high tides, which used to be rare, is now common in some places and could worsen to the point that sections of coastal cities may flood so often they would become unusable in the near future, according to a report by the Union of Concerned Scientists (UCS).

The Cambridge, Mass. group’s study, “Encroaching Tides: How Sea Level Rise and Tidal Flooding Threaten U.S. East and Gulf Coast Communities over the Next 30 Years,” looks at how often 52 cities flood have flooded in the past and are expected to flood in the future.”

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When was the last time you updated your procedural manual?

It seems that the issue of procedural manuals receives a fair amount of discussion at most E&O classes and that is for good reason. Many advocate doing away with the manual since it is a discoverable document at the time of an E&O claim and that statement is true. It is a document that both attorneys (the one defending your agency and the one that is suing your agency) will have access to and can bring into evidence during litigation.

However, while there are some circumstances where a procedural manual can hurt you, there are definitely situations where it can help you. When defining what makes an agency a “good” E&O risk, typically you will hear the word “consistency” used a fair amount; consistency is how the various procedures are performed. Having (or allowing) each employee to do things “the way they want” is not a good thing and can certainly cause problems. Another benefit is for new employees to “get up to speed” quicker with a shorter learning curve.

As with most things in life, when there is an upside, there is also a downside. The downside is when the plaintiff’s attorney (defending your client in the litigation) is able to discover a lack of consistency or that individuals in the agency did not even follow their own procedures.

From time to time, I will be asked to review agency procedures and to compare them to what the staff is actually doing. Invariably I will find situations where the staff is not performing the task the way it is stated in the manual. However, frequently, the issue is not that the employee was consciously looking to vary from the stated procedures. Oftentimes, the issue is that the procedure in the agency had been changed and while everyone was consistently performing it, the manual had never been updated to reflect the change in the procedure.

As we approach the end of 2014, if your agency has a procedural manual, ask the staff in that specific discipline to take some time to review their section and update it. A staff meeting where everyone has a copy of the manual is a common approach many agencies use. This will result in an updated manual and a staff that knows what the manual states (yes, there are some employees that have probably never looked at the manual).

A procedural manual can be a very powerful tool and I have seen many E&O cases where the agency prevails because of the manual and the consistent adherence to it by the staff. Make the power work for you, not against you.

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Are you dealing with more wholesalers than you need?

Whether in hard market or soft, dealing with wholesalers is an integral part of the normal work day of most agencies. Through their knowledge and expertise, wholesalers can provide agents with the ability to handle those coverages that the standard markets don’t desire to write. There is no doubt that there are many unique and significant E&O exposures to dealing with the wholesale segment of our industry. However, they can also heavily determine the success of an agency.

An agent’s ability to benefit from dealing with their various wholesalers is heavily tied to the agent’s ability to establish a relationship with them. This presents a challenge if an agent is dealing with more wholesalers than they really need. In some respects, the agent’s goal should be to form a “partnership” with the wholesalers that they are using. It is important to remember that wholesalers want and need to write to write business so essentially those agents that present them with good business opportunities will probably get some preferential treatment.

How many wholesalers do you need? There is no magical formula. A common best practice is to have as many as you need but not more than you need. Much of this issue centers on the type of clientele you have. Since most wholesalers have carved out a niche, choosing the wholesalers you want to have a relationship with depends on that type of business that your clients need. So identify the needs of your clients and then look to find wholesalers that can meet those needs.

Issues such as the following should also be reviewed:

-       the markets they use

-       their expertise

-       payment terms

-       do they have quoting / binding authority for their markets

-       do they issue policies on behalf of their markets

For this relationship to develop, agents need to honor a commitment to their wholesalers. This includes providing them with timely submissions that are accurate and complete, using the right app, letting them know what type of terms you are looking for, answering their questions promptly and accurately, performing the necessary follow up, etc.

Personally, I believe that many agents use more wholesalers than they need so as you approach 2015, consider trimming back the number of wholesalers you use in order to strengthen the relationship that you have with those remaining. At the end of the day, by working more extensively with the wholesalers you use, you will increase the chances that they will work with you.

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What can happen when you exceed your carrier’s binding authority

Recently in a class that I had the honor of teaching, I was asked a very unique question…actually one that I had not previously been asked. At the time, we were discussing the vital importance of being honest with the carriers / wholesalers that agents are dealing with. Unfortunately, this is an issue that when not adhered to, is causing a significant number of E&O claims. The question was essentially the following:

“If the agent has authority to bind a Homeowners account for $400,000 and they bind the Homeowners account for $450,000 and a problem develops, what is the agent’s liability? Is it the $50,000 amount ($450K – $400K) that they exceeded their authority or is the full $450,000?”

I responded with my thoughts but then agreed to “bounce this question” off of a couple of E&O carriers. The consensus of the carriers was that the degree of agent liability would probably be based on the carrier involved and the specific facts of the case but that there was certainly the possibility of the agent being responsible for the entire $450,000.

There is the definite possibility that the carrier would argue, bottom line, that the agent acted outside the scope of their authority when they bound the carrier to the $450k risk. The carrier would likely try to place the blame on the agent and look to recoup the amount of the loss. Another option might involve the carrier rescinding the policy, returning any premium dollars. In either case, the agent is in a very difficult position, one that they should make every effort to avoid.

If the agent was sued, their E&O carrier would probably look to assert the argument that had the agent brought the risk to the specific carrier’s attention, the carrier would probably would have written the coverage. I have seen these cases over the years and they are often difficult and fact intensive arguments and due to this high level of “intensity”, the litigation costs can be significant. Typically, the discovery involves a review of the carrier’s files and underwriting guidelines, depositions of underwriting staff, etc. The E&O carrier’s objective would be to develop evidence to prove that the carrier would have written the $450k risk had they been asked to.

So the answer to the question is that the agent could most definitely be “on the hook” for the entire $450,000. The best advice was well stated by the claims manager of one of the preeminent E&O carriers,

“bottomline, don’t exceed your authority.”

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Looking to buy or sell an agency? Are you factoring in the E&O issues?

It seems that every day, insurance news providers are reporting on insurance acquisitions. There are many issues involved for these agencies and others in the acquisition mode but one issue that does not seem to get the attention it deserves involves the applicable E&O issues. Unfortunately, agencies could find themselves, whether they are the buyer or the seller, without the proper coverage.

It is important that both the buyer and seller realize that not all E&O carriers handle this transaction the same and actually the process could vary, depending on whether the transaction is a merger or an acquisition. A great starting point is to contact your E&O carrier and advise them of your intentions, letting them help guide you through the process and the issues.

For the buyer, the traditional approach is to have your E&O policy endorsed to provide coverage for the “new” agency. The coverage, commonly called a Purchased Entity Endorsement, will provide coverage for errors made by the “new” agency beginning with the effective date of the acquisition. Don’t count on the E&O carrier automatically providing this Purchased Entity coverage so be sure to bring your E&O carrier into the discussion early on. If you are a retail agency and are acquiring an agency that specializes in long haul truckers, it is doubtful that your E&O carrier will be so agreeable.

For the agency that is selling, once again, it is best to contact the E&O carrier and advise them of the plan to sell the agency. The traditional approach involves the seller purchasing an extended reporting period endorsement (a/k/a “tail”). This provides an additional period of time after the expiration of the policy for which valid claims will continue to be accepted, provided the wrongful act occurred before the end of the policy period. While virtually all claims-made policies contain this provision, this does not mean there is consistency among carriers as to the available options. Some policies may only allow options up to 3 years, while some carriers may provide up to ten years – or even an unlimited period. There is a premium associated with this – 200 percent of the last full annual premium for a ten-year tail is common – so be sure to plan for this expense. It is extremely important to realize that you only have a finite time to make this important decision. As a result, don’t delay. Buying the longest option available is highly recommended.

Whether you are the buyer or the seller, there are definite E&O implications that must be carefully discussed and resolved. Including your E&O carrier in the discussion is a great starting point and should help you make the right decision.

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What insurance activities are covered by your E&O policy?

If you were to ask most agency owners this question, there is a good chance that some may indicate that they are not sure because they haven’t read their policy. In actuality, this is one of the key areas of an E&O policy that could heavily determine whether that E&O claim that you are concerned about facing would even be covered. Within every E&O policy, there is a list of those professional services / activities that are covered. Take 10 minutes and review the list; it will be time well spent.

If you are assuming that because you listed the activity on the application that should mean that the activity is covered, don’t bet on it. Unfortunately, that line of thinking is no sure bet.

There have been over the years many E&O claims that an agency faced that ultimately were not covered by their E&O policy. Some of the differences could involve non-admitted business or possibly some life and health activities. What about premium financing or loss control activities? Are these covered? It depends on the specific E&O policy form that the agency has. In the world of Agents E&O, it is generally understood that no two policies are the same and the list of covered professional services is a common difference among the forms.

If you are performing a specific service that does not appear to be covered, it is probably best to contact the broker or carrier that you secured the policy through and ask them if coverage for that activity could be provided. If they are able to, there may be a corresponding premium charge. Absent that, it is important for agents to understand that they may be “self-insuring” any claims involving that activity.

So make sure that as the agency owner, you understand what your E&O policy covers and what is doesn’t. In addition, every policy contains exclusions so it is important to review those as well to determine, to what degree, those exclusions are of concern for your agency.

Bottom line – Don’t wait for a claim to occur to find out that you didn’t have the coverage you thought you did.

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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.”

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