Include specimen policies with the proposals

Have you ever had a situation where your client had a loss before the policy was even issued? It happens, and it actually happened to me back in my days as an underwriter. My account (a big printer) had a Mercedes stolen before I even had the policy issued.

What if your client had a loss before the policy was issued and the claim was denied due to some exclusion in the policy? The client could contend that they had no knowledge of what the exclusions were and might go so far as to state that they would not have purchased the coverage had they known all of the exclusions.

Would they have a case? The agency might have somewhat of a defense if they had listed the exclusions on the proposal. Unfortunately, the titles provided to some of those exclusions might not provide enough clarity as to what the exclusion actually excludes.

Listing the exclusions (or at least some of them) is a good idea. However, if you are going to list some exclusions, it might be best to include the following statement: “Exclusions include but are not limited to the following”.

There are a couple of additional approaches.

        Include specimen policies with your proposal. This might be cumbersome to do this for all coverages, but it is especially important on coverages (such as E&O, D&O, Cyber, EPL, etc.) where there can be significant differences among the various carrier forms.

        Include a statement in the proposal that “Specimen policies are available upon request”. This is extremely easy to implement and probably won’t result in many clients actually asking.

 As I have noted in probably every E&O class I have ever taught, at the time of a problem, there are two buckets. One bucket for the client which would include all of the issues that favor the client. The other bucket is for the agency and would include those issues favorable to the agency. The goal is for the agency to have as many items in their bucket as possible. Including specimen policies or even the statement that “specimen policies are available upon request” would be an item that would be in the agency’s bucket.

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Does your proposal include this?

Let me ask you a question:

When you provide a proposal to a client (current or prospective), what information are you using to develop that proposal? While there may be some information you can gather from websites or other third party sources, aren’t you, in reality, using the information that the client has provided you?

What if that information is not totally correct? If the policy is written and the client suffers a claim, this is often the time when the carrier discovers some inaccuracies in the application. Based on the degree of those inaccuracies, the carrier may look to deny the claim based on a position that “they never would have written the account had they known the correct information”. Your agency’s position may be “we used the information the client gave us”.

There are some defenses that could be used but obviously only if they were in place.

One of those defenses should involve requiring (not just requesting) the client review the application before affixing their signature. Using a statement such as “I certainly believe that I have taken down correctly the information that you provided me so I would like to have you sign the application. However before you put your signature on the document, please review the application and advise me if there are any answers noted that you do not feel are accurate”.

Another approach to provide some degree of protection in the event of a problem is to make it very clear to the client that you used the information they provided you. To assist in protecting your agency in the event of an issue, give thought to including a statement such as:

In evaluating your exposures to loss, we have been dependent upon information provided by you.  If there are any other areas that need to be evaluated prior to binding of coverage, please bring these areas to our attention.  Should any of your exposures change after coverage is bound, such as your beginning new operations, hiring employees in new states, buying additional property, etc., please let us know so proper coverage can be discussed.

Following some simple steps could make a world of difference if a dispute arises.


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More School Districts Buying Active Shooter Insurance

As noted in the attached article written by Noor Zainab Hussain and Suzanne Barlyn that appeared on on March 21st, recent events have resulted in more schools seeking additional protection. While this article focused on schools securing this coverage, there are other venues that should also consider this coverage such as malls and  theatres. This coverage should be discussed with every client that presents this type of exposure.

“Insurance broker Paul Marshall can count on his phone ringing in the aftermath of a school shooting. Since the Feb. 14 shooting at a Florida high school, where 17 people were killed and more than a dozen injured, seven South Florida school district have bought $3 million worth of “active shooter” coverage…”

Continue Reading More School Districts Buying Active Shooter Insurance

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In 5 States, 20% or More of Drivers Have No Insurance; Countrywide Average Increases

Every day, we get behind the wheels of our car and venture off to work, vacation, run errands, etc. Personally, there is an expectation that every car I see has at least the minimum limits of liability insurance but as you will note in the attached article, this is hardly the case. This is one reason why discussion with your clients on UM / UIM is so critical.

This is an excerpt from an article that appeared on on March 15th. The article includes the statistics for every state. How does your state compare?

“Nearly one in eight U.S. motorists is driving around uninsured and putting insured drivers at greater risk in the event of an auto accident, according to a study.

The study, directed by the Insurance Research Council (IRC) and co-sponsored by The Hanover Insurance Group, found that 13 percent of all U.S. motorists were uninsured in 2015, up from 12.3 percent in 2010, following a seven-year decline from a high of 14.9 percent in 2003.”

Continue Reading In 5 States, 20% or More of Drivers Have No Insurance; Countrywide Average Increases

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How does your E&O policy address “subpoenas”?

One only needs to access the news on virtually a daily basis to hear the reference to a subpoena. It is vital that agencies (especially management) be aware that the word subpoena can find its way into the insurance agency world. What exactly is a subpoena?

Wikipedia provides the following definition:

“A subpoena or witness summons is a writ issued by a government agency, most often a court, to compel testimony by a witness or production of evidence under a penalty for failure. There are two common types of subpoena:

  1. subpoena ad testificandum orders a person to testify before the ordering authority or face punishment. The subpoena can also request the testimony to be given by phone or in person.
  2. subpoena duces tecum orders a person or organization to bring physical evidence before the ordering authority or face punishment. This is often used for requests to mail copies of documents to requesting party or directly to court.”

How do E&O policies reference subpoenas? Most often, one will find the reference in the definition of a claim with language such as: “Claim” means a written demand or written notice, including service of a subpoena….”. 

So, what does this mean if your agency is served with a subpoena? Chances are the subpoena is a request for records or documents of some type. While this may sound harmless, this is not a matter to be taken lightly so the best approach is to:

Contact your E&O carrier immediately !

The reason to do so is that there is a good chance that your agency could be party to an E&O claim in short order. By contacting your E&O carrier, 1) you are satisfying a condition in your E&O policy and 2) you are going to benefit from the experience and expertise of that carrier.

What is the downside in failing to contact your E&O carrier? Unfortunately, this has occurred from time to time and has resulted in the agency potentially not getting the necessary coverage when a lawsuit or E&O claim develops. If the agency were to receive a subpoena and not notify the E&O carrier, when an E&O claim develops, the carrier could take a position of “denied for late reporting”. 

So, when your agency receives a subpoena, take it seriously. Make sure that all staff are aware of the importance of this issue so that they can take the appropriate action.

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Does an E&O claim always involve a BI or PD loss?

First, let’s start out with the definition of a claim as defined in an E&O policy. While the exact verbiage may vary from one E&O carrier to another, the general flavor is the following:

“Claim” means a written demand or written notice, including service of a subpoena, “suit” or demand for arbitration, received by one or more insureds which alleges a “wrongful act” or asks for money or services.

The words that are in quotations (” ..”) are those that are defined in the E&O policy, typically under a Definitions section.

In the vast number of E&O claims, the issue generating the E&O claim involves a BI or PD loss that the client has suffered that is not covered or not fully covered by the client’s coverage. However, there are circumstances that don’t involve a BI or PD loss that every year seem to result in a dispute and then eventually an E&O claim against the agency.

One of the more common deals with the client not realizing (or not wanting to admit) that their General Liability or Workers Compensation policy was “subject to audit”. The client purchases a WC policy and then, for one reason or another, the audit performed at the end of the policy year reveals payroll numbers exceeding what was initially projected. An additional premium is generated as a result of the audit and the client balks at paying the AP because “they were not aware that the policy was subject to audit”.

What is the best practice for agents to implement to address this issue? It is definitely suggested that the proposal that includes policies that are “subject to audit” contain a statement that speaks to this policy condition. Also, when the policies are delivered (personally, mailed, e-mailed, etc.), it is a good idea to reference the “subject to audit” condition in print and verbally as well. The implementation of these practices should provide the agency with a solid defense should the client contend that they were not aware of this policy feature.

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Get it in writing !

It is certainly a frequent occurrence in the insurance world for clients, business or personal, to look to reduce their limits. The reason could involve issues such as cost or possibly the client feels the limits are more than their exposure.

There are various ways the client may request the reduction. When the client sends the agency some form of written communication, these should provide a strong defense should a problem arise down the road. The communication can be in the form of a letter or e-mail where there is clear evidence of who is making the request and what the actual request is. Instructions on a cocktail napkin probably will not hold much weight in the court room.

Oftentimes, the client request is either made during a face-to-face meeting or via a phone conversation. These scenarios create a potential greater degree of E&O exposure without the proper level of documentation.

If the request for a reduction is made based on an agency proposal, many producers will simply ask the client to note the reduction on the proposal and initial the request. While this may be common, it is not the best approach. If the request is noted and initialed, it is highly suggested that the producer either promptly verify / memorialize the request in writing back to the client or produce a revised proposal indicating the limits the client is agreeable to and looking for the client to sign accepting the proposal as presented.

Bottom line, the request should be in writing either from the client to the agency staff member or vice versa essentially memorializing the request.

As noted in the following article, written by Judy Greenwald and published on on 12/19/17, this issue was clearly a key element in the E&O matter of Alliant vs Cammeby’s Management Company LLC. Alliant was acting as an insurance broker for the New York-based Cammeby’s firm.

“A federal appeals court has refused to overturn two jury verdicts that found Alliant Insurance Services Inc. negligent for reducing the flood sublimit on a New York property owner’s policy before Hurricane Sandy, and finding it was liable for $20 million.”

Continue Reading Get it in writing !

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Frequency down; Severity up

Going back to the late 80s (when I first started in an E&O management position), the frequency numbers were off the charts (but not in a good way). Frequency (a measure of the number of E&O claims as a percentage of policy count) was in the 15% area. That translates into 1 claim for every 7 agencies. Today, some carriers are reporting frequency results in the 5% area…1 claim for every 20 agencies. That is one heck of an improvement.

Why the big improvement? Some folks look at technology as part of the reason. Technology has certainly come a long ways since the late 80s. It has resulted in some efficiency gains that has enabled staff to be more productive. There are more E&O classes today than ever before. And there are potentially other reasons as well. My take on the improvement in E&O claims frequency – YOU !

Today, the E&O culture and commitment of agencies (and their Sr. Mgmt.) is very high. E&O is a frequent topic that is discussed when a procedure change is being considered and it is common to see staff meetings include discussion on key E&O loss prevention issues.

So, bottom line, agencies are much more focused on E&O today than ever before. Congrats to all the agencies that can honestly state that their culture is much improved.

While the frequency results continue to improve, the severity results do seem to be heading in the other direction. Severity (a measure of the average size of an E&O claim) has been on the increase. The actual numbers will vary by E&O carrier based on the type and size of the agencies they insure.

Some carriers are reporting E&O severity up over 50% in just the last 5 years. This can be attributable to more exposures that could potentially be uninsured, greater settlement awards, more E&O claims alleging a special relationship, etc.

The key issue here for agencies is to take a serious look at your E&O limits at renewal time. A recent study that I saw in one of the trade journals stated that upwards of 50% of all agencies have a $2mil or less E&O limit. Agencies would be wise to look at increasing the per claim limit. Just ask the underwriter for the premium of the next highest limit.

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When selling the agency, how long of a “tail” should I buy?

You may be thinking that this is not an issue you need to worry about as you have no plans to sell your agency. While that certainly may be true today, there just may come a point where selling your agency is more of a viable option. Maybe you got an offer that you just can’t refuse or possibly, one of your kids (that you were hoping would come into the agency), has decided to pursue some other occupation.

Without a doubt, M&A activity is extremely active. According to OPTIS Partners (an investment banking and financial consulting firm providing expert services to the insurance distribution industry), mergers and acquisitions of insurance agencies broke all records in 2017. In total, in 2017, there were 604 deals in the US and Canada, a 31% jump from 2016.

For the agencies looking to sell, there is a key issue that needs to be extensively considered. Most claims-made policies refer to this provision as an “Extended Reporting Period”. For many years, it has also been called “tail coverage”. This coverage allows an insured to report claims that are made against the agency after a policy has expired or been canceled with the condition that the wrongful act that gave rise to the claim took place during the expired/canceled policy.

I have seen many agencies (when they are selling) buy a 1 or 2-year tail. From my standpoint, they are leaving themselves severely vulnerable to claims that are made after the 1 or 2-year period has expired. I recently saw a study done by one of the foremost E&O carriers looking at the lag time between the date of the underlying loss and the date that the E&O claim was made against the agency.

If one were to buy a one-year tail, this would have covered about 44% of the claims. Buying a two-year tail would have increased this to just short of 70% of the claims. Having approximately 70% of the claims covered would have also meant that 30% of the claims would not have been covered. Sounds risky to me. Even stretchy this out to a 5-year tail would still result in 5% of the claims not being covered.  

As you would imagine, there is a cost to buying a tail (there are many other factors as well that should be carefully reviewed). The premium for the tail is typically a factor of the last full annual premium. For a 3-year tail, the factor is 130% (this is the common percentage but not all E&O policies are consistent in this area). So, for an agency that has an annual premium of $20,000, a 3-year tail would cost $26,000. Not a small chunk of change but remember this is for 3 years of tail coverage. A 5-year tail would run around $38,000.

Many E&O carriers also offer a 10-year tail. This premium would be $40,000; an additional $2,000 to go from a 5-year tail to a 10-year tail. This would now provide coverage for over 99% of the claims, based on this E&O carrier’s study.     

For agencies looking to sell, they should do their homework and factor in to the cost of the sale, the premium for the “tail coverage”. The decision on the length of the “tail” may just determine how comfortable you are in enjoying your retirement.  

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Would you believe 1 in 10 contain an error?

How many insurance policies (personal and commercial) does your agency write? Let’s use for our example an agency that has 10,000 policies. Using 260 work days calculates to just short of 40 policies a day being sent out to customers.

Some of the latest numbers from a variety of sources (including companies that do policy check for agencies) indicates that approximately 9% of the policies from carriers and wholesalers contain at least one error. Thus, if policies were not being checked, agencies would be sending out, on average, 4 policies a day that contain at least one error and there is certainly the possibility that some of these policies contain more than just one error!

Bottom line, mistakes are being made and it is up to you, as the retail agent, to identify these errors and get them fixed.

Many agencies are of the belief that if a problem develops involving an error in the issuance of the policy, the carrier will simply “fix it”. Is there a flaw to this logic? Yes, there is!

If the error is identified in the first year, there is greater likelihood the carrier will reform the policy – essentially, they will “fix it”. There are no guarantees, but this is probably the way the matter will get resolved. However, if the error is discovered after the first year (on subsequent renewals), it is very unlikely that the carrier will “fix” the policy. Basically, the terms under which the policy was issued will stand.

The other key issue involves the future review of policies. If the policy was issued with an error that was not identified, then future reviews of the policy will probably not catch the error. Essentially, the error is being repeated but it is not getting caught. Obviously, a significant part of policy review presumes the policy the renewal is being compared to is correct. Is it?

The issue of policy checking applies to both personal and commercial policies. The fact that a large percentage of personal lines policies are downloaded does not mean that the policies are correct. In commercial lines, there is tremendous potential for the policy to contain at least one error. Unfortunately, oftentimes, it is at the time of a claim when the agency realizes an error in the insurance policy. At this point, it is too late.

The feedback that I am hearing is that not only is the percentage of policies with errors close to 10% but that some of the errors are EXTREMELY significant. Don’t take policy checking lightly. It should involve more than just a cursory review. A good best practice is to develop a policy checking document that is completed on every policy. The completed document should indicate who completed the review, when it was completed and what was found. This document should be stored in the agency system.

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