Ever have a close call?

Many agencies go through their entire career without ever facing an E&O claim. For many others, they can count the number of E&O claims they faced during their career on one hand and probably have a finger or two left over. Certainly, kudos to those agencies; that is a tremendous accomplishment. However, just because your agency has had a solid track record over a long period of time does not mean that there aren’t some things to learn (and do) to enhance your E&O culture.

Virtually every agency has had a close call in the recent past. Possibly, you had a client that had a claim denied and alleged that they “were positive” they bought the necessary coverage. This happens often. Face it – if every client bought all the coverages necessary, the number of E&O claims would shrink considerably. “Failure to provide the proper coverage” is the #1 cause of E&O claims today and probably has been for the last 50 years.

These “close calls” are oftentimes, a situation where the client suffers a loss and finds out that they did not have the proper coverage or the proper limit. When these situations occur, agencies would be wise to dissect them to determine what the agency did right and what could they have done better. To be able to look at these scenarios in depth, it is important the agency have a culture that encourages these issues be brought to management’s attention. This cannot be overstated enough. I worked in an agency back in the 70’s where if you brought a problem to the boss’s attention, the pink slip was next. So, what do you do? You don’t say anything and hope the matter goes away. That is not a desirable E&O culture.

When a client’s claim gets denied, these are situations worthy of an in-depth review for a couple of reasons. One of those reasons is “what can we learn from this situation?”. Did the loss involve a type of coverage that was never offered to the client? If so, adding this type of exposure to your exposure analysis questionnaire (for new and renewal) will hopefully ensure that the situation does not repeat itself for that client or any other one. Possibly, the procedure in the agency is to “renew as is”. This is a very dangerous position to take especially in light of client’s exposures changing on a frequent basis. Addressing this moving forward, it is suggested the agency send out an annual renewal questionnaire to the client asking if any exposures have changed.

Very possibly on those situations where a client’s loss is denied, there is clear evidence and documentation in the file showing the offering and the client’s signature on the refusal of coverage. These are great situations to discuss with the staff as it shows the power and value of doing the right thing and following agency procedure. Face it, when a client suffers a loss and finds out it is not covered, who are they going to blame? You – After all, you are their agent. They may look to bring an E&O action against your agency until you show them their signature on the document refusing the coverage.

When a close call occurs, examine it to determine what went right and what could the agency do better. These are great opportunities to ensure the situation does not happen again.

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Using groups to enhance your E&O culture

Enhancing your E&O culture and commitment is not a “one and done” concept. In all honesty, it is an issue that virtually every agency will be (or should be) working towards on an ongoing basis. Procedures and forms should be reviewed and updated periodically.

As issues are identified, it is probably best to avoid assigning these projects to only one person. Everyone in the agency is no doubt busy and assigning a project (especially one with some work associated with it) to only one person could result in that person doing some work on the project when they have a few minutes. Odds are they will never have a few minutes and if they do, that time may be dedicated to something else other than this E&O project.

Just to be clear, there should be a point person on the project that has the responsibilities of scheduling meetings, determining the plan of attack with the appropriate timelines and assigning tasks to meet the challenge. It is suggested that point person identify additional staff members that can assist in the project by providing input and handling tasks assigned. As the popular proverb goes – Many Hands Make Light Work.

There is a much better chance of a successful outcome when the 6 tasks are assigned to three people as opposed to assigning them all to one person.

In addition, by including additional staff members, this increases the likelihood that more of the key issues will be discussed and the final approach will meet with the approval of the applicable agency staff.

Typically, E&O projects have some work associated with them. For example, very few people can sit down and develop an exposure analysis checklist and procedure all by themselves. However, by including additional staff such as a producer, account executive, etc., the form and process can be developed much quicker and be more thorough.

Bottom line – look to use groups to accomplish various initiatives that will enhance your E&O culture. The project will probably be accomplished quicker, be more thorough and thus be better accepted by the remaining agency staff.

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Umbrella coverage that is not with the same carrier as the underlying – a potential problem

Clearly, one of the trends gaining some traction in the industry involves carriers looking for claims (especially personal lines) to be reported directly to them. This will enable the carrier to get on top of the claim faster with firsthand knowledge of the details. Technology is going to play an ever-increasing role in this trend.

A common “best practice” in claims is for liability claims to be reported to the various excess carriers. This enables those excess carriers to do their due diligence in investigating the claim and determining their strategy.

Here’s my issue and concern. What if the underlying coverage is not with the same carrier as the excess? In this scenario, the underlying claim gets reported to carrier A but since the claim was not reported to the agency, is there the possibility that carrier B (the umbrella carrier) has not been made aware of the claim incident?

If the underlying claim develops to the degree that the umbrella coverage would be involved, the umbrella carrier will not be too pleased to find out about the claim “at the last minute”.

This is an issue that agencies should talk thru internally to determine how best to handle. Ideally, the carrier should provide the agency with notification of the claim (claims download, acknowledgement of the claim with details on the adjuster assignment, etc.) and the agency claims representative should then look to see who the umbrella coverage is with. If the coverage is with a different carrier, serious consideration should be given for notifying the excess carrier of the claim.

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The need for the proper handling of claims

If one were to ask most agency ownership about their E&O exposure, “claims handling” would probably not be high on the list yet this is one of the current E&O hotspots agents should be aware of. When handling customer claims, there are a number of areas where things could go “wrong”.

Denial of a claim. A claims denial should be the carrier’s responsibility. Even if the agency is of the belief that the claim would not be covered, the best practice is to report the claim to the carrier and let them make the decision.

Acceptance of a claim. Technically, agents do not have the authority to approve or accept coverage for a claim. This is also the carrier’s responsibility. I understand that customers are looking for some assurance that the claim is covered but caution should be exercised. There is certainly the potential that the customer has not provided all of the “facts” of the case and one of those key undisclosed pieces could result in a denial by the carrier. Many agencies use language such as the following when communicating with the client: “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”.

Putting excess carriers on notice. There is the potential that there could be multiple policies that have some degree of coverage for any given claim. A good “best practice” is to advise all applicable carriers, especially any excess or umbrella carriers. This will give them the opportunity to conduct their discovery on the matter. It is often difficult to determine the potential of an underlying claim to exceed the limits of the underlying coverage. When a claim is submitted to your agency, make it a practice to review the file for all possible available coverage, and then put those carriers on notice. Even if the umbrella carrier is with the same insurer as the underlying, it is still highly recommended that the agency automatically put the umbrella carrier on notice at the same time the underlying loss is reported.

Since claims handling has the potential to cause some problems, following some basic “best practices” should minimize the potential for an E&O claim to develop.

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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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