E&O Insights: Key E&S Issues Agencies Need to Know

This is an excerpt from an Insurance Journal article that I authored in the January 26, 2015 edition.

“Regardless of whether the market is hard or soft, for agencies to be successful will typically require that they have an active, ongoing relationship with at least a couple of excess and surplus lines (E&S) wholesalers. The E&S industry has played a vital and significant role in securing the coverages the standard market is not interested in for as long as insurance has been part of our society. As agency producers and customer service representatives deal with the E&S marketplace, there are several key issues to understand to avoid potentially significant errors and omissions (E&O) issues.”

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Who is putting the notes in the system?

There is a common expression of lawyers in the courtroom: “If it’s not in the file, it didn’t happen”. This obviously speaks to the need to enter notes of conversations in the agency management system (among other places). But when it comes to documentation, it can actually make a difference who is the one putting the notes in the system.

Imagine a producer coming back from meeting with a client in the field. The producer walks in the agency and promptly advises the account rep of the conversation they had with the customer on some coverage issue. The producer advises the CSR to enter the information in the system. Is the essence of that documentation questionable in the court’s eyes. You bet it is!

One of the many keys to documentation is that the information needs to be entered by the person that has the information first hand. What is the credibility of the information if it entered by someone other than the “first hand” party? It definitely is suspect because the information is considered “second hand” and thus subject to a degree of loss of credibility.

So in the scenario above, the key is for the information to be entered into the system by the producer, not the account rep. This will help to ensure a higher credibility factor which could make a difference if there are some questions on the validity of the information.

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How is your agency generating your proposals ?

As most agencies would agree, the insurance proposals you generate for your prospects / customers are extremely important. After all, they could make the difference between securing the account or not.

Proposals are also an extremely important document when it comes to potential E&O litigation. There is no question that both the defense attorney (defending your agency) and the plaintiff’s attorney (defending your customer) are going to request this document and will review it to see not only what it says but, equally important, how it says it.

First, in the development of the proposal, some agencies have been known to take last year’s proposal and do a series of cutting and pasting. This is definitely not suggested as it can lead to issues / coverages / incorrect statements, etc being carried forward and making the proposal inaccurate. Since most agency management systems have a proposal template included within the system, the suggested approach is to use that standard template for both new and renewal proposals. The standard template / format should include disclaimers, key conditions (such as what is necessary to bind) and other key language. This ensures that these important statements are included on all proposals.

Bottom line, the proposals should be started “from scratch” and developed using the most current coverages and exposures.

The language used is equally as important so agencies should develop their proposals with this in mind. Many years ago, the term “all risk” was common and created a host of E&O claims as it implied that “everything was covered” when we all know that this was not the case.

It is best to develop your proposals understanding / assuming that the prospect is not as knowledgeable about insurance since this is probably an accurate position.

Look to find ways to provide definitions of key phrases or various abbreviations used. While your agency may know what co-insurance means, it is fair to say that you may have a prospect / customer that does not understand this key phrase and it’s tremendous implications. Actually an effort should be made to avoid the use of abbreviations unless they are referred to and explained further in the proposal.

Proposals are usually utilized to advise customers of other coverages that they should consider. Actually when making reference to these additional coverages, use the phrase “other coverages to consider” as opposed to “recommend”. A disclaimer such as “coverages to consider include but are not limited to the following” should be included. This clarifies that the list is not a complete list of all available coverages.

Lastly some agencies use carrier issued proposal as opposed to generating your own. While this is acceptable (more so for the smaller accounts), it is important to realize that the carrier issued proposals probably do not include the necessary disclaimers, conditions needed to bind, etc. So if your agency takes this approach, be sure to include a cover letter that contains all of this key language.

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What is the quality of the policies you are getting from the wholesaler market?

I certainly hope that agents know the answer to this question. For those that don’t know the answer, it is heavily suggested to find out the answer.

In discussions with a number of E&O carriers, this is an area that is generating a fair amount of E&O claim activity. It is also just another E&O issue that Excess & Surplus Lines presents that makes this segment of the marketplace challenging to say the least.

There are a number of key issues involving the checking of E&S policies. Let’s start with the scenario of an agent moving the account from the standard market to the E&S market. Typically (but not always) E&S policies will not be as broad as coverage in the standard market. It is critical that when a wholesaler provides a proposal, retail agents need to carefully review the proposal to see what coverage is provided and what coverage (that you asked for) is not being provided. Certainly securing specimen forms is highly suggested. These should be reviewed and provided to the prospect / client with the proposal.

Assuming that the policy was ordered, when that policy is received, it should be carefully reviewed (and compared to the proposal) to ensure that the coverage provided is what was expected. There is the definite possibility that mistakes can occur in the assembling of the policy by the wholesaler (if they have policy issuance authority) or by the E&S carrier themselves. Any areas in need of correction should be immediately handled.

Another common area that is generating E&O claims involves the renewal of your E&S accounts, even when they are with the same carrier. It is extremely important for agents to understand that the renewal of an E&S policy can look much different from the expiring coverage. E&S carriers can add various exclusionary language / limitations to the renewals with no real advance notice. While they (the E&S carrier or wholesaler) should reference the changes on the renewal proposal, don’t assume that they will. This further speaks to the importance of a careful and detailed comparison of the E&S policies when they are received to determine to what degree 1) the coverage is different from what was ordered or 2) the coverage is different from the expiring.

One final note: agents need to be extremely diligent in what they say / what they put in writing to avoid representations that there is no reduction in coverage.

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Nebraska High Court Rules Affirms No Claim for Woman Bitten by Dog

One can only wonder how many “dog watchers” understand the insurance implications if they get bit.

As noted by the attached article from Associated Press that appeared on claimsjournal.com on Dec 22, the Nebraska Supreme Court encountered this case and made their ruling.

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Survey Finds More Than 50% of Renters are Hispanic, Most Uninsured

It seems that every year, survey results are communicated that consistently show that individuals and families that rent are going without insurance. As noted in the attached Dec 24th article from claimsjournal.com, there appears to be an opportunity for some further education of the need and value of this important coverage.

“Only twenty nine percent of Hispanics who rent their homes report having renters insurance, according to a new survey by State Farm. In fact, among respondents without renters insurance more than one third (34 percent) said they had never heard of renters insurance. Further, most overestimated the cost of coverage and underestimated the value of their property. Not having renters insurance could leave Hispanic families vulnerable to a financial catastrophe especially during the holiday season.”

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Are your Employee Benefit clients aware of the products and services you offer ?

Regardless of the size of your employee benefit book of business, it is highly suggested to have a process that, at least annually, provides your agency’s customers with updated information and explanation on the various employee benefit products /and services your agency offers.

For smaller accounts, it is probably more appropriate to mail this information either with or in advance of the renewal information. The goal of this initiative is to ensure that your customers are aware of additional products in the marketplace. In addition, there is a good chance that this process could result in some increased sales.

The agency file should reflect what was sent and when. As customers respond with questions or a request for further information, a procedure should be in place to promptly handle those inquiries. Obviously conversations between the agency and the customers should be clearly documented in the system.

For larger accounts where there will be greater interaction between the agency and the customer, this list of additional products / services is typically delivered in person. This information could be included with the proposal or via a separate marketing piece. In the “new” world of benefits, agencies are under intense pressure to differentiate themselves from the competition. Ensuring that your customers are aware of your products and services is certainly a step in the right direction.

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Property Disclaimers

On virtually all lines of insurance, there is no doubt that commercial property accounts produce the greatest number of large E&O claims. Based on the customer exposures, these E&O claims can easily exceed $100,000 and for some accounts, E&O claims in excess of $1,000,000 have occurred with a fair degree of frequency.

Typically the E&O claim alleges that the agency did not provide the proper limits on either the building, the contents, or on the business income exposure. There have certainly been E&O claims where all three of these exposures were alleged to have been “underinsured”.

While agencies have various “estimator” tools to address some of these exposures, clearly determining the proper property is not a perfect science. These tools can be a great starting point but they are obviously heavily influenced by the various “inputs” such as square footage, construction type, etc. Without the correct detailed information, the “outputs” can be inaccurate and thus not reflect the correct limit. While this is an issue for all property exposures (personal and commercial), determining the correct commercial property values seems to pose more of a problem.  

In the event of an E&O claim, customers oftentimes allege that the agent “picked the limit” and thus they (the agent) should be held responsible for the problem that has developed in the subsequent settlement of the claim. For an agent to add an element of E&O protection, it is heavily suggested that agents provide annually some disclaimer wording to commercial and personal clients. On various questionnaires and proposals (both personal and commercial lines), language such as the following should be provided: “property values determination is ultimately your responsibility so be sure to regularly review your property limits for adequacy”. The goal is to identify the client as the final decision maker.

It is also common for agents to add to the disclaimer some reference materials that the customer can access to assist in the determination of the property exposure such as appraisal or valuation services.

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Happy Holidays to you and your families

This is a very special time of year and I certainly hope that this Holiday season allows each of you to spend time with family and friends. Be sure to let them know how special they are in your lives. For those that lost a loved one or a close friend during the past year, this can be a challenging time. Take time to reflect on the special times and memories that those individuals brought into your lives.

With few exceptions, most of us will have the day off. Among the exceptions are those that have chosen the career of protecting us day in and day out. I am speaking of our village, city and state police forces who without fail, do their job and don’t ask for much thanks in return. This is a great time to let them know that you appreciate what they do and to offer them a Happy Holiday greeting. I am sure that they will appreciate it.

To each of you and your families, the best of the Holiday season.

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