Trusting your clients – what’s the worst that can happen

Your agency has a customer that owns a number of dwellings covered under a master policy. One day, your client contacts your agency to cancel coverage on one of the covered locations since the property had been sold. The coverage request was made by phone and as the account exec, the coverage is cancelled as requested.

Or so you thought.

This customer was a long-time client of the agency and had made numerous changes to their property policy over the years. The agency account exec, trusting the client, did not see a need to request the client send a confirmation e-mail. Nor did they see a need to send the client an e-mail memorializing the conversation. As previously noted, this transaction had occurred numerous times in the past.

Six months later, the property in question, sustains a significant fire loss. The client contacts the agency to report the claim, only to be advised that there is no coverage for that location on the policy. The client advises the account exec that there should be property for this location; it was the dwelling next door that was to be cancelled. An E&O claim is brought against the agency seeking damages of $100,000.

Did the client give the agency account exec the wrong address? Possibly.

Did the account exec misunderstand the instructions from the client? Possibly.

There is no doubt that agents want to show their clients a high degree of trust. However, mistakes do happen. Will the client admit their mistake? Probably not – ask any agency that has had an E&O claim and they will advise you that it is amazing the story the client will tell when they are facing an uninsured loss.

It is certainly okay to trust your clients, especially those that have had their insurance coverage with your agency for some time. Former President Ronald Reagan coined the phrase many years ago, “trust but verify”. How does that translate into the insurance world? What should the agency account exec have done?

The key issue that was lacking in this agency transaction was documentation. The agency management system was documented but there was no documentation back to the client to confirm the change request. Without a document that memorialized the conversation, any testimony in E&O litigation is going to be viewed as “hearsay” which is not going to have the same degree of credibility. The agency should have sent the client an e-mail essentially restating the coverage change request including the date of the change.

Another option for the agency to consider is to mandate that the coverage will not be modified until the agency receives a written request (e-mail is acceptable) and agrees to the change. It is vital that any documentation clearly detail what coverage is being changed and when.

If either one of these approaches had been used, it is doubtful that an E&O claim would have developed. Could the above scenario occur in your agency?

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Who is your focal point to improve your E&O culture?

Without a doubt, life at the agency side of the business is very challenging and very fast paced. It seems like there is never enough time to get everything done. Taking on an additional project is probably not something staff are going to be too excited about.    

However, to enhance the agency’s E&O culture, continuous improvements are needed. But when agency management brings up an initiative to implement, are they asking the staff to “just get it done”? If so, what will probably happen? A half-hearted effort by some and a minimal effort (if an effort at all) by others. For all agency personnel, there is always work to keep them busy. What do the staff hear – “I can’t keep up with what I have and they want us to take on more”. Their emotions kick in before they really think through the process.

In many agencies, the problem is that there is no one that has the role of really driving the E&O initiative. No one is accountable for whether the project is completed or not. As a result, odds are that the project will probably get started but never get finished.

Is this reality in your agency? A good best practice, employed by many agencies, is to develop a structure that increases the odds of a successful outcome. That structure includes a point person in each of the respective areas (Personal Lines, Commercial Lines, Benefits, etc.) that has the responsibility to “manage” the project. “Managing” the project does not necessarily mean that this person is going to do all the work. They may actually not do any of the work. Their role is to map out a strategy that includes the key steps and key processes. Let’s look at an example.

A key initiative in E&O loss prevention is to periodically (annually is suggested) reach out to your clients to get an update on their exposures. So, if the objective is to develop a process and procedures for this, what would the “focal point person” do?

They would break down the initiative into steps such as:

  • What should the form look like?
  • When should it go out?
  • Can we automate the process?
  • Should we communicate via letter or e-mail?
  • Where in the system should this questionnaire be stored?
  • What is our procedure for when the questionnaires are returned?
  • When do we want to roll out this new procedure?

In some of the areas just mentioned, assembling a team of key players is heavily suggested. This should help to ensure that the final product and process has been vetted.

As with any significant project, breaking it down into pieces helps to move that project along.

Establishing a structure for the implementation of new E&O initiatives should play a significant role in seeing that the project is completed and well thought out. The focal person should be responsible for reporting to management on the progress of the project.

Without a doubt, this approach will achieve more success than management just asking the staff to “get it done”.

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What is the value your agency puts on staff education?

When one thinks of the key pieces of a quality agents E&O prevention program, typically topics such as documentation, exposure analysis checklists, confirmation of client insurance decisions (purchases and rejections) and policy review all come to mind. And they are all very important if an agency truly looks to minimize their E&O claims potential. However, there is one area that could get overlooked or taken for granted. This deals with educating the staff regarding the areas of insurance they handle.

There is no doubt that multiple times every day, your agency clients are asking questions on their insurance program. Questions such as the following:

1) What does co-insurance mean?

2) Mom and Dad are in a nursing home so the house is vacant – what do I need to know?

3) What is the difference between ACV and Replacement Cost?

4) Should I get an umbrella? – I don’t have any real assets

And there are many more with many being much more complicated. Obviously, the manner in which these questions are answered is key as your clients are probably making decisions based on what you advise them. In addition, in virtually all states, agents will be held accountable for what they say and what they put in writing. Thus, if “incorrect” information is provided and a problem develops, your agency may be found liable.

Based on this, clearly education of the agency staff should be at a very high level. There are multiple ways to do this. I know of several agencies that have a training department or at a minimum, staff dedicated to instructing the agency staff on a whole host of important technical insurance issues. For many agencies, this type of approach may not be feasible.  

A good place to start is to do an evaluation of each of the staff and what areas they need further training on. Posing this question to staff might actually be a good approach. In addition, agencies should look to their state agents’ association for technical training. There are also designation courses (CIC, CPCU, etc.) that provide some technical information. One area that is often overlooked is insurance periodicals. Personally, I feel that the insurance industry is blessed with some great periodicals that cover technical topics on a monthly basis.

Bottom line, education of agency staff is a key element in a quality E&O loss prevention program. Dedicating the time and resources should ensure that when the staff are asked the various questions that they are able to respond with confidence and accuracy.

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Moving a book of business to new carriers – a potential HUGE E&O issue!

Virtually every day, agents will move an account to a new carrier. Typically, the basis for the move is due to the desire to get a lower premium for the client. This issue has developed into one of the bigger issues / concerns for E&O carriers. The concern is that when you move an account to a new carrier, there is the possibility that the “new” coverage is deficient in some areas. The best practice is to proactively advise the client (in writing) those areas where the coverage is not as broad as the expiring policy.  

There are other times where the agent is forced to move an entire block of business to a new carrier. Possibly the agency was not meeting the volume requirements of the carrier, prompting the carrier to terminate the relationship or the carrier may have had a major issue with the agency (such as a history of misrepresenting the risk on applications). Also, quite possibly the agency had some issues with the carrier such as their claims practices, their strict underwriting, etc. The possibilities could go on and on.

This now results in the agency needing to move the entire book of business with that carrier to one or multiple carriers. Whether one account or an entire book is moved to a new carrier, the issues are largely the same.

The best approach is to proactively strategize how the agency is going to handle this. The prior carrier may have had excellent rates and thus when moving the account to a new carrier, the client could potentially wind up paying a higher premium. Whether the premium difference is major or minimal, it is probably best to notify the client of the need to replace them with a new carrier and any potential premium issues. If there will be some coverage issues, the client should be advised of these coverage issues in writing (definitely for any reductions in coverage).

When moving an entire carrier book, there is the possibility that multiple carriers will be considered. For each of the carriers under consideration, an analysis of the coverage should occur comparing the coverage to the “expiring”. Some of the coverage differences might be “subtle” due to a difference in the edition dates of the forms. This is especially true for homeowners’ accounts. The analysis needs to be performed. In addition, extreme caution should be exercised on how the message gets delivered. A statement such as “we need to move you to a new carrier and the coverage will be even better than what you had” could come back to haunt you.

Moving an entire block of business to new carriers will certainly be a lot of work involving the completion of new applications, etc. Determining the key steps should make the process go smoother with one of the key steps involving what premium and coverage differences the client will face. Without this degree of strategizing and premium / coverage analysis, there could be a significant number of E&O headaches waiting to occur.    


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What role does claims have in your proposal process?

In the vast majority of new business accounts (especially in personal lines and small commercial), it would not be the norm to include claims in the proposal discussions. However, since claims is where “the rubber hits the road”, it might be appropriate to at least advise the claims folks (assuming that claims is a separate division) of the degree of new business activity.

When the new business accounts become larger, the importance of the role of claims definitely becomes more significant.

For many E&O carriers, statistics are showing that the way agencies handle claims is generating a significant amount of E&O activity. This demonstrates that virtually everyone in an agency has the potential to cause an E&O claim.  

Every agency has clients that generate their fair share of claims. Possibly, the account has a major products liability exposure or has a large property or liability exposure where frequency is the main issue. With new business, this scenario will normally surface when loss runs are secured. If this is the case, an agency should consider including the claims person in the sales presentation. At a minimum, the proposal should reference the agency’s claims staff and their expertise. This is also a good time where the claims staff should be aware of this new business opportunity.

Let’s presume that the agency secures a medium to large account that has a history of claims frequency. Let’s include in the presumption that the claims department in the agency knows nothing about the risk. Now the claims start pouring in and the claims staff is totally unaware of this new business account. This increases the possibility that these claims could overwhelm the claims staff resulting in a “less than totally professional” handling of those claims. When these “missteps” occur, there is greater potential for a problem that could result in an E&O claim.

Conversely, from time to time, an agency may lose one of these accounts. When these accounts leave your agency, is the claims department notified? Without this type of notification, the claims staff could continue to be involved in the handling of claims when they should not be.

Every agency plays a role in the handling of claims, whether that role is direct handling or an advocacy role for those situations that warrant it. For new business accounts, accounts that you lost or possibly where the account was moved to a new carrier, agencies should consider involving their claims department in the process. This level of communication should result in a more client-centric outcome.   

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Are you inputting the information correctly?

As one could certainly imagine, the completion of the app to secure coverage is critical. Specifically, the data and the information on that app are the key elements. Whether the application is completed on-line or otherwise, the carriers are implicitly counting on the accuracy of this information to determine acceptability / pricing, etc. As noted by the following actual E&O claim, when that information is not accurate, bad things can happen.

This claim arises out of allegations that the agency erroneously reported a commercial property as 80-99% sprinklered in an online application, resulting in the policy being issued with a Protective Safeguard Endorsement. The problem was that the property was, in fact, not sprinklered.  The app was incorrect.

The property sustained a fire that rendered it a total loss. When the claim was submitted to the carrier, it was denied based on a violation of the Protective Safeguard Endorsement conditions in that the property did not have a working sprinkler system. An E&O action was subsequently filed against the agency, alleging the agency presented false information to the carrier, resulting in an inappropriate endorsement being added to the policy that left the client without coverage for this loss.

How could an “error” like this occur? Was it intentional in an attempt to secure better pricing? Was it a situation where the producer never visited the risk and thus counted on the prospect to provide the correct information? The answers to those questions are not known.

Bottom line, the client suffered a total loss and there is no insurance to respond. The agency faces an E&O claim for which they may be found responsible.

If the application was completed based on information the client provided over the phone, this type of information should have been confirmed back (in writing) to the client and the client asked to review and verify its accuracy. If the application was completed on site, the producer should have asked to see the sprinkler system and the prospect should have been requested to sign the app, whether a signature was required or not.

Due to the level of importance that an application plays in the securing of coverage, honesty is the only way. The information needs to be 100% accurate regardless of how the application is provided to the carrier.

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Do the wholesalers you use have E&O?

Probably over the last month or so, insurance agencies have received letters from their wholesalers / MGA’s, etc. requesting evidence that your agency has E&O insurance. They will typically require a certificate verifying this coverage. Ironically, it has not been common practice for agencies to be asking these same intermediaries for evidence that they have E&O coverage.

That should change. Agencies should have an annual process of requesting wholesalers etc. for two items:

–     Evidence of E&O insurance (with an “A” or better rating per A.M.Best). It is suggested that agencies require wholesalers to have at least $5mil limit. This is not to say that the agency would not use the wholesaler if they had less than $5mil. However, what if the retail agency were to find out that the wholesaler does not have any E&O? Could this determine whether the agency would want to continue to do business with the wholesaler? It probably should.

–     Verification that the intermediary is complying with the state licensing requirements.

For some agencies, this may be an arduous task. An option would be to build into the agreement / contract with the intermediary a requirement for the two items mentioned above.

There have been E&O claims where it was alleged the agency was responsible for placing coverage through, or sending clients to, a company that fails to meet its obligations. Securing evidence of E&O and licensing compliance would certainly help to alleviate these types of  claims.   


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Are you holdings your customers accountable?

Is lack of customer accountability an issue in your agency? Do you have agency staff  asking the question – “why do customers always make us feel like it is our fault when they have a loss that is not covered? They knew that they didn’t have that coverage”. This seems to be one of the bigger frustrations among insurance agencies.

An agency will be hard pressed to hold their customers accountable without a file that is well documented. However, documentation by itself will not get it done. It is important to realize that when an E&O claim happens, the E&O carrier will look to secure the actual file in question (paper or electronic) to see what it looks like and what is included. Solid documentation will make the E&O carrier’s job much easier.   

Probably a day does not go by where there is some degree of client interaction. Customers are asking questions, modifying coverages, etc. Obviously these questions (and the answers provided) should be documented in the agency management system. In addition, requests to delete or decline coverage or to modify coverage in some manner should be documented as well. But documentation in the system is not enough!

Without some form of documentation that confirms or memorializes the discussion, mistakes can occur. Let’s take the scenario that the customer declined the personal umbrella proposal that you recently provided them. One solution is to request the customer send a note to reflect this; another solution is to send the customer a note! Something to the effect of the following:

“per our conversation of (date), you are declining the personal umbrella proposal we recently provided. If I misunderstood you or this is contrary to your understanding, please contact the agency immediately”.

The goal here is to attempt to address any potential misunderstandings between what the customer told you or thought that they told you and what you heard.

Has your agency ever had the scenario involving a commercial customer where the customer orders the package, the auto and the workers compensation but states “let me think about the umbrella and I will get back to you”. These conversations need to be very clearly documented not only in the agency system but with some form of written documentation between the agency and customer reflecting the customer’s decision. A document stating “at this time, per your request, the umbrella coverage has not been placed” really does not take that much time to produce yet it can have such a profound impact on an E&O claim if one develops.

How about the scenario involving the completion of an app? Since the best type of documentation involves something with the insured’s signature on it, holding customers accountable is enhanced when an agency can get the customer’s signature on a document. This is why getting customers to sign applications is so important. In virtually all legal jurisdictions, a customer is going to be held responsible for the accuracy of the information in an application if they signed it. A solid best practice is to require that the customer review the application and if everything looks in order, to sign it.

Enhancing the agency proposals can be a great way to hold customers accountable. Three great approaches include:

  • Offer a variety of options. Don’t just offer a proposal for a $1mil umbrella; offer multiple options – make them choose the limit they want.  
  • Include definitions of key insurance terms.
  • Include specimen policies / endorsements. This allows your customers to read the actual forms that will be part of their insurance coverage.   

Enhance your E&O culture by making your customers more accountable.

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Does reporting an E&O claim / incident mean your E&O premium will go up?

This is an often asked question and thus obviously an area of concern. Unfortunately, it is not a question that is easily answered as the end result may depend on a variety of issues including the facts and circumstances of the E&O matter.

First, for those agents that are maybe reluctant to report an E&O matter to their E&O carrier for fear of an increase in their E&O premium, it is vital that you understand what the policy conditions of your E&O policy state about this. Most (probably all) E&O policies require that an E&O matter be reported to the carrier as soon as possible. This requirement is to allow the E&O carrier to do their due diligence and to contact key parties while the issues are still somewhat fresh in everyone’s mind. In all honesty, this is beneficial for all parties. A quality E&O carrier provides more than just a policy; they should play the role as a resource to give agent’s piece of mind on potential claim issues. They will provide guidance including the possible assignment of defense counsel depending on the facts. Not reporting the E&O matter to the E&O carrier because you think it is going to go away is not the approach you want to take.

So the E&O matter gets reported. How this affects your E&O premium will probably be based on a variety of issues including the length of time you have been with that carrier, your past loss history and the facts of the case. If it looks like your agency is not going to be liable, there is now a greater chance that your premium will not be affected. However, if there is evidence of some reckless handling of the client file and the claim has some severity to it, these are typically the circumstances that could increase your E&O premium. Based on the facts, there is the possibility that the agency could face a non-renewal but those outcomes are rare.

It is always suggested to report the matter to your E&O carrier and provide them with an accurate picture of what happened. If it looks like the agency is going to be found liable, advising the E&O underwriter what you learned from the matter and what changes you are planning on making is suggested.

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Picking an E&O carrier

For insurance agencies, your E&O protection is one of the most important coverages your agency will purchase. Without the proper protection, a significant E&O claim could prompt the agency to go out of business. So, the selection of where you place your E&O coverage deserves a tremendous amount of focus and analysis.

There are many E&O carriers in the marketplace, some that have been selling this product since the 60s and 70s and others that are somewhat new to the market. The sheer number of E&O carriers can be overwhelming. For this reason, it is wise to have a list of the key issues that are important to your agency.

A good starting point for many agencies is to look at the carriers that your agent’s association has access to. These carriers have been vetted and typically have shown a commitment to the market. Since E&O carriers may have different underwriting appetites, typically the agent’s associations are going to have 2-3 carriers, if not more based on the size of their state.

In the world of professional liability, there is no standardized policy form so you can count on the various carriers having different policy forms. When getting proposals from a variety of E&O markets, agents should be sure to ask for a specimen policy. This will enable the agent to review and compare the coverage forms of the carriers. Some key areas in the policy form to review include: 1) what professional services are covered, 2) the definition of “who is an insured”, 3) what limits / deductibles are available 4) is the policy form a “claims-made” or a “claims-made and reported” form (key differences between the two), 5) what “tail” options are available and 6) what additional coverages can be added onto the policy such as employment practices / cyber etc.

While the E&O premium is certainly going to be part of the decision process, agents should be extremely careful about putting too much weight solely on this issue. There is certainly the possibility that if the premium is low, the coverage may extremely limited and contain some gaps in areas that are important to your business. In other words, “you get what you pay for”.

It is always suggested to look at the length of time that the E&O carriers have been writing this type of business. A significant duration shows a commitment to this class of business. Writing E&O coverage is not for the faint of heart. The duration also demonstrates that the carrier understands this type of business and has built a claims operation that is there to provide “piece of mind” when a problem develops.

Managing an insurance agency is hard word and thus agents need access to knowledge and expertise to help them build their own E&O culture through loss prevention initiatives. Some carriers have tools that are available at no cost to help agents identify “E&O hot spots” within their agency.

While the E&O carriers are probably going to interview your agency to help them better understand your operation, don’t hesitate to interview the E&O carrier underwriter that you will be dealing with. You want someone that has solid E&O knowledge and can answer your questions as they arise. Part of the interviewing process should include better understanding the carrier’s claims operation since really at the end of the day, this is where the rubber hits the road.

Selecting your E&O carrier and the coverage they provide is probably one of the most important decisions your agency is going to make. Dedicate the time to ensure that you make an educated decision.

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