Federal Court Rules CGL Insurance Covers Data Breach

This excellent article, written by Andrew G. Simpson certainly raises some interesting issues moving forward. It is unknown whether this opinion is or will be shared by other courts and there is also the possibility that CGL carriers / ISO will now look to strengthen their exclusion pertaining to this exposure. This article appeared on www.insurancejournal.com on April 12, 2016.

It also calls into question whether any claims involving this exposure should now be automatically presented to the insured’s CGL carrier.

“A federal appeals court in Virginia has upheld a lower federal court in ruling that a commercial general liability policy (CGL) may cover a data breach. In a case involving the publication of private medical records on the internet, the courts found that coverage included in a CGL for personal and advertising injury applied.”

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Have you hired any new employees in the last year?

For most agencies, the answer is probably “yes”. From some of the latest employee statistics, it certainly appears that we are an aging population that has a retirement date somewhere on the near horizon. As the “veterans” retire, their positions will need to be filled and as many in the industry know, finding “tomorrow’s employees” is challenging to say the least.

As the adage goes “agencies don’t make mistakes, people do”. Thus, the development of new employees is very important and hopefully will result in further growth of the agency. However, there is an issue that agency staff, especially those in management, need to be focused on. New employees do have more potential to generate some problems that if left unchecked, could become the agency’s next E&O claim.One of the problems deals with how well the new employee embraces the expectations and the procedures of their new agency. Many employees that are new to your agency probably worked at another agency before joining you. For these employees, there is a good chance that the way they did things prior is embedded in their minds. As a result, as they process work, there is certainly the potential that they will perform those duties the way they did prior which may not be in sync with the expectations of your agency.

To address this and hopefully “nip it in the bud”, early on in the employment cycle, employees should be put through an orientation program which includes, among other things, a review of the procedures of the agency based on their specific position. If the agency has a procedures manual, either in paper or electronic form, this information should be reviewed with the employee. It is suggested that at the end of the review, the employee be asked to acknowledge, via their signature, that this information was provided and reviewed.

Unfortunately, this does not guarantee eventual success. It is suggested that for at least the first 6 months, management should perform periodic audits of the work processed, the use of the agency management system (including where various forms are to be stored) and the timeliness of the handling of the various tasks. It is also important to realize that even though the new employee used the same agency management system at their prior place of employment, they may have used it differently. This “audit” will provide the agency management with a better perspective of how well the new employee is embracing the culture of the agency and the various E&O loss prevention initiatives.

It could also identify some issues to be addressed, such as the need for further training. There is no doubt that this will be time well spent and could just save your agency from a future E&O headache.

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What’s in a Name? Insurance Coverage?

This excellent article, written by Attorney Steven Pitt, brings into question an issue that has potential E&O implications. This article appeared on www.claimsjournal.com on April 4, 2016.

“Are insureds required to notify the insurance company of a change in business form and structure after the inception of the initial policy? This issue recently came before the United States Court of Appeals for the Tenth Circuit in Christy v. Travelers Indemnity Co. of America, 810 F.3d 1220 (10th Cir. 2016).”

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Top Business Risk for 2016…might surprise you!

I was recently reviewing a publication from Allianz Global which provided survey results from over 800 risk managers and global corporate insurance experts on the top Business Risks for 2016.

For the 4th year in a row, the top peril of concern was Business Interruption. While many insurance producers think of Business Interruption in the context of damage to the insured premises, there is much more to this issue.

Overall, the article cited that Business Interruption losses are up significantly over the past year reaching close to an average of $2.5million per loss. A major driver, per Hugh Burgess (AGCS) is “that interconnectivity of risk is growing day-by-day, as technology, globalization and social change create a complex web of relationships and interdependencies with “just-in-time” and “lean” manufacturing now standard practices”.

This “interconnectivity” issue is creating a significant business concern as respects supply chain disruption. As a major proponent of the use of Exposure Analysis Checklists and questionnaires, I can only wonder how many insurance producers are addressing the Business Interruption issue in its full context. This should include discussion of the Contingent Business Interruption exposure. If a supplier’s facility ceases activity because of a disaster of some kind and this adversely impacts one of your insured’s operations, the financial loss would be covered.  

This excellent article provided some very revealing statistics on how significant risk managers and global insurance experts view this Business Interruption exposure. While catastrophes and explosion are viewed as the top two areas of concern that generate business interruption losses, the 3rd highest cause dealt with Supplier failure. 

I have spoken with many high level insurance producers who commented that they never offer Business Interruption without including discussion and the offer of Contingent Business Interruption. Is this the case in your agency? Sounds like it should be!


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Matching coverage – why this is not the best approach

Probably more often than not, when new potential customers discuss their insurance program with an agent, they request that the agent essentially “match the coverage that they have”. One of the many fallacies with this approach is the prospect probably firmly believes that the coverage they have is the coverage they need. This could be due to the fact the prospect does not truly understand their insurance program and any potential flaws or gaps. 

Consider this actual E&O claim:

The prospect approaches the agency and provides them with a copy of their current policies and states that they want the new agent to match their current coverages and “save them some money”. The new agent proceeds to market the account and is able to match the coverages that appeared on the dec page of the current policies. Unbeknownst to the agent, within the policies (not listed on the dec page) was a sub-limit for extra expense coverage. On the policy procured by the new agent, there was thus no extra expense coverage. A fire occurs and when the customer made a claim for the extra expense coverage, it is denied due to the lack of coverage. The customer then looks to the agent and advises him that he had this coverage prior and had asked the agent to provide matching coverage.

This type of issue can be problematic for the agency since they had undertaken a duty to secure the same coverage per the request of the customer.

This claim clearly shows one of the downsides of agreeing to match coverage for a prospect. Another problem with this approach centers on the belief the prior agent did a professional job in handling the insurance. For example, if the prior agent did not handle the valuation properly, by the new agent matching the limits determined by the prior agent, they are essentially duplicating the mistakes of the prior agent.

What’s the “lessons learned”?

When an agent is provided a copy of the prior policy, if they agree to match the coverages, they then have a duty to match the coverages and limits. It is probably best to advise the new customer that an exposure analysis will be done and the appropriate coverages suggested.

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When in doubt, contact your E&O carrier

Each week, I receive calls from agents around the country with questions regarding some potential E&O issues they are dealing with. Oftentimes, the scenario includes a customer that has had a claim only to find out their coverage is not going to respond as they thought. The agent wants to know what they should do.

Personally, while I welcome these calls, invariably during the conversation, I raise the question of “have you contacted your E&O carrier”. In virtually all of the situations, the E&O carrier has not yet been contacted and there almost seems to be a reluctance to do so. Having been at the E&O carrier side for 20+ years, encouraging the agents to contact the carrier with a problem was one of our objectives. Any E&O carrier worth their weight would no doubt agree.

Some agents look at only contacting the E&O carrier when they are facing a lawsuit or a “demand for money or services” which in many situations is when an issue is technically considered a claim. However, your E&O carrier is more than just that. They should be considered a resource that can provide some guidance and direction on the problem the agency is facing.

In many of the situations, the agency does not feel that they have done anything wrong but still wants to offer some degree of restitution. This is an area where agents need to be very careful and where they would definitely benefit by contacting their E&O carrier. The potential problem with a “good will” type payment is that it could be considered an “admission of liability”. There are some E&O policies where an admission of liability can have extremely significant ramifications on the E&O carrier’s commitment to defend or pay if the agent is find ultimately negligent.

By contacting the E&O carrier, they will advise you regarding a “good will” payment and may be willing to provide a recommended legal release to avoid this “good will” payment from blowing up in your face down the road.

Bottom line, your E&O carrier is there to assist you and agents would benefit by reaching out to them for their guidance and expertise. It could be the best call you ever made.

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Is Technology the reason why E&O claims are down?

Over the last 10 years, many of the E&O carriers have seen claims frequency continue to decline. In fact, many are reporting claims frequency in the 6% area which essentially correlates to one claim for every 17 agencies. Going back to 1990, that number was one E&O claim for every 7 agencies. What’s the reason for the decline? 

Personally, I feel that the overwhelming reason is the agencies themselves. In my travels, I am not sure that I have ever seen such a strong focus on E&O prevention. There is no doubt that agencies are factoring in E&O loss prevention into their procedures and more strongly including it within the expectations of their staff.

In a recent class when I broached this issue, the main perspective from the floor strongly believed that technology was a contributing factor to the decline in E&O claims. This was an excellent and astute observation. Technology has played a very significant role. For agencies to be at peak efficiency and productivity, full utilization of technology is vital. However, technology by itself is not the total answer.

In the world of Agents E&O, one of the key “buzz” words is CONSISTENCY. The agency’s procedures need to be consistently followed among the staff. How many of today’s agency procedures involve the use of technology? Probably most of them. This then strongly implies that the use of technology by the staff needs to be handled on a consistent basis. How do agencies achieve that?

To achieve this desired level of consistency, agencies should develop / have a manual that speaks to the accepted processes and how the system’s various functionality and capabilities are to be utilized. To enhance the manual, it is suggested to include screen shots. Based on the structure and technology platforms within the agency, the manual should address processing within the agency management system as well as document management systems. Since there are typically differences between the processing and management of P&C accounts and Employee Benefits accounts, the manual should either differentiate between these industry segments or have a separate manual for each. The development of this type of manual takes time and talent. Including key staff members is a great way to ensure the necessary detail is included.

At various times during the development of the manual, training should be conducted. By doing this in both a group setting and one-on-one, this will ensure all employees receive the necessary assistance.

Technology is certainly a key issue and reason why E&O frequency is down but to really achieve the necessary level of consistency, the development of a technology manual is a must.

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Survey Shows Many Americans Fine with Lying to the IRS, or Their Insurer

Very honestly, I am not surprised by the survey results cited in this interesting article by Don Jergler that appeared on insurancejournal.com on March 15th. “Customers Lying” is an issue that agents have been dealing with for many years.

However now that there are some “facts” to support it, what will you, as an insurance agent, do about it? In many of my blog postings over the years, there has been reference to the need for agents to REQUIRE that their customers review the app before they are asked to sign it. The power of this approach is focused on the premise that customers will be held responsible for the contents of an application they have signed. In the event of a problem down the road, taking this approach can provide a valuable defense for the agency.

This also gets to the heart of the matter why an agency should NEVER sign an insured’s name to an application.

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Upcoming Speaking Engagements

As veterans of the industry, we would all probably agree that the youth are the future of our industry. It is incumbent on all of us to encourage our young adults to pursue a very rewarding career in the insurance industry. I am honored again this year to present an E&O loss control class for the students of the Eastern Kentucky University Risk Management School and the members of the PIA of Kentucky. The session on March 24th (this Thursday) is on the campus in Richmond, Kentucky. My topic is “Key E&O Issues by Line of Business” with the inclusion of a number of E&O tips that every agency should implement. If you are interested, please contact PIA Kentucky at www.piaky.org.

On May 1st in Bismarck, North Dakota, I will be presenting along with Sean Marrin (Morley Law Firm – Grand Forks, ND) an E&O Mock Trial based on an actual E&O case that occurred a few years back. The fact pattern is interesting as it involves an agent reducing the building limit per the request of the building owner (allegedly). The agent has documentation in his file that speaks to the request but the building owner has no recollection of the request at all. Isn’t this the typical scenario? There will be testimony from the agent and the building owner and the conference attendees will be the jury. How did the case turn out? Find out by joining us and registering for the conference at www.piand.com.


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Mergers and Acquisitions – a potential E&O exposure?

I recently read a National Underwriter article dealing with Mergers and Acquisitions. The primary focus of the story dealt with the record year for M&A activity of insurance agencies. In fact, the new record broke the old record (just set the prior year) so it certainly appears that M&A activity is extremely active.

While there are many issues related to mergers and acquisitions to consider, there is one that doesn’t seem to get the attention it deserves: how does the typical E&O policy address potential liability issues that can make a good deal a “nightmare” without the proper attention. While this is not an overly complex matter, it is also not all that simple. Proper planning and appropriate attention to detail are extremely important.

A good time to become educated on some of the significant coverage issues is as soon as you start thinking about buying or selling. Any good E&O carrier “worth its weight” can provide guidance and direction based on your specific scenario. They should be contacted.

Both the buyer and the seller should allow sufficient time for the development and providing of additional paperwork, copies of the proposed transaction documents, applications, etc., the E&O carriers may require.    

When you’re the buyer, it is best to consider “asset-only” purchases, and not purchases of any liabilities of the agency going out of business. This is one of the many areas where an attorney is needed to ensure the buyer is fully protected. The traditional approach is to have your E&O policy endorsed to provide coverage for the “new” agency for errors made by the “new” agency starting with the effective date of the acquisition.

If you are selling your agency, contact your E&O carrier and advise them of your plans. Don’t hesitate to ask questions regarding cost, options, timeframes, etc. This is an important decision and should be carefully planned. One of the many important issues is to understand the “known loss provision” in the E&O policy. If you are selling your agency and are aware of any actual unreported claims or situations that could lead to a claim, it is vital these are reported to your E&O carrier to lock in coverage. Failure to report these real or potential claims has significant potential to result in a lack of coverage.

The seller should secure an optional extended-reporting-period endorsement (a/k/a “tail”). Even after a sale, the now-defunct agency is still at risk of being sued. The purpose of this optional tail is to provide an additional period of time after the expiration of the policy for which valid claims will continue to be accepted, provided the wrongful act occurred before the end of the policy period. Be aware there is a tremendous lack of consistency as to the available options. Some carriers only allow an additional 1-year “tail” while others offer options much longer. The charge for this additional coverage comes with a hefty premium charge, so plan for this expense. You also only have one time to make the decision.

Thinking about buying an agency or selling yours? Now is the time to start understanding the E&O issues.

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