Does an E&O claim always involve a BI or PD loss?

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.

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Get it in writing !

It is certainly a frequent occurrence in the insurance world for clients, business or personal, to look to reduce their limits. The reason could involve issues such as cost or possibly the client feels the limits are more than their exposure.

There are various ways the client may request the reduction. When the client sends the agency some form of written communication, these should provide a strong defense should a problem arise down the road. The communication can be in the form of a letter or e-mail where there is clear evidence of who is making the request and what the actual request is. Instructions on a cocktail napkin probably will not hold much weight in the court room.

Oftentimes, the client request is either made during a face-to-face meeting or via a phone conversation. These scenarios create a potential greater degree of E&O exposure without the proper level of documentation.

If the request for a reduction is made based on an agency proposal, many producers will simply ask the client to note the reduction on the proposal and initial the request. While this may be common, it is not the best approach. If the request is noted and initialed, it is highly suggested that the producer either promptly verify / memorialize the request in writing back to the client or produce a revised proposal indicating the limits the client is agreeable to and looking for the client to sign accepting the proposal as presented.

Bottom line, the request should be in writing either from the client to the agency staff member or vice versa essentially memorializing the request.

As noted in the following article, written by Judy Greenwald and published on on 12/19/17, this issue was clearly a key element in the E&O matter of Alliant vs Cammeby’s Management Company LLC. Alliant was acting as an insurance broker for the New York-based Cammeby’s firm.

“A federal appeals court has refused to overturn two jury verdicts that found Alliant Insurance Services Inc. negligent for reducing the flood sublimit on a New York property owner’s policy before Hurricane Sandy, and finding it was liable for $20 million.”

Continue Reading Get it in writing !

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Frequency down; Severity up

Going back to the late 80s (when I first started in an E&O management position), the frequency numbers were off the charts (but not in a good way). Frequency (a measure of the number of E&O claims as a percentage of policy count) was in the 15% area. That translates into 1 claim for every 7 agencies. Today, some carriers are reporting frequency results in the 5% area…1 claim for every 20 agencies. That is one heck of an improvement.

Why the big improvement? Some folks look at technology as part of the reason. Technology has certainly come a long ways since the late 80s. It has resulted in some efficiency gains that has enabled staff to be more productive. There are more E&O classes today than ever before. And there are potentially other reasons as well. My take on the improvement in E&O claims frequency – YOU !

Today, the E&O culture and commitment of agencies (and their Sr. Mgmt.) is very high. E&O is a frequent topic that is discussed when a procedure change is being considered and it is common to see staff meetings include discussion on key E&O loss prevention issues.

So, bottom line, agencies are much more focused on E&O today than ever before. Congrats to all the agencies that can honestly state that their culture is much improved.

While the frequency results continue to improve, the severity results do seem to be heading in the other direction. Severity (a measure of the average size of an E&O claim) has been on the increase. The actual numbers will vary by E&O carrier based on the type and size of the agencies they insure.

Some carriers are reporting E&O severity up over 50% in just the last 5 years. This can be attributable to more exposures that could potentially be uninsured, greater settlement awards, more E&O claims alleging a special relationship, etc.

The key issue here for agencies is to take a serious look at your E&O limits at renewal time. A recent study that I saw in one of the trade journals stated that upwards of 50% of all agencies have a $2mil or less E&O limit. Agencies would be wise to look at increasing the per claim limit. Just ask the underwriter for the premium of the next highest limit.

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When selling the agency, how long of a “tail” should I buy?

You may be thinking that this is not an issue you need to worry about as you have no plans to sell your agency. While that certainly may be true today, there just may come a point where selling your agency is more of a viable option. Maybe you got an offer that you just can’t refuse or possibly, one of your kids (that you were hoping would come into the agency), has decided to pursue some other occupation.

Without a doubt, M&A activity is extremely active. According to OPTIS Partners (an investment banking and financial consulting firm providing expert services to the insurance distribution industry), mergers and acquisitions of insurance agencies broke all records in 2017. In total, in 2017, there were 604 deals in the US and Canada, a 31% jump from 2016.

For the agencies looking to sell, there is a key issue that needs to be extensively considered. Most claims-made policies refer to this provision as an “Extended Reporting Period”. For many years, it has also been called “tail coverage”. This coverage allows an insured to report claims that are made against the agency after a policy has expired or been canceled with the condition that the wrongful act that gave rise to the claim took place during the expired/canceled policy.

I have seen many agencies (when they are selling) buy a 1 or 2-year tail. From my standpoint, they are leaving themselves severely vulnerable to claims that are made after the 1 or 2-year period has expired. I recently saw a study done by one of the foremost E&O carriers looking at the lag time between the date of the underlying loss and the date that the E&O claim was made against the agency.

If one were to buy a one-year tail, this would have covered about 44% of the claims. Buying a two-year tail would have increased this to just short of 70% of the claims. Having approximately 70% of the claims covered would have also meant that 30% of the claims would not have been covered. Sounds risky to me. Even stretchy this out to a 5-year tail would still result in 5% of the claims not being covered.  

As you would imagine, there is a cost to buying a tail (there are many other factors as well that should be carefully reviewed). The premium for the tail is typically a factor of the last full annual premium. For a 3-year tail, the factor is 130% (this is the common percentage but not all E&O policies are consistent in this area). So, for an agency that has an annual premium of $20,000, a 3-year tail would cost $26,000. Not a small chunk of change but remember this is for 3 years of tail coverage. A 5-year tail would run around $38,000.

Many E&O carriers also offer a 10-year tail. This premium would be $40,000; an additional $2,000 to go from a 5-year tail to a 10-year tail. This would now provide coverage for over 99% of the claims, based on this E&O carrier’s study.     

For agencies looking to sell, they should do their homework and factor in to the cost of the sale, the premium for the “tail coverage”. The decision on the length of the “tail” may just determine how comfortable you are in enjoying your retirement.  

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Would you believe 1 in 10 contain an error?

How many insurance policies (personal and commercial) does your agency write? Let’s use for our example an agency that has 10,000 policies. Using 260 work days calculates to just short of 40 policies a day being sent out to customers.

Some of the latest numbers from a variety of sources (including companies that do policy check for agencies) indicates that approximately 9% of the policies from carriers and wholesalers contain at least one error. Thus, if policies were not being checked, agencies would be sending out, on average, 4 policies a day that contain at least one error and there is certainly the possibility that some of these policies contain more than just one error!

Bottom line, mistakes are being made and it is up to you, as the retail agent, to identify these errors and get them fixed.

Many agencies are of the belief that if a problem develops involving an error in the issuance of the policy, the carrier will simply “fix it”. Is there a flaw to this logic? Yes, there is!

If the error is identified in the first year, there is greater likelihood the carrier will reform the policy – essentially, they will “fix it”. There are no guarantees, but this is probably the way the matter will get resolved. However, if the error is discovered after the first year (on subsequent renewals), it is very unlikely that the carrier will “fix” the policy. Basically, the terms under which the policy was issued will stand.

The other key issue involves the future review of policies. If the policy was issued with an error that was not identified, then future reviews of the policy will probably not catch the error. Essentially, the error is being repeated but it is not getting caught. Obviously, a significant part of policy review presumes the policy the renewal is being compared to is correct. Is it?

The issue of policy checking applies to both personal and commercial policies. The fact that a large percentage of personal lines policies are downloaded does not mean that the policies are correct. In commercial lines, there is tremendous potential for the policy to contain at least one error. Unfortunately, oftentimes, it is at the time of a claim when the agency realizes an error in the insurance policy. At this point, it is too late.

The feedback that I am hearing is that not only is the percentage of policies with errors close to 10% but that some of the errors are EXTREMELY significant. Don’t take policy checking lightly. It should involve more than just a cursory review. A good best practice is to develop a policy checking document that is completed on every policy. The completed document should indicate who completed the review, when it was completed and what was found. This document should be stored in the agency system.

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Is this insurance product on your exposure analysis checklist?

What’s the product? Product Recall insurance.

According to an analysis that was done by Allianz Global Corporate & Specialty, “defective product-related risk is the single largest driver of liability claims” with losses from product recalls being the major contributor. Losses from this sector have cost insurers more than $2 Billion in just the last 5 years. Thus, this is an area that has the potential to cause significant hardship to a risk that lacks the proper coverage.

It is easy to remember some of the more noteworthy claims in the recent past. Issues such as the recall of the Samsung Galaxy Note 7, the Takata airbags that impacted 19 auto manufacturers (60,000,000 vehicles) and the faulty ignition switches in GM vehicles.

These three issues alone cost an estimated $34 Billion !!

In a recent article written by Patricia Harman that appeared in Claims magazine (, Christof Bentele (AGCS head of global crisis management) stated the reason for the tremendous increase in the number of product recalls:

“product recalls have risen steadily in the past decade” / “tougher regulation and harsher penalties, the rise of large multinational corporations and complex global supply chains, growing consumer awareness”.

Product Recalls have actually affected a wide range of Business Industries. These include:

  • Automotive / industrial supplier
  • Food & Beverage
  • IT / Electronics
  • Retail
  • Manufacturing / packaging
  • Medical
  • Transportation / logistics
  • Domestic appliances
  • Chemical
  • Engineering / construction

The analysis by AGCS went on to state that the estimated cost of a significant recall can exceed $12,000,000.

It is easy to discount the potential exposure for your clients by stating “my clients don’t have this type of an exposure”. Maybe they don’t but doesn’t it make sense to at least ask the question? You may just be surprised but if they don’t have the exposure, you can feel confident that you asked the question. That, my friends, is a big part of what E&O prevention and the use of an Exposure Analysis checklist is all about! Asking the right questions and documenting the responses.

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Be careful when using statistics

Imagine that you are sitting down with a current or prospective customer talking about the issue of flood insurance. As you are discussing the coverage, it is conceivable that the customer may ask the following question: “what are the chances that my house is going to be impacted by a flood?”

This is a legitimate question since the customer is trying to decide whether to spend dollars on insuring an exposure. In some cases, the response may include some statistics such as “for your area to be impacted, that would take a storm like we have never seen before. The chances are probably one in a thousand.”

Essentially, you are advising the client that there is a 99.9% likelihood that their house will not be affected. Sounds like pretty good odds! As a result, the client decides not to buy the coverage.

Well, this “1 in a thousand” likelihood is exactly what the odds were with Hurricane Harvey this past year and also the major rainfall that occurred in October 2015 in Charlestown, South Carolina. Thus, one in a thousand does not mean it won’t happen. It just means that the catastrophe will happen but probably only once in that thousand-year period. Unfortunately, for some homeowners in the areas affected by Harvey and the greater Charleston, SC area, that “one year” happened probably sooner than they thought.

Tremendous caution should be exercised when discussing catastrophes and the need for various coverages. Statistics are typically based on historical data and the likelihood the accuracy of data will continue moving forward. However, Mother Nature seems to be anything but predictable.

What if during the same discussion, the client turns to you as the agency CSR and asks, “what would you do”? How would you respond? If you state, “if I were you, I wouldn’t buy the coverage”, this could heavily influence the customer’s ultimate decision. It is best to sidestep the question and advise the customer that this is a decision that they need to make, and it should not make any difference whether you would buy it or not.

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A Refresher on the Named Storm Deductible

Unfortunately, at the time of a loss (especially a catastrophe), there may be customers that didn’t truly understand how the deductible applies on their insurance coverage.

In the following article, published on on January 17th, Denise Johnson points out a potential area of confusion: the difference between a deductible and a named storm deductible.

Is there the possibility that some of your customers don’t totally understand this issue? Might be an opportunity to educate your customers on this important distinction.

“Hurricanes Harvey and Irma caused massive devastation to Texas and Florida and now frustration for policyholders, their attorneys and public adjusters due to the named storm deductible on some policies.”

Continue Reading A Refresher on the Named Storm Deductible

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“Nothing brings out an agent’s mistake as quick as a catastrophe”

I am not sure if I am the official author of this quotation but it is definitely an expression I have used thousands of times. Why? Because when you think about it, you can see how accurate it really is.

If one of your clients had a loss, what are the chances that there is an “error or omission” on that file? Possible but not probable. But if 250 of your clients have a loss, what are the percentages that at least one of those files contains an error of some type. Much more likely.

In an article in the January issue of Claims Magazine (, it was cited that through 9 months catastrophe losses were projected to be in the $28 billion area, over triple the 2016 result. This was heavily driven by Hurricanes Harvey, Irma and Maria. The article also stated that some industry experts are estimating that 2017 could finish up with catastrophe losses in the $70-$100 billion area, making it the largest on record.

When one thinks of catastrophes, Hurricanes are probably one of the first issues that comes to mind. However, other catastrophes include earthquakes, fire storms, significant snow falls, wind storms, etc.

You can certainly count on a significant number of E&O claims coming out of these catastrophes. The issue could involve the lack of coverage, insufficient limits, misunderstandings in coverage with poor documentation of those discussions, etc.

Since it is difficult to predict, with any degree of accuracy, which of your accounts are going to suffer a loss due to a catastrophe, agencies need to have procedures in place that serve as communication to clients the various coverages they should consider. This can take the form of a renewal questionnaire which are sent every year to clients to bring to their attention exposures they may not have coverage for. Also, in the agency proposal, reference to suggested coverages should be included. Addressing exposures such as flood (including the importance of buying flood coverage for the full value of their house), earthquake, tornados etc.

While no agent wants to have a client that has suffered an uninsured loss, it does happen. The purpose of these questionnaires is to have documentation showing that you reached out to the client to educate them on a variety of issues. Even if the client does not return the questionnaire, there is still a value in sending it as it will be part of the agent’s defense in an E&O matter should one develop.

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Are you familiar with the U.K. Insurance Act dealing with “Fair Presentation of Risk” ?

Oftentimes, I have used this media to communicate issues dealing with the importance of being honest with your carriers, This includes the material used to communicate the nature of the risk (the application) as well as other communication (i.e. answers to underwriter questions).

Carriers are certainly expecting (and they have a right to) that the information provided by agents and brokers accurately represents the risk. When it doesn’t and when the risk has a loss, the carrier may allege that they would not have written the account had they known the “correct” information. This is definitely a matter not to be taken lightly.

Within the last couple of years, the United Kingdom has enacted some legislation (The Insurance Act 2015) which made significant reforms to insurance law. For agents and brokers dealing in the London and U.K. market, the changes are significant and need to be acted upon.

Basically, the essence of the Act requires policyholders and potential policyholders purchasing insurance in the UK (and through the London markets) to make a “Fair Presentation of Risk” that they are seeking to insure.  What exactly does that mean?

Some of the key components of this Act:

The policyholder (and potential policyholders) must conduct a “reasonable search” of their exposures. Specifically, they are required to:

– Make adequate inquiries within their business to identify and verify information relevant to the insurance they are seeking to obtain.

Inquiries should include all relevant knowledge of the Sr. Mgmt of the business and those involved in the buying process.

– Reasonable inquiries must also be made of any relevant third parties involved with the business (includes external consultants, contractors, etc.)

All of the risk information identified through the “reasonable search” must be presented clearly and in a manner that will enable prospective insurers to access the risk. Simply providing them with a voluminous amount of information (“Data dumping”) and expecting the U.K. market to dissect it is not allowed.

It is expected that not only should significant information be highlighted but also unusual activities and/or known areas of concern that could affect the insurance should be highlighted.

This is an issue that must be taken seriously when dealing with the U.K. market. What are the potential ramifications? Failure to adequately satisfy these obligations can result in rescission or reformation of any coverage secured. E&O claims would be sure to follow.

To ensure that clients and potential clients are aware of this, agencies should look for a means to communicate this information (in writing) to their clients (current and potential).



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