Consent to settle clause – is it getting a bad rap?

Do you know what the consent to settle clause in an E&O policy is commonly referred to? The Hammer clause. The hammer that when the agency does not want to agree to what the E&O carrier believes they can settle a case at, the carrier can invoke a “penalty”. With some E&O carriers, the penalty is that any settlement (loss and defense) that is over and above what the carrier thought they could settle the case at is the agency’s responsibility.

Sounds like a pretty strong hammer!

Let’s look at how an E&O settlement could take place in the absence of a consent to settle clause. There have been (and probably still are) E&O carriers that don’t have this clause in their policy. Essentially what this does is to allow the E&O carrier to settle the case whether the agency agrees or not. This could very easily result in a claim being settled against the agency when they did not feel they had done anything wrong. How could this happen?

Compare the following:
#1 An E&O carrier settles a case against the agency for $10,000, only paying $5,000 in defense costs – total $15,000 minus the agency deductible.
#2 The E&O carrier fights the case and takes it to the courts (and wins) incurring $20,000 in defense costs.

Which is the better settlement? From the carrier’s perspective, it is #1 because the dollars / the financial impact is less. Personally, I think the winner is #2 because the E&O carrier fought for the agency to protect their level of professionalism (isn’t that what the E&O carrier is supposed to do?). Also, with #1, the agency now has a paid claim on their record for something that they really didn’t do. This could result in a higher rate, higher deductible, etc.

A consent to settle clause is a good thing. It prompts dialogue between the E&O carrier and the agency. There has been many an E&O claim where the agency’s insistence that they committed no wrong played out favorably for the agency when the carrier aggressively fought the claim. This, of course, requires the agency to be totally honest in communicating exactly what happened.

It is interesting that many E&O carriers are making some modifications to their E&O policy in this area. Instead of the claim being essentially capped at the amount the carrier thought they could settle the case at, there is new language that adds some additional coverage for the agency. The language is similar to the following:
“If we recommend a settlement which is acceptable to the claimant and you do not agree to that amount, we will pay the amount which the claim could have been settled at plus 40% of the amount of damages which are in excess of that settlement”. The remaining 60% is the responsibility of the agency.

This is a positive development and language like this should become the norm in short order. Don’t get me wrong – E&O carriers want to minimize the amount they pay for an E&O claim – that is good business sense. However, they understand that the agency should have a strong say in the direction the claim goes. The consent to settle clause helps to do that.

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There is real danger if you admit liability (without the consent of your E&O carrier)

When it comes to your E&O insurance, admitting liability is definitely something that you want to avoid. Quite honestly, the admission of liability can totally change the direction of a potential E&O matter facing your agency. Virtually every E&O policy speaks to “admission of liability” with some very strict language.

How does this happen? What does the admission of liability look like?

Think of the last time you dealt with a client that called your agency to report a claim. After taking the information and reviewing the client’s coverages, it appears that the loss is not covered (more about that later). You advise the client you do not believe the loss will be covered. Unfortunately, that is not where the conversation ends.

When the client voices their obvious displeasure to your response, you proceed to advise the client with responses such as:
– You have no flood coverage. How did we not provide you with a flood proposal?
– It looks like we messed up in not providing the coverage you needed to cover this loss.

Responses such as these may be alleged that you are admitting, on behalf of the agency, that your agency did not do the proper job and because of your “negligence”, there is no coverage in place to cover the loss. Actually, the first response noted above was a common element of E&O claims that developed from uncovered flood claims as a result of Superstorm Sandy.

Obviously, the admission of liability by the agency is a major concern because your admission can prejudice the development of an EO claim if one were to develop. Agencies need to realize that just because the client had a loss that was not covered does not mean that the agency was negligent in their duties. The question of legal liability is up to the legal system to decide. The admission of liability by the agency will definitely make it harder for the agency to be absolved of any negligence.

Dealing with clients, especially on uncovered claims matters, is an issue you want to prepare for so that when the event does happen, the staff are aware of how best to handle. While you want to show empathy to the client, crossing that line to one of admission of wrongdoing is what you want to avoid. It is advisable to discuss this at an upcoming staff meeting.

Lastly, when it comes to claims being reported to the agency, it is important to note two key issues:
You should not be denying claims. This is the responsibility of the carrier. It is probably best to advise the client you will report the claim and the carrier will make a coverage determination.
You don’t have the authority to approve claims or advise the client that the loss is covered. This is also a carrier duty. How should you respond? A statement such as “While I am cautiously optimistic that this claim is covered, I do not have the authority to make coverage determinations. That is the role of the carrier. I will report the claim and advise you as soon as I hear anything further”.

Some of the issues cited above are the reason why the manner in which agencies handle claims are a significant cause of E&O claims.

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Carriers will sue their agents?

The answer is yes. They will and actually this has been a part of the E&O world for many years.

Recently, I was reviewing E&O policies from a number of carriers. I am always looking to see what coverages are being added, what enhancements are being introduced and also what exclusions E&O carriers are now adding to their coverage form. In one coverage form, a particular E&O carrier has an exclusion for claims made against the agency by insurance carriers. So if the agency is hit with an E&O claim from one of their carriers, there is no coverage. This surprised me as I am not sure I have seen this exclusion in the past. While I am surprised, the addition of this exclusion is extremely noteworthy.

Why would an insurance carrier sue one of their agents? Aren’t they your friends, your business “partners”? In the ideal world, yes.

Let’s look at one of the primary expectations carriers have of their agents. There are certainly expectations of growth and profitability; that’s a given. However, for the relationship to develop and stay strong, there is an expectation of trust; trust that the applications being submitted accurately reflect the exposures of that specific client. Wouldn’t you agree that sounds pretty reasonable?

While it may be reasonable, it does not always happen. In any given year, upwards of 5% of E&O claims involve insurance carriers suing their agents. Typically, this will evolve when a client has a loss and the carrier determines that the risk is not exactly what the agents purported it to be. If the “incorrect” issues are deemed to be material, the carrier has a variety of options. They can void the policy, returning the premiums back to the client. The other option, probably more common, is for the carrier to pay the claim and bring suit against the agency. Without a doubt, the carrier is winning many of these claims.

The questions on the application are there for a specific reason. Agency sales staff should not be guessing at the answers as an incorrect “guess” could have significant negative results.

Claims by insurance carriers against agents are not going to go away. Carriers are taking this “trust” issue seriously and they have every right to do that. Agents should check to see how their E&O coverage addresses this issue. They should also reinforce (on a continuous basis) the message with their sales staff that honesty in their dealings with their carriers (including wholesalers) is a must.

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Documentation needs to be handled promptly

For as long as the concept of E&O has been around, one of the key phrases has been “Document, Document, Document”. This is so for good reason. The degree of documentation is one of the main drivers that can either prevent an E&O claim from occurring or if it does occur, documentation can heavily determine the direction of that E&O claim.

However, in reality, “document, document, document” is just the tip of the issue. For documentation to have the desired effect, the documentation needs to be detailed; who was involved in the discussion, when and where did the discussion take place and what was the resolution or next steps to be taken. Documentation stating “spoke with insured about their auto coverage” does not really tell much of the story.

Another key element of documentation is that it is done promptly. No doubt, there are some agency staff that before they go home for the night, they go into each of the specific client files and enter the documentation of the conversations that occurred that day. This is not good enough.

Let’s presume that the discussion with the client was done at 9:30 in the morning. Over the course of the day, how many clients will you speak with? Probably more than just this one. Let’s presume that you spoke with 10 clients that day. It is now 4:30 and you are getting ready to call it a day but before you do, you proceed with documenting all of the discussions you had that day. While you may have a very good memory, there is the definite likelihood that 1) you are not going to remember all of the issues discussed in the 9:30 call or 2) you may confuse the discussion with one client with the conversation with another client.

It is important to remember that when you enter the documentation in the system, the system will automatically indicate exactly when that documentation was entered. How will it look if you enter the 9:30 client discussion at 4:30 in the afternoon? If a problem develops resulting in an E&O matter, you can count on the opposing legal counsel drilling you on the delay and the potential lack of thoroughness of the documentation.

What is the ideal scenario? Enter the documentation in the system immediately upon the conclusion of the conversation. If this is not possible, the documentation should be handled no more than an hour after the discussion took place. Management needs to work with the staff to ensure that this happens.

Bottom line – for documentation to have ideal value, it needs to be handled promptly and promptly is measured in minutes, not hours.

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Keys (from an E&O standpoint) in the development of the agency website

How do most agency websites get developed? Typically, the agency contracts with a marketing firm to build a website that is very impressive and says a lot of great things about the agency and the type of business the agency handles. After all, isn’t the website designed to impress current and prospective clients to induce them to deal with the agency?

Is there the possibility that the website makes statements that technically are not true? Statements such as:
– We will identify your exposures to ensure that you are properly covered.
– We will search the entire marketplace to provide you with the best coverage.
– We will ensure you have no gaps in your insurance program.
– We will annually update your property values to ensure that you are not penalized in the event of a property loss.

These all sound impressive and may assist in the agency landing the account. You are probably wondering “so what’s the problem?”

A problem arises when the website makes a statement that is not correct. Actually, the last statement noted was a key issue in an E&O case I was involved in many years ago. The problem was the agency did not do what the website stated and the client suffered a fire loss that resulted in a $500,000 co-insurance penalty.

Agencies need to understand that the website could be a key factor in determining the direction of an E&O claim. Both plaintiff and defense counsel will be reviewing the website 1) to determine its applicability to the case and 2) to determine whether the agency honored what the website stated.

When looking to have a website designed / updated, the issue may not be what words / phrases to use but instead, what words / phrases to avoid. It is best to avoid words such as “expert” or “specialist” as they have the potential to raise the legal standard the agency could be held to. In addition, the goal should be for the website to accurately state the capabilities of the agency. To state “we will ensure you have no gaps in your insurance program” (this is an actual statement in an agency website) is really not possible. The agency can work with the client to identify the various exposures but at the end of the day, it is up to the client whether they buy the coverages discussed.

Another issue that is often overlooked deals with the communication of your agency objectives to the staff. In many of the cases where I ask a producer about the agency website, their response is “I have no idea what our website says”. All agency personnel should be keenly aware of what the website (as well as other promotional material) says about the agency.

It is very important for agencies to have a strong message on their website. Just make sure that it is not saying things about your agency that really aren’t true.

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How are you keeping the staff focused on E&O ?

The development of a solid E&O culture is definitely not something that you mention once and expect the staff to abide by whatever they were told. To develop a solid E&O culture requires a continuous message to the staff.

How is this typically done? Some common (and unique) approaches to consider:
– During those times that management addresses the staff, it would certainly be appropriate for there to be some inclusion of comments pertaining to E&O loss prevention. Many staff may need to be provided the “why” behind the E&O message. This will help them understand the importance. A key element is that management is viewed as “walking the walk and talking the talk”. Without this, the comments will be viewed as shallow and not truly sincere.

– Including E&O discussion during the agency staff meetings. The topic could be on E&O in general or on one specific item such as documentation, sign off on client buying decisions, watching the words used either in print materials or verbally. Many agencies have commented that they have used articles in this blog to help strengthen the message with the staff.

– Messages around the office. What do I mean by this? A good example deals with the importance of documentation. There is a common phrase used in the court room that “if it is not in the file, it didn’t happen”. I have seen agencies that have these words put on paper and displayed in various ways around the agency.

– Celebration of results. It is important for staff to see the good things that are happening in the agency and that the procedures are being followed. This is a primary purpose of internal auditing; to determine to what degree the various processes and procedures are being completed. Assuming the results are positive, there should be a celebration of some type. If some of the staff are not adhering to the required procedures, they should be asked to develop an action plan on how they are going to change the results moving forward.

A strong E&O culture requires a consistent message that shows the required commitment. It does not happen overnight. By finding ways to keep E&O loss prevention “front and center” demonstrates that this is an issue the agency is very serious about and each member of staff should be serious about as well.

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Do your branch offices have the proper E&O culture ?

Remember this old game – tell something to the first person in line and ask that they tell the next person what they were told and have that person tell the next one, etc. Invariably, when you ask the 10th person in line what they were told, the story barely resembles what the first person was told.

Well, the same thing happens in the world of insurance, especially for those agencies that have branch offices. Somehow, what the branch offices heard differs, sometimes significantly, from the “home office”.

When you are dealing with key E&O procedures and practices, this disparity can cause some issues and potentially some E&O claims. How can this potential problem be averted? Here are a couple of suggestions:

– The agency should have a point person that has the overall E&O loss presentation responsibilities. This way, someone clearly “owns” this important initiative. It is vital that this point person have the support and backing of Sr. Management.

– When procedures are implemented, changed, etc., the point person as well as a key member of Sr. Management should visit the branch offices to ensure a clear delivery of the message. If a visit is not possible, video conferencing can be used provided the entire branch office staff are on the video conference. Delivering the message to one person and asking that they communicate it to the rest of the staff could result in the message being somewhat “watered down”.

– Have a point person in each office that serves as the champion to ensure a strong E&O culture. This way when Sr. Management leaves, there is someone in the agency that keeps the focus on the issues.

Ideally, you want each office to take ownership of this key element of the agency. I have seen many agencies implement initiatives in their office. For example, to strengthen the need for quality and prompt documentation, put signs around the office stating, “if it’s not in the file, it didn’t happen”. These serve as constant reminders of the expectation.

Bottom line, more often than not, the branch offices of agencies (whether achieved through growth or acquisition) are more of a “hot spot” for E&O claims than the “home office” is. Look for ways to keep this from happening in your agency.

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Wisconsin Court: Bulldog Attack Not Covered by Insurance Policy

As I have referenced numerous times over the last 8 years or so, dog bites are generating a significant number of liability claims and based on policy language and potentially other issues (such as underwriting guidelines), some of those liability claims may not be covered by the homeowners’ policy. As you will note in the attached article that appeared on insurancejournal.com on May 17th, the court upheld the language in the policy pertaining to dog bites.

“A Wisconsin appellate court says an insurance company doesn’t have to cover a bulldog attack that left a woman hospitalized.”

Continue Reading Wisconsin Court: Bulldog Attack Not Covered by Insurance Policy

Could this issue have been avoided? It is tough to say without knowing some further details. However, if the policy did, in fact, stipulate that only ONE dog attack would be covered, possibly reinforcing to the client the need and benefit of reading their policy would have helped. A letter that accompanies the policy to the client advising them to read the policy and to advise if there are any questions might have resulted in a different outcome in this matter.

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How strong is your focus on training?

Let me ask you a couple of questions…

Five years from now, how many of the current agency staff will have retired? Where will your agency find qualified people to replace and train them? In addition, as the agency grows in volume, there is a good chance that additional staff will be needed to fill the necessary job responsibilities. How will you train those new staff?

As we all know, learning insurance and its various nuances is not easy and definitely takes time. There is a good chance today that many agencies have internal and sales staff that don’t know insurance to the degree they should and since agency staff can be held accountable for what they say, this presents a very scary picture. In fact, when some E&O carriers look at their statistics that are driving E&O frequency, lack of sufficient product knowledge is high on the list. Clearly, agencies need to have a solid focus on training to ensure their staff know the products they are selling.

There are a variety of approaches to the training of sales staff on the various technical elements of insurance. A key issue is that someone in the agency clearly needs to “own” this issue. This person needs to do the proper evaluation and develop a structure that provides the training to the needed areas. The evaluation could be done using a test or possibly a mock sales presentation where the staff are asked various questions on specific coverages. Some additional approaches to consider:

– Weekly classroom environment where a specific type of coverage / type of business is discussed and the exposures dissected. Consider asking your carriers if they can help.
– Your state agents’ association. They may have some training scheduled on various topics or could possibly at least recommend someone if needed.
– Training organizations such as the Institute or the National Alliance.

Bottom line, training of staff needs to be a key issue within every agency. This will hopefully result in staff knowledgeable on the coverage they are selling but it should also minimize the potential for your agency to face an E&O claim.

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Unmarried couples living in the same household – a potential E&O issue?

Today, this is quite possibly much more of an exposure than in recent years – couples that have decided to “live together” without getting married. If the homeowners’ insurance was not modified, would there be coverage for the additional person if a loss occurred? There are some issues that could determine this.

First, it is important to look at the definition of “Who is an Insured”. It is common for this to read as follows:

“Insured” means a) you and residents of your household who are (1) your relatives or (2) other persons under the age of 21 and in the care of any person described in a. (1) of this provision. Thus, using this policy language, if the unmarried couple bought a home together (in both of their names), I would guess that most carriers would be willing to issue one policy with both names as the named insured. Thus, coverage for both parties should be in place.

But what if the home was only in the name of one of the parties, would there be coverage for the other person? Technically they don’t meet the definition of “who is an insured”. Thus I would conclude that “no, there would not be any coverage – no property coverage nor liability coverage.”

If the additional person has substantial personal property, it would be prudent to check with the homeowners’ carrier to see whether they can be added and thus covered. If that will not be allowed, the additional person should look to look to purchase a separate renters’ insurance policy. This should be easily accomplished.

This is all well and good provided that your agency is aware of this exposure and can find out the necessary details. However, is there the possibility that you have clients with this exposure that have not given any thought to the insurance implications?

Might be a question to add to your new and renewal business questionnaires and checklists.

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