Do you have established written procedures for your E&S business?

For as long as the insurance industry has been around, the Excess and Surplus Lines (E&S) marketplace has played a key role in helping agents place a wide array of coverages. But with that value certainly comes some uniqueness and with that uniqueness comes some E&O risk.

To minimize the risk, it would be prudent for agents to include in their procedures manual specific references to the E&S industry. For those agents that don’t have a procedures manual, it is highly suggested that procedures still be established and submitted in writing for all agency staff to reference when handling this type of business.

Some key issues that should be referenced:

The app. While many carriers will accept an ACORD app to provide a proposal, there is the definite possibility that they may need their own app to bind coverage. Agents should look to determine this issue as early as possible. Often times, if the carrier is going to require their own app to bind the risk, this will be referenced on the proposal from the wholesaler.

When to submit the app. The timeliness of when the wholesale / E&S market can provide a proposal can vary based on the status of the marketplace. It is suggested to allow sufficient time (45 – 60 days is suggested) and then follow up for the status.

Review of the coverages proposed. Is the coverage what you asked for? This is one of the more common key issues that agents need to be aware of. There is a good chance that the coverage you requested is not the exact coverage the market quoted. There should be a thorough review of the proposal as it may contain some exclusionary / limiting type endorsements. If the reference to some of the endorsements does not really tell you what is actually being excluded (or covered), it would be best to secure specimen forms to review. Including these forms with the proposal is recommended.

The agency proposal. Since retail agents are technically not the agent of record (the wholesaler is), the retail agent does not have the authority to bind the risk. Thus, the retail agent is going to need some time to contact the wholesaler (who may need to contact the E&S carrier) to get the coverage bound. Many agents include on the proposal the date when a decision on the coverages needs to be made to allow the retail agent time to get the account bound before the effective date. It is important to note that in the E&S / residual market place, there is no backdating of coverage.

Binding the risk. As just noted, retail agents do not have the authority to bind the risk. They also do not have the authority to issue binders so if a binder is going to be needed, the wholesaler should be contacted to handle that.

The policy. The policy should be reviewed to verify that it matches the coverages that were agreed to. There is the possibility that a “new” endorsement could find its way onto the policy that could have a material effect on the coverage.

The E&S carrier. There are many E&S carriers that do a fantastic job. They may not be household names so due diligence should be exercised on these carriers (financial rating, length of time in business, etc.).

Bottom line, agents need to know the “rules” and do their homework when dealing with this segment of the marketplace. To ensure consistency in the handling of this type of business, the agency should establish and provide the staff with those written procedures.

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Are you preparing for the technology of tomorrow?

The insurance industry will definitely look a lot different over the next 10 years as technology advancements and the greater application of artificial intelligence become more a part of the industry’s culture.

This is an excerpt from an article authored by Denise Johnson that appeared on on August 13 that spoke to how technology is going to impact the claims handling process.

“A March 2017 LexisNexis whitepaper on the future of claims technology defined touchless claims as “a process or workflow that is similar to Virtual Handling except no claims adjuster or insurance carrier employee is involved in the claims process at all. Technology is used to report the claim, capture damage or invoices, run a system audit and communicate with the customer electronically. If the claim meets approved criteria, the claim is automatically paid without human intervention.”

Continue Reading Bolstering the Claims Process With Touchless Claim Technology

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Is Education one of your 2019 goals? It probably should be.

Around this time of year, most agencies start to give some thought to their goals for the next year. There is a good chance that they will come up with several initiatives and since some of these may involve some degree of financial investment, the agency would probably want to budget for the anticipated costs. The same holds true for giving serious consideration to the establishment of a few E&O goals – issues that will enhance the E&O culture and provide a higher degree of E&O protection.

For every agency, the goals will probably be different based on where that agency is in their E&O loss prevention efforts. One that I want to focus on involves Staff Education.

In preparing for a speech I will be giving in Atlanta in September, I read a report by McKinsey & Company that addressed what insurance might look like in the year 2030 (it will be here before we know it) and the impact of artificial intelligence. One of the predictions they arrived at was “The number of agents is reduced substantially as active agents retire and remaining agents rely heavily on technology to increase productivity. The role of agents transitions to process facilitators and product educators”.

It is that last statement that I want to focus on – agents will have more of a role as product educators. Clients will want to better understand their exposures and how insurance can insure those exposures. This seems to strongly imply that those agencies that have a higher level of education focus will be the agencies that will survive and thrive in tomorrow’s world.

Every day, clients are looking to your agency for knowledge and expertise. To provide that, the applicable staff need to possess that knowledge. Growing in technical knowledge is certainly very important. Other staff education issues might include improved customer service skills and automation skills.

Without a doubt, staff and client education is today extremely important and will continue to grow in the level of importance towards the future survival of independent agencies.

Where does your agency stand on the issue of client education? Where does your agency stand on the issue of staff education? 2019 might be a good year to take the importance of this issue to the next level.

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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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