One of the biggest misconceptions on E&O limits

Recently, I saw the results of an E&O survey conducted by Insurance Journal with one of the questions focusing on the E&O limit that agencies bought. Roughly half (49.4% to be exact) had E&O limits of $2million or less.

If I had to guess, there is a strong likelihood that many of the agencies that fall within this $2mil or less category are the smaller size agencies. They are probably of the belief that due to their size, there is no real need for higher E&O limits. This, my friends, is one of the biggest misconceptions on E&O limits. Bottom line, the size of your agency is not an indicator of the probable or potential size of E&O claims that your agency could face.

Virtually every E&O carrier could bring to your attention some significant multi-million dollar claims that customers had where the amount of insurance was not enough. Actually, when you look at E&O claims, the # 1 cause of claims involves “Failure to obtain the proper coverage”. So essentially, the key issue for E&O is not what you sold and not what the client bought but instead what coverage / limits the client did not buy.

It is what is not covered that generates probably well over 90% of all E&O claims.

Another question on the survey asked if the agency had purchased higher limits at renewal time. Approximately 85% of the agencies indicated that they had not done so.

It is critical for agencies to realize that renewal time is probably the only time that agencies will be able to secure higher limits on their E&O coverage. This is an area where agencies need to be proactive. You cannot wait until you need the higher limits to buy the extra coverage.

With January being one of the heavier months when E&O policies come up for renewal, agencies would be wise to look at some limit options. What is the cost for that extra million of coverage? It could very well be a lot less than you think. If the cost is more than you can absorb, consider increasing your deductible to the next level and using the savings to buy the next highest limit.

When was the last time you really did some research on your E&O protection? It probably is one of the most important buying decisions your agency will make.

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Do you have specific procedures for handling of claims–made policies?

It is certainly fair to say that claims-made policies have a tremendous amount of uniqueness to them. One of the key issues inherent in virtually all claims-made policies involves the issue of a “retro date”. This date will basically determine whether an error or omission can even be considered for coverage.

For coverage to potentially apply, the date of the “error or omission” must be after any applicable retroactive date as noted on the policy. In other words, there is no coverage for any wrongful act that occurred prior to the retroactive date. For the customer to have coverage for all prior wrongful acts, “full prior acts” coverage should be secured.

There can actually be times where a policy may contain both full prior acts coverage and a retro date. This will often occur when the client is securing higher limits on the coverage provided by the claims-made policy. For example, a client could have a policy for limits of $2,000,000 with full prior acts for those limits. If the client wanted to increase the limits to say $5,000,000, it is conceivable that the insurance carrier would provide those additional limits with a retro date applying to the additional limits. If that were to occur, the agency should take extra caution to make sure the policy was issued correctly. There have been E&O claims where the insurance carrier issued the policy (using the example above) with the retro date applying to all $5,000,000 of coverage. If this is not caught and promptly brought to the attention of the carrier (and fixed), there is a significant possibility that an underlying claim would not be covered.   

In the world of claims-made policies, retro dates are one of the most critical issues that agents need to be focused on. When remarketing a claims-made account to a new carrier, the new carrier should not be allowed to change the retro date. If they insist on doing so, moving the coverage to that carrier should not be considered. It is vital that retro dates NEVER be advanced.

For agencies dealing in claims-made coverage, the staff should be fully trained in detail on the various key issues and the impact on coverage applying at the time of a loss. In addition, the agency should have procedures requiring extensive review of carrier proposals and policy review. This degree of detailed analysis could just make the difference on avoiding a potential E&O claim.

When agents provide the clients with a proposal involving claims-made coverage, consideration should be given to providing on the proposal additional detail to help the clients better understand the coverage as well.

Claims-made coverage is very unique and should be treated as such especially on the application of retro dates.   

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Are you making notes on your proposals?

Typically, when producers review the proposal with the prospect / client, as the discussion evolves, and decisions are made, the producer will make notes on the proposal. The notes could involve requests for additional information, coverages accepted / rejected, etc.

It is probably fair to say that these notes may not involve full sentences; they are probably words that at the time of the discussion, the producer knows what they mean by the words noted.

Fast forward 6 months and let’s presume there is a question on what was meant by the notes, how confident is the producer going to be on what was meant on a conversation that occurred 6 months ago? Unfortunately, this occurs with some degree of frequency and when the issue turns into an E&O claim, the manner in which these issues get resolved can have a HUGE impact on the direction an E&O claim takes.

Here is a recent example I am aware of:

The proposal indicates a variety of other coverages for the client to consider and the producer is reviewing those coverage to find out whether the client would like a quote or policy on any of those available coverages. For 9 of the 10 coverages noted, it is clear what the intent is. However, on one, neither the “yes” box or the “no” box were checked (let’s assume the coverage noted was Employment Practices Liability). There was simply a notation of “$300,000”. What did this “$300,000” mean? Well that is where things took on different variations. The resolution was critical because the client had suffered a claim involving this coverage.

The producer’s version was that the client had Employment Practices coverage already with a limit of $300,000. The client’s version of the discussion was that he asked the producer to get them a policy for a limit of $300,000. How this will ultimately get resolved is not clear at this time.

The key issue for producers to be aware of is that at any point in time, they may have to explain what is meant by virtually every handwritten note made on the proposal form. There is a good chance that it will be an attorney asking them these questions. So, if you are making notes on the proposal form, make sure the notes are clear. The best practices option to consider is to have a document (e-mail / letter, revised proposal, etc.) that is sent to the client that memorializes the discussion the agency producer had with the client. This will go a long way towards addressing any potential misunderstandings.

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Are you checking your Personal Lines Downloads?

It seems that over the years, as automation has kicked in to a much higher degree, agencies have developed a corresponding higher level of trust on the quality of the work product from their carriers. It is almost like “it’s automated so it must be perfect”. Believing this is a slippery slope to disaster.

As the old adage goes “garbage in, garbage out”. As a member of the personal lines staff in your agency, you entered the information but does that means it is right? How stressed were you when you entered the information? How many other jobs were you trying to do “at the same time”? So, is there a chance that you uploaded incomplete or inaccurate information? Without a doubt, this situation has occurred oftentimes so if you entered the information incorrectly, the end product will now not be accurate. In addition, how confident are you that what you entered is the way that information will show on the dec page?

Recently, during a discussion with an agency I was working with, the manager of the Personal Lines division (a very capable person) admitted that when she entered the information on a change of auto for her own policy, she forgot to put comp and collision on her replacement auto. A very simple error because she was trying to multi-task and was in a hurry. Sound familiar?

The typical best practices on the issue of checking your personal lines downloads is to:

–        Check all new business. The checking should be more than just a check of the premium. Are the named insureds / drivers correct, is the address correct, are the vehicles and the coverages for each of the vehicles correct? Are all the requested endorsements (and specific detail) included on the policy?

–        Check all endorsement requests essentially addressing the same issues as with the new business check.

There is a key reason why new business needs to be checked. If it is not checked but the policy contains an error, what will happen when the renewal policy is generated? That policy will also be wrong.

Bottom line – don’t assume that because the policy issuance is automated that the information is correct. Agencies should have a checklist indicating those items to be checked. There should be an activity noted in the agency system to verify who checked the policy and what the findings were.

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What is your 2018 E&O goal?

Virtually every agency establishes goals and objectives they plan to accomplish with most of those goals probably dealing more with premium volume, new business, income and expenses. While the establishment of these goals is important, serious consideration should be given to the setting of E&O goals; issues and initiatives that will play a role in minimizing the potential for the agency to face an E&O claim.

For every agency, the goal will probably be different based on where that agency is in their E&O loss prevention efforts. Some initiatives to consider:

Staff Education – your clients are looking to your agency for knowledge and expertise. To provide that, the applicable staff need to possess that knowledge. While growing in technical knowledge is certainly important, other staff education issues might include possessing stronger customer service skills  and automation skills. For this reason, the education objective should be customized for each staff member.

Advise clients of other coverages to consider – this initiative heavily deals with customer accountability. It also serves as an education tool. Oftentimes, a list of other coverage to consider is included on the new or renewal business proposal.

Securing customer signatures on applications – this issue is key as most courts will hold the customer accountable for the contents of the application if their signature is on that application. Thus, if there is a misstatement on the application that the client signed, this could play a key role in the defense of the agency if a problem were to develop.

Confirmation of rejected coverage – every agency should have a procedure that requires all rejected coverages to be memorialized in some written form of communication back to the client.

Getting updates at renewal time on any change in exposures – face it, your client’s exposures can change drastically from one year to another. To “keep up” with these changes, many agencies have designed a form that is automatically sent to each personal and commercial lines customer 60-90 days prior to the expiration of coverage. The goal is to secure an update of any changes in exposures so that insurance discussions can take place.

For many agencies, the development of a strong E&O culture takes time. By establishing and accomplishing E&O goals each year, your agency will be closer to achieving the desired level of E&O commitment. 

 

 

 

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Those crazy Certificates of Insurance

Where would you think the “improper execution of certificates” ranks among the leading causes of E&O claims? After all, it is just a piece of paper that clearly states the certificate is issued as a matter of information only and confers no rights upon the certificate holder. It is also stated that the certificate does not affirmatively amend, extend or alter the coverage afforded by the policies listed.

In reality, the “improper execution of certificates” is generating close to 10% of all E&O claims. Why is this number so high? It certainly appears that certificate holders are relying upon the certificate as a factual representation of the coverage in effect. Imagine that!

I recently became aware of an E&O claim where the agency provided the certificate holder with a certificate that listed the BOP, auto and umbrella policies. The problem was that the coverages had never been placed.

Was this just a simple, yet very costly, mistake? Probably and it could have been avoided so easily.

One way to significantly minimize the potential for the above scenario to occur is to have the certificate generated from the Agency Management System.  This practice will ensure that the certificate is consistent with the policy.

Other issues involve agencies issuing certificates showing business placed thru their E&S wholesalers. The problem with this is that technically, the wholesaler is the agent of record, not the retailer. As a result, certificates issued by retailers may not be considered valid.

Several years ago, I spoke at a conference on the latest issues involving E&O. At the conclusion, an agency owner, in front of around 250 people, stated that in his agency, you put on the certificate whatever is necessary to keep the customer happy. Needless to say, this is not sound advice at all. The certificate should only reflect the actual coverage provided and should not include any statement / coverage that is not consistent with the policy. This could present a legal risk, including violation of insurance regulatory requirements.

The issuance of certificates is serious business and failure to follow some basis “rules” could cause some real E&O headaches. Those crazy certificates – much more of an E&O issue than many realize.

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Hey Producers – how good is your note taking?

In virtually every agency, producers / sales staff play an integral role in the current and future success of the business. Producers are typically responsible for new business sales and retention of accounts, especially the medium to large accounts.

In virtually every agency, producers also play an integral role in minimizing the potential for E&O claims to develop. Most E&O carriers will advise that producers generate around half of all E&O claims. So, establishing a strong E&O culture certainly requires a strong buy-in and commitment from the production staff.

When producers are meeting with prospects or clients, it is key for the discussions that occur to be memorialized. A primary reason for this involves the legal standard of agencies and their staff. Agents are heavily responsible for providing the coverage the client has specifically asked for. If they cannot provide that coverage, there is direct responsibility for the agency to advise the client.

To increase the chances of meeting this legal standard, it would be prudent for the producers to be taking notes either during or soon after the meeting has concluded. The notes should include who was at the meeting, where the meeting was held, what was discussed / resolved and any open items that need to be addressed.

It is not uncommon for these notes to be shared / memorialized in a letter / e-mail to the client. This should hopefully ensure that there is no misunderstanding between the respective parties. At a bare minimum, the notes (handwritten or typed) should find their way into the agency file.

Producers need to make a strong effort towards meeting this requirement. For whatever reason, producers do seem to struggle when it comes to note taking. A producer’s “DNA” seems to be more geared towards sales and “when you are taking notes, you are not selling”. That excuse is what I normally hear but not an excuse that I buy into. Producers need to be diligent in their note taking. There are apps that provide many hours for dictation. Dictating the information and then transcribing it later is certainly an option and the benefit of this approach is that the information of the discussion is fresher in the producer’s mind.

However it is done, producers need to be taking notes and ensuring that those notes find their way into the system. Anything short of this is not acceptable and going to cause some real problems if an E&O claim develops.

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What do you want your agency known for?

Hopefully, every agency has a message / a motto that they want their customers to see in them. Call it – their guiding principles they strive to achieve.

Recently at an insurance conference I participated in, a COO of a very solid insurance agency operation stated his agency’s objective in two very succinct phrases. Those were

  • To protect the assets of our clients
  • To make the complex understandable

Personally, I really liked those statements and would have to believe that many agencies would have objectives fairly similar.

For many E&O carriers, there is a common statistic regarding the level of staff within the agency that is generating their fair share of claims, actually more than their fair share. This staff level is the producers. From my perspective, this should not be taken as a “knock” against producers. In reality, this illustrates just how important producers are in the “equation”. For agencies to seriously address their commitment to E&O loss prevention, they need to get a very strong buy-in from their production staff. But how do you do that?

This is where using your agency’s guiding principles comes in. If your production staff truly and totally buys in to the guiding principles, this is a major step in the right direction. Let’s look at each of the principles cited previously:

To protect the assets of our clients – this speaks to the effective use of an exposure analysis checklist; a process to attempt to uncover the exposures facing your prospect or client. The exposure analysis survey has been viewed by many, including yours truly, as the closest thing to a silver bullet in preventing E&O claims. After all, the # 1 cause of E&O claims is “Failure to provide the proper coverage”. In other words, your client has a loss that is either not fully or partially covered. Who will they blame? This is when agents have the “bulls-eye” on their back. The more your producers can understand the exposures of the agency customer, the greater the ability to suggest coverages to address those exposures. Oh, by the way, you will also sell more insurance.

To make the complex understandable – while your clients probably understand their business very well, they may not have the same degree of proficiency in understanding their insurance program and how it works. This guiding principle speaks to customer education; very much a key ingredient in an agency’s E&O loss prevention program. There are a wide host of ways to educate clients. These include social media, the proposal, newsletters, etc. Insurance definitely has some complexity to it. Help your customers better understand the world of insurance.

Bottom line, if the producers buy-in to these guiding principles, they will have grown in their commitment to E&O loss prevention. So, at the end of the day, what do you want your agency to be known for? Clearly articulating your message to the staff is a great place to start and will certainly pay solid benefits.  

 

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What if your client does not want their policies?

I have heard this question asked numerous times over the last year. The client’s policies are received and reviewed by your agency and when you contact the client to arrange a time to drop them off, they advise you that they don’t want the policies and for your agency to hang on to them. Is this ok or is it a potential problem?

Let’s assume that you follow your client’s instructions and hang on to the policies (probably storing them electronically). The client then subsequently suffers a loss only to find out that the loss is not fully or maybe even partially covered. There is a good chance that your client will take the position that they were not aware of the particular exclusions, conditions or limitations applying to the loss since they never saw the policies. They may have some success in using this defense since technically they never did see the policy. In most states, there is a legal liability duty that clients have to read their policy. Whether they actually read the policies in another matter.

So what should you do? The best course of action is to send the policies anyway. A common response might be something such as “I can appreciate that you really don’t see a need to receive the policies but since technically an insurance policy is a contract, it is best that you receive the policy and review it to make sure that everything is in order. Certainly feel free to advise if you have any questions or see areas that are not correct.”

Since an insurance policy is technically a contract, why would someone not want to read a contract that applies to them?

Thus, it is best to send / deliver the policies to the client. If your agency provides clients with a portal to store information such as policies, when the policies are uploaded to the portal, the client should be so advised with a suggestion sent to them to remind them that the policies should be reviewed.

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“I’m the expert on insuring…….”

In my posting of September 5th, the issue of the legal standard was addressed. This is the basic standard that largely shapes the final resolution of most E&O litigation. There is, however, an element entitled “special relationship” that has the potential to elevate the legal standard.

If “special circumstances” are present in the agency relationship, the agent may possibly be under a duty to take some sort of affirmative action, rather than just follow the instructions of the client.

This could involve situations such as 1) intimate knowledge of a client’s personal and business endeavors, 2) where a client has multiple businesses and agency writes all of the exposures, 3) where a social relationship exists and 4) where additional compensation is involved.

In addition to those just mentioned, the words (spoken or written) have the potential to raise the legal standard. As a result, agency sales staff need to be cognizant that they can be held responsible for what they say and what they put in writing.

Statements such as the following:

  “I will make sure that you are properly covered”,

  “this coverage is definitely better than what you currently have”

  “I am the expert on insuring _______”.

Statements such as these can be held against the agency. Thus, caution should be exercised on the words / phrases used during the sales process. Obviously, sales personnel are looking to make the sale but it is critical that they exercise good judgment in not creating unrealistic expectations or overstating the benefits of coverage.

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