First, let’s start out with the definition of a claim as defined in an E&O policy. While the exact verbiage may vary from one E&O carrier to another, the general flavor is the following:
“Claim” means a written demand or written notice, including service of a subpoena, “suit” or demand for arbitration, received by one or more insureds which alleges a “wrongful act” or asks for money or services.
The words that are in quotations (” ..”) are those that are defined in the E&O policy, typically under a Definitions section.
In the vast number of E&O claims, the issue generating the E&O claim involves a BI or PD loss that the client has suffered that is not covered or not fully covered by the client’s coverage. However, there are circumstances that don’t involve a BI or PD loss that every year seem to result in a dispute and then eventually an E&O claim against the agency.
One of the more common deals with the client not realizing (or not wanting to admit) that their General Liability or Workers Compensation policy was “subject to audit”. The client purchases a WC policy and then, for one reason or another, the audit performed at the end of the policy year reveals payroll numbers exceeding what was initially projected. An additional premium is generated as a result of the audit and the client balks at paying the AP because “they were not aware that the policy was subject to audit”.
What is the best practice for agents to implement to address this issue? It is definitely suggested that the proposal that includes policies that are “subject to audit” contain a statement that speaks to this policy condition. Also, when the policies are delivered (personally, mailed, e-mailed, etc.), it is a good idea to reference the “subject to audit” condition in print and verbally as well. The implementation of these practices should provide the agency with a solid defense should the client contend that they were not aware of this policy feature.