The backdrop on this E&O claim involves an account the agency had to replace due to the prior policy being non-renewed as it was no longer within the carrier’s appetite. Although this was a tough account, the agency was able to find replacement coverage. During the course of the proposal, the producer advised the client the policy terms of the new coverage were the same as those provided under the expiring policy. The coverage is bound.
At the end of the policy period, the new carrier issued a premium audit notice to the client. The client was expecting this as they were aware of the subject to audit provision. However, during the audit, the new carrier asked for payroll information concerning one of the client’s subsidiaries. The client immediately contacted the producer asking why the carrier was asking for subsidiary information when the old carrier NEVER asked for this?
As soon as the client asked the question, the producer remembered that despite the question on the application asking for the payroll for both the parent and subsidiaries, the prior carrier had agreed that the client’s payroll audit would not include this particular subsidiary’s operations because the operations were ancillary to the main operations of the parent. Of course, the new carrier never agreed to this arrangement and eventually required the client to pay an additional premium of $100,000. The client subsequently brought an E&O claim against the agency to recover the $100,000. Five years later, the matter is still in litigation.
What can be learned from this real-life E&O claim? Actually, there are a few solid lessons to be learned.
1) Keep a running note/list in the file of any special circumstances / agreements relative to an insured’s coverage and make it a point to review that information on every renewal. Also make sure marketing is aware of the special circumstances where appropriate.
2) Be extremely careful about representing that new terms are the same as expiring, because “terms” includes not only the wording of the policy itself, but how the carrier interprets the words.
3) When moving coverage to a new carrier, give thought about the policy terms that carriers can interpret differently, the audit terms being an example.
Moving coverage to a new carrier is not as easy as it sounds. The agency should have a checklist to ensure that the necessary review is completed.