Don’t let E&O loss prevention scare you!

Mention E&O loss prevention to folks in the insurance industry and many of them will probably comment “that is scary stuff”. In fact, if you were to interview insurance agency owners coming out of an E&O class, some may voluntarily comment “That’s it, I am selling the agency”. 

When it comes to E&O loss prevention, the way that we look at it will heavily determine our “buy in”. In many respects, it is a mental thing. If you view it as “scary”, you may be reluctant to ever write a piece of business or talk to a customer because of your belief that if not handled correctly, those are E&O nightmares waiting to happen. E&O loss prevention should be respected and appreciated for the benefits that it generates. And the benefits are many!  

Many E&O carriers have advised me that they are able to close 60 – 70% of all E&O cases for no loss payment. There may be defense costs but no loss dollars paid. How does this happen? For one, it takes an E&O carrier that has a commitment to aggressively pursue defense of those cases but at the end of the day, it is the actions of the agency that heavily determines the outcome of the claim. Thus one benefit to strong E&O loss prevention is that you will significantly increase the chances of prevailing in an E&O matter.  

A benefit that is often overlooked is the impact on sales and growth of the agency. Let’s take a quick look at some of the more common E&O “tips” that are provided. 

Exposure Analysis Checklist – helps the agency understand the risk better and plays a key role in identifying the exposures of the risk. By proposing coverage for some of these exposures, you will probably write more business. 

Customer Education – by educating your customer through various aspects such as social media, newsletters, account reviews, etc., you will write more business.  

Quality proposals – by including definitions, claim examples, etc., this will help your customer better understand the coverage they have. No doubt, they will appreciate this, further helping your new business sales and customer retention. 

All of the above will help you write more business while further assisting in strengthening the E&O culture of your agency. So, don’t be scared of E&O loss prevention – embrace it and you may just find your agency writing more business.

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Does everyone in the agency know the carrier’s underwriting guidelines?

It is interesting that every year, there are E&O claims involving carriers suing one of their agents. Yes, the carrier is suing their agent and with the right set of facts, they are winning! While this may be a surprise to some, this has actually been occurring for quite some time. What causes this to happen? 

As hopefully all of the agency staff knows, each carrier has underwriting guidelines that clearly defines what type of risk they want to write or in many situations, those risks that they don’t want to write. Some of the criteria that are typically referenced include the age and construction type of various property risks as well as specific type of risks (for example – roofers) that carriers want to avoid. The criteria may also include issues involving whether the risk has been non-renewed or cancelled for non-payment. The guidelines are provided to the agent either electronically or in paper and can be part of the agency agreement or a separate document.  

These guidelines, when adhered to, can allow the agency to bind that carrier to a risk provided it falls within those guidelines. One of the key questions that every agency should ask themselves is “does everyone in the agency know the carrier’s underwriting guidelines”.  

The problem arises when the agency binds the carrier to a risk that, after a loss, the carrier takes the position that they would not have written the account had they know the “correct information”. One situation I am aware of involved the agency binding a homeowners account for a home that was 23 years old. The problem was that the underwriting guidelines stated that the agent only had binding authority for risks 20 years old or less. The home suffered a loss and when the carrier found out that the age of the home was not within their acceptable binding guidelines, they agreed to pay the claim (since the customer had not misrepresented the risk) but then proceeded with E&O litigation against the agent…..and won!! 

Many of the situations where the carrier sued the agency for not adhering to the underwriting guidelines involved producers who were not aware of those guidelines. Since they play a key role in the solicitation and binding of new business risks, it is imperative that they know, or at least check, the underwriting guidelines before binding a risk.   

Unfortunately, there have been E&O claims where the producer knew the guidelines but chose to ignore them in order to get an account written. One that comes to mind involved a producer who “lied” about the construction of a risk, stating that it was a frame home when it was actually a log home. While some may view this as semantics, that is not the way the carrier saw it.  

Be sure that the producers are aware of the underwriting guidelines for each of the carriers and since they do change from time to time, timely notification to the producers of the changes is also critical.

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What role do your producers play in policy checking?

When one thinks about the sales process, obviously producers play an extremely important role. They gather the necessary information, typically through some type of exposure analysis checklist, they have a hand in the marketing of the account, they are involved in the generation of the proposal and then hopefully, they are awarded the account. This will then result in the producer advising the selected market what coverages are being purchased. For some agencies, the process may end there but very honestly, there are additional steps that the producer should be extremely involved in.  

One of those steps includes a review of the policies when they are received from the markets. After all, who knows better exactly what coverage was purchased than the producer that was involved in the sale.  

Some agencies may have the account exec / account manager involved in the policy checking and this is certainly fine but they should not be the only ones performing the review. The producer should be required to do their review comparing the policies received to what was requested by the client and then subsequently ordered from the market. 

Talk with virtually any agency and they will advise you that there are oftentimes mistakes in the policies issued by the markets and that from time to time, the mistakes can be extremely significant. Thus, the need for a thorough review.

The agency would benefit greatly by having a policy checking form that prompts the reviewer what exact areas of the policy should be reviewed. After the review, the form should be signed off on noting what was discovered. There should also be an activity noted in the agency management system when the review was done and the results.  

If the review found some mistakes, depending on the length of time necessary to get a correction, it is probably best to deliver the policy noting to the client the errors and that corrective policy endorsements have been requested. By following this process, the client now has the policy and should be requested, via a cover letter, to review the policies and to advise of any areas in need of correction. If the policy was 100% correct, the policy should then be promptly delivered to the client.

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E&O Insights: Big Trucks Can Cause Big E&O Claims

This is an excerpt from an Insurance Journal article that I authored in the September 21, 2015 edition.

“Travel most any highway and it will appear that the trucking industry is healthy. Moreover, many insurance professionals are optimistic about the future of the trucking market. While this potentially provides insurance agencies with some significant opportunities, it is vital for agencies to recognize that trucking is not just any type of an account. With significant business opportunities comes significant potential for big claims. Ask most errors and omissions (E&O) liability carriers and they can readily identify some E&O claims well in the $5 million-plus area.”

Continue Reading E&O Insights: Big Trucks Can Cause Big E&O Claims

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Are you “trusting but verifying”?

When I bring up the issue of auditing to agency owners and management, oftentimes, I hear that there are just not enough hours in the day to handle this function. It is somewhat surprising that some will comment that they “trust” their employees to do the expected job while others will comment that they have a veteran staff and that staff knows what they need to do. While I am strongly in favor of trusting your employees, I also believe that adding an element of “verify” to the equation is a healthy thing.

If one does not feel that they have the time to “audit the staff”, it is important to recognize that auditing can actually take various shapes and sizes. For an agency that is not performing any type of real auditing at present, it is suggested that they start on a smaller scale, possibly identifying 5 key issues and doing a random review of “x” files each month. Issues such as

Documentation – since quality documentation in agency files is probably one of the most important tasks an agency performs, review 5 files a month for each of your employees each month specifically looking at the agency notes. Was the documentation handled promptly and is it detailed noting who was spoken with and what was discussed?

Proper use of agency management system – issues include how the employees are managing their suspense / diaries and are they placing all of the documentation and communication in the proper designated spot in the agency system.

Sign off of declined coverages – when customers decline various coverages, the file should reflect that decision. Depending on how the “declination” of the coverage was handled, it might be appropriate for the agency staff member to send a note to the customer memorializing the conversation.

Policy Checking – there should be evidence that the policies were checked when they were received to verify that the coverage provided is what was requested. There should be an activity noting when the review was done and the results.

Policy delivery – for producers, the file should contain a note / an activity when the policies were delivered

When some agencies think of auditing, they may be thinking of a formalized process and the development of the necessary audit forms, etc. This is probably the place where the agency will want to wind up. However for agencies that are not really doing any type of auditing, it might be appropriate to start small and grow the process over time.

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What’s your E&O culture? Might want to check with your staff…

As many folks know, my main focus for quite some time is to help enhance the E&O culture of an agency…one person at a time. This is one of the reasons why I started this blog.

In working with insurance professionals, either in a class room setting or in the agent’s office, I typically pose the question “what is the E&O culture of the agency”. Since this is not a question that is easy to truly quantify and to arrive at a score, the more pressing question is “is it stronger today than it was last year at this time”. The goal is to achieve growth thru the various components that heavily determine the agency’s culture.

When agency management periodically do this reality check, it would be extremely beneficial to include the staff in the discussion. In most, if not all agencies, the staff probably has a better handle on how the agency is doing from an E&O standpoint. They know the pros and they know the cons. They know who is doing the job and who is not.

Obviously as management asks the staff for their honest feedback, they need to let the staff know that their open and honest feedback would be most appreciated and welcomed. There must be absolutely no concerns about the potential for retribution if some of the feedback is critical. If management truly wants to know the issues that is standing in the way of growth, great. If they want the staff to tell them what they want to hear, don’t bother asking the question.

I have spoken to many agency professionals and without a doubt, the overwhelming majority have a solid handle on whether E&O growth is being achieved. So be sure to include them. Not including them in the feedback process has the potential to paint a much different picture. One that in the long run does not serve the agency well.

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Selecting the right E&O limit

Without a doubt, most agents would like to know the exact limit they should carry on their E&O policy. Some agents approach this by analyzing their book of business specifically looking to determine what is the maximum limit they provide for any one customer. So if that maximum limit is a $2mil umbrella, they conclude that $2mil must be the appropriate E&O limit.

In actuality, nothing could be farther from the truth. One of the primary reasons why it is so difficult to determine the “right” E&O limit is due to the fact that typically an E&O claim is generated by the insurance you failed to provide. Thus if that customer has a major loss and alleges that they asked the agent for higher limits, the agent could theoretically be sued for much more than $2mil.

Let’s look at some key issues, starting with how your limits work.

With E&O, there are typically two sets of limits. Using the example of a “$2 mil/3 mil limit”, the first number is the limit available for any one claim made against the agency. While this is definitely the more  important number of the two, the second number “$3mil” is called the aggregate and represents the limit available for all claims made against the agency during that policy year. Agents should definitely not discount the importance of the aggregate.

The type of business you write. A good starting point towards “calculating” the appropriate limit is for an agency to look at the type of business they write. For example, E&O claim arising from personal lines are typically smaller than those arising from commercial lines. However, million dollar plus E&O claims can occur from the sale and service of personal lines, especially if you are writing some high net worth clients.

E&O claims involving commercial lines tend to be larger and some have been known to be over the $10 million level. I am aware of many E&O claims in excess of $10mil involving professional liability. So for agencies writing predominately commercial, look at the types of commercial lines accounts you write and assess the potential severity of an uninsured claim. Accounts involving large commercial property or auto exposures or significant products liability have significant severity potential.

In regards to the aggregate, agents should secure an aggregate that is a multiple of the per claim. So if the agency has a $3mil per claim limit, consider an aggregate in the $6mil area. This should ensure that your E&O continues if you get hit with a sizeable E&O claim.

The size of your agency. It is interesting that many agency owners believe that because they are not a big agency that they cannot have a big E&O claim. This is not sound thinking as the size of your agency is not a good indicator when determining your E&O limit. While big agencies can have big claims, so can smaller agencies.

Is defense included in the limit or “in addition to”? If defense is included within the limit, there is significant potential for the defense costs to impair the limits available to pay an E&O claim. If you are not sure how your policy responds, check with the underwriter. Having the defense costs “in addition to” is the better option.

Choosing your E&O limit is an important decision and one that you really only have one time of year to make; the anniversary of your policy. Don’t hesitate to ask your underwriter for pricing at various limit options. Give serious consideration to increasing the deductible and using the savings to secure a higher E&O limit.


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Does good customer service reduce the potential of E&O claims?

There is an expression that I heard many years ago that certainly seems to have a lot of truth to it. The comment went something to the effect of “Not many people recognize good customer service but they sure know bad customer service when they see it”.  When one thinks of the many interactions that we have over the course of the day, it is probably easier to remember the bad experiences more than the good.

As I travel around the country, flying is unfortunately my most common means of travel. Unfortunately, over the last 2 months, I have been stranded 3 times in airports in my attempts to get home. In looking back at all 3 of those circumstances, I was amazed how some airline customer service personnel (one United employee in Houston specifically)  know how to deflate a situation. They did not cause the problem but they were the ones forced to deal with it.

In most situations, don’t we just want to be shown some empathy / compassion. When this happens, there is no doubt that we are less likely to raise our level of emotion. Conversely when we get an attitude back, we probably want to write a letter to their boss (not that the letter would probably ever get answered) complaining and threatening to never go on that airline again.

In your insurance lives, from time to time, you are going to encounter a customer (face to face or on the phone) that is not happy with the situation. In some instances, in your role at the agency, you were not directly involved in the issue but now have to deal with the irate customer. By showing an empathetic side combined with a solid level of customer service, the customer is probably going to respond in a positive manner. Possibly, something as simple as mentioning that you are willing to speak with your manager to see if there is anything that could be done, might very well be enough to defuse the matter. Conversely, an attitude of “that’s your problem, not mine” could raise the level of emotions and potentially escalate the matter. This is the response that I recently got from a car rental agency. These types of situations, in the agency world, could lead to litigation if the matter is serious enough.

So does good customer service reduce the potential of an E&O claim? It would probably be difficult to prove it but there is one thing for sure – it sure doesn’t hurt. Provide a level of customer service that you can be proud of.

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Why is it important to keep “emotion” out of your agency notes / e-mails?

It is probably fair to say that from time to time, conversations between the agency and their customers (whether on the phone or face to face) do not exactly go as planned. There are a whole host of issues that could prompt a customer to become very agitated at an agency staff member such as advising them of a probable uncovered claim, etc. The opposite (agency staff member getting agitated with a customer) could also occur both hopefully those circumstances are few and far between.

As agency staff is aware, it is very important that these conversations be documented in the system. Based on the situation, it may also be appropriate and beneficial to document these conversations in some form of written communication back to the client.

Let’s focus on discussion on the recording of the conversation in the agency management system. Many agency staff are of the opinion that these agency notes are for “their eyes only” or at least only for select fellow agency personnel. In most cases, this is probably true. So the agency staff member records something to the effect of “Just spoke with the insured regarding their uncovered loss. What a real jerk they are. I can’t believe that we insure someone so stupid in our agency”.

Now fast forward the timeline and now that same customer is pursuing legal action against your agency because they thought they should have coverage for their loss. Both the defense attorney (defending your agency) and the plaintiff’s attorney (defending the client) will have a right to see the entire agency file (notes, proposals, e-mails, etc.). As the agency staff member involved, how do you now feel about the agency notes that you entered that you thought were for “your eyes only”?  There is certainly the possibility that these notes (containing the negative comments) will be used against your agency. I would trust that the jury is going to look very negatively on the comments.

There are a number of “rules of thumb” that are used regarding notes entered into the agency management system. One that every agency staff member should honor very carefully is:

Don’t put anything in the agency file that you wouldn’t want a jury to read!

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