E&O Insights: Do You Have Clients That Will Be Buying or Selling?

This is an excerpt from an Insurance Journal article that I authored in the March 23, 2015 edition.

“While most agents are aware that mergers and acquisitions are hot topics in the world of insurance agencies, insurance is not the only segment of our industry affected. In many communities, hospitals, accounting firms, real estate firms and law firms also look to acquire, merge or sell. If your insurance agency is “the agent” for one of the parties, there are key insurance issues that will need to be discussed and could come into play. For virtually all businesses with a professional liability exposure, the manner in which the professional liability coverage is handled could make a significant difference on whether a professional liability “error or omission” is covered. Whether your agency’s client is the buyer or the seller, proper planning and attention to detail are extremely important.”

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Ethics: is it the same as E&O loss prevention?

At one time, I wondered why many, if not all state insurance departments, didn’t allow an E&O class to count towards the state specific ethics requirement. After all, doing the right thing in many cases is both ethical as well as a solid best practice from an E&O loss prevention standpoint. However, actually it would appear that ethics (defined by some as the moral principles that govern a person’s or group’s behavior) is much more than E&O loss prevention and E&O loss prevention encompasses much more than ethics.  

There are some similarities however. Take for example, is it ethical to sign a client’s name to a document? I would personally not think so but maybe this issue is not as black and white as one might think. Signing a client’s name to a document is never suggested from an E&O perspective.

How about the situation where you, as the agent, stretch the truth in an attempt to get an account written with one of your carriers? I would be the first to state that this does not sound ethical at all and it is certainly not suggested from an E&O standpoint. Dealing with your carriers in a totally honest fashion sounds like it is both a solid best practices and also meets an Ethics “rule”.

However, not everything related to E&O loss prevention deals with ethics. As the agency CSR, if you don’t document the file noting the rejection of coverage from the client, have you breached some element of ethics? While this is a key E&O loss prevention issue, it does not really deal with an issue of morality. Is it wrong not to enter the information in the system? Yes but that does necessarily make it unethical.

Most, if not all, state insurance departments have rules / standards that they expect you to comply with that deal with ethical behavior. It is fair to say that just because you are measuring up successfully with the various E&O loss prevention best practices, this does not mean that you are complying and meeting your state’s ethical standards and rules.

So how well are the staff in your agency measuring up from an ethics standpoint? It is probably best for all to attend an Ethics class at some point to find out.

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The power of insurance periodicals

When you stop and think about it, I trust that you would agree with me that the insurance industry is blessed with a tremendous number of quality insurance periodicals. I regularly subscribe to 6 or so (some digital, some hard copy) representing both the P&C and Benefits sides of our business.

In any given issue, there is great material. In just the last two weeks, there have been articles regarding key issues that agencies need to be aware with HIPPA, the finer points of boat insurance, tools for account rounding, evolving insurance issues dealing with Lyft and Uber, social media pointers and a host of E&O tips (from a variety of solid E&O professionals).

The point for bringing this up is that whether the agency staff is brand new or of veteran status, every agency should have a solid focus on ensuring that the staff is educated on those issues affecting their specific responsibilities and the industry as a whole. These periodicals (many of which are actually free) are a very effective means to accomplish some of this education.

If you are not receiving these publications, now is a good time to start. As these publications are received by your office, do your best to peruse them promptly for articles that would be of benefit to your agency staff. While routing the publication through your agency is the easiest approach, at times, the periodicals may get “hung up” at a particular staff member’s desk. A better approach is to make copies for all applicable staff members – this will then enable them to retain a copy for their future use and as a resource.

The content of these articles also makes for great subject matter at your next agency staff meeting. Bottom line – there are many excellent authors that are contributing to these publications. They offer great suggestions on a whole host of topics (E&O, coverages, workflow, evolving topics, etc.). Make sure that these publications don’t just get put in a pile to read “when you have time” as this has the potential to deprive the staff of some great education and knowledge. Each of the agency staff will greatly benefit from this great material and when they grow, the agency grows. Oh, by the way, using the “tips” in these periodicals is going to help your agency sell more insurance!

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What do you want your reputation to be?

“If you tell the truth, it becomes a part of your past. If you lie, it becomes a part of your future” – Unidentified author.

Talk to most Agents E&O carriers about the type of E&O claims they experienced in 2014 and sadly, claims involving agents that were not honest with their carriers or their customers will not only be on the list but could very well be in the top 3.

For anyone reading this that subscribes to the position of lying to carriers or customers, please do our great industry a favor and find another job. Not only are you hurting the industry but as the quote above stated, you are hurting your reputation. As big as the insurance industry is, it is still a small industry and getting caught lying will affect you for the rest of your career.

Let’s face it – to a large degree, the relationship between your agency and your carriers is heavily built on honesty. The carriers are expecting that when you present a risk to them that the description of the risk is accurate. So as you look to complete the initial application for the marketing of the account, how confident are you that the answers to the questions are 100% accurate? Reviewing the information with the customer is suggested.

There have been a number of recent E&O claims that involved failure to accurately disclose risk characteristics associated with placements. Issues such as 1) negligent misrepresentation and 2) failure to disclose critical information are unfortunately common.

When the carrier comes back with some additional questions on the risk, as the producer, are you guessing at the correct answer or are you in fact getting the correct information from the risk you are looking to place?

What are the repercussions when the carrier alleges that your agency has lied on the nature of the risk? There are three common outcomes, all of which are not good.

- the carrier may rescind the policy, essentially returning any premium dollars. If there has been a loss and the carrier rescinds the policy, your agency could be held responsible.

- the carrier may pay the claim (if they don’t feel that the customer has been part of the lack of honesty) and then turn around and sue the agency. This has been happening for many years and it certainly seems that it is happening more often today.

- the carrier issuing immediate notice of termination of the agency contract. The carrier obviously feels that they can never trust your agency again. Yes, this is happening!

Oh by the way, you could also get fired and lose your license.

The Best practices that every agency sales person should adhere to:

Scrupulous attention to:

- Carrier appetite (especially as defined in their underwriting guidelines)

- Proper handling of applications

- Clear communication of risk characteristics

- Attention to detail

- Clear documentation of ALL conversations with customers / carriers / wholesalers

So what do you want your reputation to be? That’s your decision.

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Job Descriptions – how current are they in your agency?

Essentially job descriptions are designed for the staff to know what is expected of them and what their duties and responsibilities are. In addition, since professional development is extremely important for the growth of an agency, job descriptions should also address any licensing, professional development requirements and expectations. Bottom line, for an agency to have a strong E&O culture and commitment, there are many that will contend that it starts with having quality job descriptions for all levels within the agency.

Imagine an agency that does not have any job descriptions for the staff because the feeling is that the staff knows what they should be doing and what they are responsible for. Is there the possibility that staff members with the same title are doing things differently or have different ideas of what is expected of them? Most definitely!

One of the keys is that for the tasks and procedures in your agency, it is clear who is responsible for performing which tasks. The issues can include tasks such as the submission and follow-up on the marketing of accounts, identification of exposures, customer service requirements, the handling of certificates, etc.

The presence of job descriptions will be key when hiring new employees. As an example, the responsibilities of an account manager in your agency may be different than the same job title in the agency the employee came from.

These job descriptions don’t need to be complicated but they should contain sufficient detail describing the main aspects of the employee’s duties. There is no way for a job description to list all of the tasks and duties of a specific position, nor would you want that to be the case. This is the reason why there should be a degree of flexibility to all job descriptions. A statement such as “and any other tasks as assigned or deemed necessary” should be included.

Since change is occurring daily within agencies, job descriptions should be reviewed annually and updated based on the current job responsibilities and expectations. As job descriptions are updated, the staff should be provided the updated versions. It is suggested to keep copies of the older job descriptions for possible reference down the road.

From a legal aspect, certainly one of the keys is that without job descriptions, it will be more difficult to hold a staff member accountable for their performance or failure to handle certain duties.

If your agency currently does not have stated job descriptions, you are probably not alone. However that should not serve as any degree of consolation as the presence of job descriptions is a key step and component to ensure a solid E&O commitment and culture.

Bottom line: for employees to perform their job to the expectations of their organizations, it is critical that the employees be provided a document that provides a detailed overview of those expectations.

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How often is your agency having staff meetings?

First off, I am not talking about those informal meetings where the manager comes on the floor and asks everyone to gather around for a quick meeting. While those are necessary, it is debatable how productive they are since it is questionable whether you have everyone’s undivided attention. I am talking about staff meetings that are in a conference room and where there is hopefully an agenda of topics to discuss.

Staff meetings can be an extremely productive use of time. The goal is to educate the staff on a multitude of various issues that can include a change in a carrier’s underwriting guidelines, a new procedure, or discussion on a specific topic for educational purposes. Using a staff meeting to communicate this key information provides a much more focused environment where you have a better chance of having the staff’s full attention.

Education should be a strong focus of the staff meetings. Since some agencies struggle with coming up with some topics, here are some to “chew on”. The following topics were those that a number of E&O carriers indicated as their hot topics and a primary cause of E&O claims in 2014:

- The Additional Insured issue. This has been one of the main causes of E&O claims for a number of years. There are a variety of available resources that will help staff to understand issues such as “Why blanket additional insured does not mean everyone is covered” and the issues associated with “completed operations”. The additional insured issue is also generating a number of E&O claims involving improperly executed certificates of insurance.

- The importance of doing a comparison when moving coverage from one carrier to another. This has been referred to as “the Mirror Test” and is a major concern of E&O carriers when coverage gets moved to a new carrier.

- The value and benefits of policy checking and prompt policy delivery.

- Why being honest with the carriers and wholesalers you are dealing with is of the utmost importance.

One final comment on staff meetings. They provide a great opportunity to  stress key agency practices, such as the agency’s specific expectations of professional, thorough and timely documentation not only in the agency file but also with written documentation back to the customer when appropriate. Staff meetings provide a clear and consistent message to all members of the agency.

If your agency has not been holding agency staff meetings, start with once a month and see if it is necessary to conduct them with greater frequency. If you have been conducting but have not found them beneficial, look to “retool” your approach with the above suggestions to achieve greater benefit.


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The manner in which you handle claims can cause E&O claims

Ask any E&O carrier for those areas that generate E&O claims activity and you may be surprised to hear that the manner in which your agency handles claims is a major cause. For many E&O carriers, this issue is currently generating 10-20% of all E&O claims so when an agency looks to educate their staff on their various E&O exposures, it is important to look beyond just the producers and the internal account management staff.

On any given day, customers are calling your office to report claims of one type or another. While it is certainly appropriate to bring to the customer’s attention some of the issues (potential non-renewal, increase in rate, claim is not much more than the deductible, etc.), it is also necessary that the agency staff be aware of the language in the agency agreement / contract regarding the reporting of customer’s claim. If you are not sure what it says, now is a good time to review those agreements and to communicate this information to the appropriate agency staff.

Based on the specifics of the case, it may be necessary for your agency to provide the carrier with key information. While this is expected, it is also important to not make any coverage determinations. An incorrect analysis has the potential to be a key issue should E&O litigation develop down the road. Advising the customer that there is coverage only to have the claim ultimately denied by the carrier is not a good thing.

When it comes to liability claims, it is often difficult to project where these claims can go in their ongoing development. Over the years, more than one underlying liability has adversely developed to where the umbrella carrier became involved. The key is to not wait for the adverse development to happen before deciding to put the umbrella / excess carrier on notice. Depending on the state, the excess carrier could claim prejudice and have the ability to deny the excess claim for “late reporting”. With liability claims, putting all applicable carriers on notice is highly suggested.

Many agencies want to play a claims advocate role on behalf of their customers. On the surface, this is acceptable and admirable but this also has some E&O risk associated with it. Oftentimes, agents tend to play this role when a claim has been denied. This is okay but agents should limit their involvement to getting clarification on the reason for the denial or to discussion where it is felt that the carrier is not interpreting the coverage correctly.

There is one thing that is extremely consistent about E&O claims; they typically are generated by underlying claims that were not covered to the satisfaction of the customer. In other words – an uncovered claim. If this situation presents itself and your “gut” feeling is that this has the potential to be a major problem, it is best to contact your E&O carrier to look for their advice and guidance on how best to handle.

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Retro Date – a key term with professional liability

In evaluating E&O claims statistics, in most situations, E&O claim frequency from the sales and service of professional liability typically generates around 10% of the claims. However if one were to look at the severity (the dollars paid out in judgments), that number would be in the 20% area. There is no doubt that professional liability claims can be substantial and if there is an “error or omission” in the agency file, there is certainly the possibility that those professional liability claims may not be covered.

One of the key factors that can impact whether a professional liability claim is covered involves the term “retro date” or “retroactive date”.  Within a claims made policy (typical type of coverage for professional liability), there are a variety of key triggers with the two main points being the date of the “wrongful act” and the date the claim is made. A claims-made policy only covers claims made during the policy period (or any extended reporting period if applicable).

The definition of a “wrongful act” is typically the act, error or omission that an insured commits that ultimately gives rise to a claim. For coverage to potentially apply, the date of the “error or omission” must be after any applicable retro date as noted on the policy. In other words, there is no coverage for any wrongful act that occurred prior to the retro date. Oftentimes, the alleged “error of omission” can occur months (possibly years) before the claim is brought thus for the customer to have coverage for all prior wrongful acts, they should look to secure “full prior acts” coverage.

If your agency is writing professional liability (also referred to as errors or omission coverage) for a start up operation, the “retro date” will be the inception date of the first professional liability policy. As the E&O policy renews (whether your agency keeps it with the same carrier or moves it to another carrier), that original retro date should be maintained. There have been a number of E&O claims where the “retro date” was advanced to the new policy year, thereby resulting in no prior acts coverage for that customer. The final settlement of some of these professional liability claims were in the millions.

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E&O Insights: How to Calm the E&O Waters When Insuring Marinas

This is an excerpt from an Insurance Journal article that I authored in the February 23, 2015 edition.

“As spring approaches, agencies may have some opportunities to secure commercial accounts dealing with watercraft business. These accounts, typically classified as marinas, boat yards or boat moorage, offer a multitude of services to private and commercial boat/yacht owners. Understanding the class of business and the variety of these exposures could make a difference in “calming the errors and omissions waters.”

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How are you introducing your new staff to the concept of E&O?

Recently during a recent visit with a high quality professional agency, I had the honor and pleasure of meeting with many of their newer employees to discuss the concept of E&O and the key initiatives that have been shown to definitely minimize the potential of an E&O claim. It was interesting that at the onset of the sessions, I asked the question how many had ever been to an E&O class before. To my surprise, less than 25% of the newer staff had ever been to an E&O class.

By and large when E&O classes are held, typically by the various state agents associations, the attendees usually consist of more senior staff, many in a management position. While this is important, it has the potential to lose significant impact unless the attendees take that information back to all of the staff members. In some respects, even if the information is taken back to the staff, it is really not the same since some of the various “E&O horror stories” that help to make the various points are probably not going to be mentioned.

It would appear that a very effective approach to introducing newer staff to the concept of E&O would be to include as part of either their orientation program or within the first 6 months on the job, a requirement to attend an E&O class that goes into the necessary depth on the various key components of an effective loss prevention program. If it has been a while since many of the agency staff have been to an E&O class, consider looking for an instructor that can come to your office for a day (to teach half of the staff in the morning and the remaining staff in the afternoon). While webinars are great and very effective, the benefit of the classes is that they usually have a much greater degree of questions and attendee interaction.

Sending at least your newer staff to an E&O class is an investment in your agency and should provide returns many times over.

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