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.