When Dogs Bite, Home Insurers Pay Average $32,000

As you know, I have dedicated a number of articles to the subject of dog bites and the potential that when coverage is limited or not provided under the homeowners policy, E&O claims can occur.

As noted in the attached article that appeared on insurancejournal.com on May 15th, the number of claims are down but the average settlement is on the rise.

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Some cool tech tips for producers

It certainly appears that year after year, within insurance agencies, producers are the main discipline generating E&O claims. Virtually every year, the number is 50% plus. This should not be construed as a knock against producers. In reality, it demonstrates the importance and tremendous responsibilities of producers in the industry.

For most producers, time (or lack of) is a key issue and thus requests for better note taking of client conversations, documentation in agency files, etc seem to “just not happen” or fall short of expectations. For producers to manage their time and fulfill their sales responsibilities while at the same time minimize their E&O exposures requires that producers utilize the tools that are available in the market.

Tech Tips from Steve Anderson focuses heavily on some of the latest tools that enable producers to be more efficient and to get the job done. Here is the latest edition – hope some of Steve’s tips help you meet the demands of the job while reducing your E&O exposure!

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Just because a relationship is long does not make it “special”

In the world of Agents E&O, there is the potential for courts to impose different levels of legal liability standards in a litigation matter. In the overwhelming majority of E&O cases, the agent “has no duty to advise as a matter of law because the parties’ relationship was a typical agent-insured relationship”.

In some respects, you can view the agent as an “order taker”. As unappealing as that may sound, when an agent gets thrust into an E&O litigation matter, they may just be glad that this is the standard that they are held to.

There are a number of scenarios where there is the potential for the courts to impose a special relationship standard on the agent and thus hold them to a higher standard, essentially that of an advisor. While it often felt that the longer the relationship, the more there is the possibility of a “special relationship” standard, this is really not true. In essence, while all special relationships are long term, not all long term relationships are special. There is much more that the courts look at to determine this special relationship standard. Those issues involve whether the agent:

- Exercises broad discretion to service the insured’s needs

- Counsels the insured regarding specialized insurance coverages

- Holds oneself out as highly skilled expert, coupled with the insured’s reliance upon the expertise

- Receives compensation, above the customary premium paid, for the expert advice given

An agent’s duty to procure coverage has been viewed as distinct from their duty to advise. While the concept of special relationship has been around for some time, most courts seem to be reluctant to find a duty to advise as a matter of law.

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E&O Insights: Insuring Restaurants and Taverns Presents Some Real E&O Risks

This is an excerpt from an Insurance Journal article that I authored in the May 4, 2015 edition.

“Although most agencies insure at least one restaurant or tavern, this shouldn’t suggest that they are easy accounts to write. Errors and omissions (E&O) carriers will readily admit that writing this class of business presents some challenges. Moreover, these challenges have significant potential to generate E&O claims. One thing for certain is that these risks have their share of losses and, when there are losses, there is a greater chance that some of those losses are not insured.”

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What companies are you using for your E&S business?

For the most part, agents are very good at having a standard that requires their carriers meet a certain AM Best rating. Typically, I see A- as that standard although from time to time, some agents will drop down to a B++ or B+. Monitoring these ratings is obviously extremely important as they do change and the changes can be significant. The focus on these ratings (and potential changes) seems to be strong among most agencies.

There is one area however that some agents do seem to take for granted. That involves the carriers that their wholesalers are using to write business. At times, it appears that agents are expecting that their wholesalers will only do business with highly rated carriers and while that applies to many wholesalers, there are definitely some wholesalers that will take on carriers that either are not rated by AM Best or where the rating could be considered somewhat suspect; possibly in the low “B” category or even a “C” rating.

When agents receive proposals from the wholesalers on business they have submitted, focus on the premium seems to be the #1 area. There is a flaw to this approach as the coverage could be much more limited than expected. Focus on the coverage (suggest that a specimen policy be secured) is equally important to verify what coverage was provided compared to what was requested. For some agents, that is where the attention to detail stops.

It is vital that attention be given to the carrier that the wholesaler has used for the proposal (should be noted on the proposal). Since the agency may not deal with this carrier on a frequent basis, it would be wise to review the latest on that carrier thru the AM Best website. If the carrier does not have a rating (typically referenced by an “NR” rating), it is suggested to check with the wholesaler to determine their knowledge of this carrier and why an “NR” rating has been assigned. Just because a carrier has a “NR” rating does not translate into that they are not a quality carrier but it should raise the red flag and prompt some further investigation. The ratings of E&S carriers could also change so periodic review of these carriers should be conducted. If the carrier rating does not meet your minimum agency standard, consideration should definitely be given to discounting / not even considering that proposal. The premium may be very attractive but will the carrier still be around at the time of a claim? Bear in mind that with few exception, the various state Guaranty Funds do not apply to E&S business.

Bottom line, agents need to know the carriers that the wholesaler is proposing and to determine their acceptability. They also should look at their E&O coverage to determine to what degree they are protected should the E&S carrier encounter financial problems (this will be referenced in the Insolvency section of your E&O coverage). Applying these additional procedures proactively could just save your agency from an E&O headache down the road.

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Homeowners valuations – are you relying on your companies?

It is interesting to note that the homeowners line of business generates a significant number of E&O claims. In fact, in some years, it has been as high as 1 in every 5 E&O claims. In the vast majority of those E&O claims, valuation (or actually incorrect valuation) has been at the core of the E&O issue.

On the surface, this may be somewhat of a surprise to many. After all, the industry has some great tools to assist agents in calculating the proper ITV number on a replacement cost basis. In dissecting the E&O claims data, one of the root causes of problems at claim time is that the agent had not entered the correct “inputs” into the estimator system. As the adage goes, “garbage in, garbage out”. Without the correct square footage, construction type, quality of construction, etc., there is not a estimator system in existence that will be able to provide a quality output. So agents need to take the time to secure those correct inputs.

However, there is another issue. That other issue centers on the reliance, by the agents, on the carriers to determine / provide the correct information to perform a quality approximator. More than once, I have been asked “isn’t it the carriers responsibility when they perform an inspection to provide the correct information?”. Maybe yes, maybe no. There are a number of flaws to this line of thinking.

One of the key flaws is that it is rare to find carriers that perform an inspection on every homeowners risk they write. While they have the right to have an inspection done, economics makes this position unrealistic. It is just not feasible or cost effective for a carrier to do an inspection on every risk. I would have to believe that part of that logic centers on the premise that the agent has seen the risk (not simply a “drive by”) and knows the condition of the risk and the necessary valuation data. Like it or not but essentially many carriers are saying that this is the agents job.

One of the other flaws is that when carriers do perform an inspection, the inspection is basically a loss control inspection to determine the quality / condition of the premises and whether there are any hazards that raise the potential for a loss to occur. Oftentimes, they are not measuring the house, simply inspecting it. There are certainly some homeowners carriers that do both.

The key issue is that when the agency writes a homeowners risk and they are aware that the carrier will be “inspecting the risk”, the agent needs to clearly understand exactly what services the carrier will be performing. As the agent, if you are not sure (this certainly varies from carrier to carrier), then you need to ask.

Bottom line, the agency should make every effort to get the correct information at the time of the completion of the application and if the carrier is going to be inspecting, the agency should clearly know what that inspection” involves. Don’t assume because when one assumes, the potential for a problem to develop just got bigger.

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E&O Insights: When Do You Want to Educate Your Clients?

This is an excerpt from an Insurance Journal article that I authored in the April 6, 2015 edition.

“Education of your agency’s clients will likely happen at one point or another. Ideally, it will happen proactively through a series of account reviews, newsletters and other learning opportunities. The other option is that it occurs reactively when a customer has a loss, only to be advised that there is no coverage for the particular loss, or there are some policy conditions/limitations the client was unaware of. Which conversation will probably go smoother? The proactive approach, without a doubt.”

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Policy checking – a key aspect of E&O loss prevention

As I have addressed many times in this blog as well as in my webinars and seminars, policy checking is extremely important. I know that agencies would like to believe that the policies are perfect but mistakes do occur and the mistakes can be significant. Many insurance agency execs have advised me that while the overall quality of policies has improved over the last couple of years, mistakes are happening. Unfortunately, some of these mistakes are extremely important. The list of errors includes incorrect named insureds, locations left off, vehicle schedules not correct, wrong retro dates and so on.

Needless to say, it is critical that agencies 1) don’t assume that the policies are correct and 2) have a process to perform this review. The definition of “the process” needs to be more than just a cursory review. To start with, the review should include the use of a standardized checklist that is completed by the reviewer and saved in the system. The individual completing the checklist should be required to sign / initial the checklist noting when the review was done, what was found and what corrective measures, if any, were taken. The agency should also require an activity code in the system noting the review was done. Management should be able to identify policies where the checking was not completed. 

Some agencies have advised me that when they do the review, they compare the policy against the original application. While this does have merit, the danger of this approach is that there may be coverages or other specifics requested on the application that the carrier was not willing to provide in their proposal. As a result, while comparing the policy against the application does have merit, the policy should also be reviewed against the carrier proposal to make sure that the coverages / other key details are in accordance with the proposal. 

Are you of the belief that if the policy is not correct that it is the carriers fault? There is some truth to this position however that philosophy loses merit the longer that the error goes unnoticed. This gets to the heart of the matter that it is vital that the agency discover any inaccuracies as soon as possible.

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How well do you know the coverage of your own E&O policy?

Just this week, I was advised of an Agents E&O policy in the marketplace that did not provide any coverage for the sales or service dealing with inland marine and dwelling fire. Why the E&O carrier carved out coverage for those two lines of business is certainly puzzling. The knowledge of this information raised my level of concern on how many agencies have actually read their own E&O policy. I can only imagine the perspective of an agency insured with this carrier when they found out, at the time of an E&O claim, that the E&O claim was denied because it dealt with one of these lines of business.

E&O policies can be drastically different from one carrier to another. Among the areas where there can be noteworthy differences:

Trigger of coverage - while the vast majority of Agents E&O policies are on a claims made basis, there is a potential twist. That deals with some policies being on a “claims made and reported” basis. This type of policy mandates when the claim must be reported to the carrier for coverage to respond. Agencies should check their policy to know what conditions are necessary for coverage to be triggered. If this is unclear, ask the agent/broker that sold you the coverage or contact the carrier directly.

Retro date vs. full prior acts – 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 agency to have coverage for all prior wrongful acts, they should look to secure “full prior acts” coverage.

Who is an Insured - Is there coverage for former / retired employees, officers? What about leased or temp staff? Is there coverage for all of your independent contractors? These are a few of the more common issues involving insureds.

Activities covered - does your agency act as a consultant? What about any LA&H sales? Any sale of Mutual Funds, Securities or other investment products? Are you a Surplus Lines Broker? Review your policy – typically, the activities covered will be clearly noted. Be alert for any activities that you perform where coverage does not appear to be provided.

Exclusions – every policy has exclusions – read them carefully to understand them and to determine whether they could apply to you. Don’t be misled by the number of exclusions – many carriers look to clarify what is and what is not covered by providing an exclusion. Just because there is no exclusion does not mean that there is coverage.

Supplemental coverages - do you have coverage for Subpoena expense? What about Loss of Earnings to compensate you for time spent on claim issues? Also, one of the newer supplemental coverages that E&O carriers are providing involves defense coverage for a State Regulatory Investigation. These are all important coverages that could impact your agency.

Bottom line – you work hard to make sure that your clients are properly covered and that they understand their coverage. Have you done the same solid job insuring yourself?

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Is everyone in your agency handling claims the same way?

As I have reported numerous times over the past number of years, the handling of claims is and continues to be a major issue and cause of E&O claims. Some E&O carriers are reporting that upwards of 1 in every 6 E&O claims are the result of improper handling of customer claims by the agency.

When I started at the agency side of the business in 1976, I was a CSR handling S-Z for personal, commercial and claims. While I thought I was technical proficient on the personal and commercial issues, in all honesty the claims handling scared me to death. I actually used to dread a customer calling in to report a claim. When one considers that this is one of the key areas where the agency can show their value, my lack of confidence handling claims was definitely not a good thing. When I look back at those days, my lack of confidence was probably heavily due to the lack of training and guidance that I received on the proper way to handle and manage customer’s claims.

Some agencies now have a dedicated claims person and this is certainly a positive step. However, since most agencies provide vacation for their employees (I hope so), what happens when the claims person is on vacation? How are claims handled? I doubt that customers are advised to “call back next week when our claims person is back from vacation”. Obviously during these times, other staff (account execs, etc.) are now put in a position to handle those claims. Do they know what they are doing and are claims being handled in the same manner as the claims person? 

To address this situation, agencies should look to develop a claims procedure manual that speaks to the proper manner and procedure for handling first and third party claims. What adjusters should be assigned and when, what if there a question on whether there is coverage, when to put the excess carriers on notice on liability claims, what do I document in the system? There are just some of the issues that need to be clearly addressed in the claims procedure guide. Without a guide, employees may fumble their way around the handling of a claim. When this occurs, the potential for a mistake or “error or omission” increases dramatically.

If your agency does not have a claims procedure guide, look to develop one over the next couple of months and then meet with any applicable staff that may be faced with the task of handling a claim to get them trained. I sure wish the agency that I worked at had this. I would have had a lot more confidence knowing that I was handling claims the proper way.

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