E&O HOTSPOTS 2013 and beyond.

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Curtis Pearsall

Pearsall Associates Inc.

Special Consultant to the Utica National E&O Program [email protected] www.agentseotips.com

E&O HOTSPOTS

– 2013 and

beyond….

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E&O loss control

What is the commitment / culture of

your agency? Is it stronger today than it

was last year at this time?

What is your

personal

commitment to

E&O prevention ? Is it stronger today

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 Brief overview of the latest E&O stats / trends –

overall & state specific

 Discussion on many hotspots that are currently

causing significant E&O claim activity and some that are projected to hotspots in the near future) and

what can be done to prevent them from causing you an E&O claim

 What can be learned from “Sandy”

Agenda for today’s

session

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What are those Hotspots?

 How agency claims staff are causing E&O claims  Additional Insured – why this issue isn’t going away

 What you need to know regarding following up on your customer’s non-pay notices

 Guess who is suing agents today?

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 What can happen when you don’t perform the Mirror Test  Are you using words that could get you into E&O trouble?  The latest E&O issues involving dogs / valuation

 Why documentation really is the key

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 Excess & Surplus Lines / Residual markets

 Social Media – is this tomorrow’s next big E&O Hotspot?

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 Frequency- E&O claims (Utica) down slightly in 2013 as

compared to 2012

 Overall, in 2013, frequency is 2.1% in North Carolina

and 5.1% countrywide

 Severity- Overall average (all claims) - $52,000

 plus $12K for defense costs (this doesn’t mean that you won’t be the agent that gets hit with the “big

one”)

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

50% by producers



50%

by the rest of the staff (CSR’s,

receptionist, claims staff, etc.)



Anyone in your agency immune

from causing an E&O claim?

Who in the agency

“makes” the claims?

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HOTSPOT

# 1

How agency claims staff are

causing E&O claims

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 Issues:

◦ Customer advises agency not to file claim

 Does it make a difference whether it is a 1st or 3rd party claim?

 Document the conversation in the agency system but it is critical that you also document the discussion in written communication (letter / e-mail, etc.) back to the customer

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 Issues:

◦ Not realizing other policies that might be impacted by claim

 All policies should be reviewed for possible coverage

 Put those carriers on notice

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 Issues:

◦ Agency staff denies the claim – believes that it is not covered or that it technically is not a claim

◦ Advising a customer that the claim was covered only to find out it was not

◦ Improper coverage interpretation ◦ Failure to professionally handle

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HOTSPOT

# 2

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 Issues:

◦ Blanket additional Insured

◦ Certificates of Insurance

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What is an Additional Insured ?

They are commonly referred to a person or organization provided the status of “insured” by endorsement.

Oftentimes, an endorsement is necessary that specifically requires identification of the entity. Upon pulling the file, you note that Blanket Additional Insured coverage is

provided.

Are you all set…? Maybe not!

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Most Blanket Additional Insured endorsements require that there be a written agreement or contract that requires the entity to be added as an Additional Insured. Without a written contract, the Blanket Additional Insured coverage does not afford additional

insured status.

This is a common error by agencies, especially in the handling of Certificates of Insurance.

Also, it is important to note that merely checking the box on the

Certificate of Insurance form does not afford Additional

Insured status. This is one of the main reasons why mishandling

of Certificates of Insurance are today resulting in approximately 4% of all E&O claims.

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Always check your customer’s written agreement

before issuing a Certificate of Insurance

to ensure that you are indicating the proper coverage.

If you need to indicate coverage for an Additional Insured on a Certificate, verify with the carrier in writing that they

will provide such coverage.

Make sure that this conversation with the carrier is

documented not only in your file but also by sending the carrier an e-mail summarizing the discussion and

understanding.

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What if you don’t have the agreement or the AI doesn’t know if there is a written contract / agreement

Include on the Certificate of Insurance

“coverage as an additional insured is provided if required by written contract”

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Other important issues to understand / be on the lookout for…

◦ If the policy has been endorsed to provide coverage for an AI (or afforded under the Blanket AI form), with the exception of policy limits, the policy applies to each insured as if the insured is the only insured.

Also, the policy exclusions that apply to the Named Insured also apply to the Additional Insured.

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◦ What if the Additional Insured also has their own coverage?

If the “other insurance” wording is ISO on both policies, when an insured has been added to the CGL of another, they are afforded primary coverage and their own policy would then be considered excess. This presumes that they have been added as an additional insured via

endorsement.

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◦ Make sure that the person signing the certificate is

licensed in the state where the client is doing business (do not have the system sign the certificate – review them)

◦ Make sure that you have the ability to pull up an old cert on the form in existence at that time (does your systems do this automatically or do you need to adjust the

settings?)

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◦ The difference between some company Additional Insured forms and ISO.

Not all Additional Insured forms are the same. Some of the specific carrier forms are very narrow in coverage and thus could result in your insured not being in

compliance with the requirement.

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HOTSPOT

# 3

Following up on non-pay

notices – what you need to

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What is your duty to F/U ?

The need for consistency

What constitutes Burden of Proof?

Non-pay notices

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Your duty to F/U – you are under no obligation –

But once you undertake the duty, the duty is yours

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The need for consistency:

Should not “discriminate” between customers

(calling some but not others)

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The burden of proof is on your agency to prove

that you made the call.

Is a phone call enough?

What if you get an answering machine?

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HOTSPOT

# 4

Guess who is suing

agents today?

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- Insurance Companies (and not just your own) - Property owners, Contractors, Subcontractors,

Maintenance Companies

- Banks / Credit Unions

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Agents are increasingly being brought into coverage cases especially where its initial claim investigation

reveals discrepancies between what the insured says and what the agent says

This allows the insurer to argue, essentially, that it has no coverage obligations to the insured for specific reasons but if the Court finds otherwise, it is

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Insurers still bring the more traditional claims arising out the agent’s breach of an agency agreement where the insurer claims that the agent’s wrongdoing

exposed it to a risk that it would not have otherwise agreed to insure

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Claims are being brought against agents by insurers of third parties

Insurers are increasingly looking for ways to avoid coverage by transferring risk

Insurers will review contracts to determine if its insured is entitled to indemnity from another party, or

if its insured has coverage as an additional insured on someone else’s policy

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If a party who is “supposed” to be an additional insured on another policy is not and a party who is

entitled to contractual indemnification has no

recourse against the indemnifying party (because it lacks the proper coverage), the agent of party X who

was supposed to have made party Y an additional insured is probably going to be blamed.

It is party Y’s insurer who is going to be doing the blaming. They will be doing what they received a premium to do (defend and indemnify) but looking

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Agents customarily prepare binders in connection with real estate transactions

Due to the economy, an increasing number of individuals and businesses are failing to maintain property insurance on

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If an owner of a mortgaged property allows coverage to lapse (be cancelled / non-renewed), what happens

in the event of a fire resulting in a total loss ?

The owner may be able to walk away, having no equity in the property to lose, and may be judgment proof. The bank has

insufficient security to cover the outstanding debt.

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Banks are relying on binders, certificates, and any other documentation they can find in these situations (or other

resources – such as the agent’s E&O policy) as a replacement for the property coverage that had once

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Due to the expansion of risk transfer, multi-level contracts in the fields of construction and property

maintenance are wreaking havoc on insurance agents –

Especially the agents for the lowest-ranking subcontractor

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On a large construction project, it is commonplace for the owner to require additional insured status on

the project manager’s policy, as well as contractual indemnification from the project manager.

The project manager will, in turn, impose those same requirements on subcontractors who will

impose those requirements on second tiered subcontractors

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If an employee of a second tier subcontractor gets injured on the job, anyone and everyone in the chain is likely to be

named as a Defendant in a lawsuit

The owner, project manager, and subcontractor now look to the second-tier subcontractor / employer to take over their

respective defenses and to indemnify them.

The entire case now falls on the shoulders of the second tier subcontractor

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If the second tier subcontractor’s policy doesn’t cover these parties…

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Agents do sue other agents for errors and omissions – typically this occurs when one agent is (perhaps wrongfully) sued and

the liability arguable rests with another agent.

The more troubling agent vs agent case is where the agent that is actually liable tries to shift the blame or spread the

exposure by claiming that the error giving rise to the claim began with the prior agent.

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Example:

Agent A writes E&O for an Accounting firm with full prior acts

Agent B takes over account and to save account premium, changes coverage to a current retro date (2010),

not full prior acts

Agent C takes over account and due to the manner in which Agent B wrote the coverage (no full prior acts, the best that

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Example:

The Accounting firm is sued for something that did in 2008

Due to 2010 retro date, there is no coverage

Agent C gets sued but turns around and sues Agent B because they did not write the coverage correctly

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Wholesalers are also being implicated in E&O claims,

oftentimes by the retail agent who claims that the policy that was procured was not the policy that was requested.

These are not easy to win since the wholesaler advised the retailer on the proposal what coverage they could provide –

heavily up to agent to identify any “gaps”

Do your wholesalers have E&O? Ask them for a certificate. After all, they are asking you.

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Let’s take a

10 minute break

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HOTSPOT

# 5

The Mirror Test – what

happens if you don’t do it

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What is it?

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There is no doubt that over the last number of years, to retain accounts, you may have had to move them

to a different carrier

When you do so, it is key that you analyze the coverage differences and

bring them to the customer’s attention

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This actually applies to

both personal and commercial accounts

Some of the common differences:

Sub-limits

Coverages / endorsements

Exclusions

Carrier rating

Method of payment (agency vs. direct bill)

The Mirror Test

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Problem can occur even when you keep the coverage with the same carrier

Example: E&S

The carrier modifies the coverage by including a new exclusion on the renewal. Since there is no conditional

renewal notice requirement, it is key that your office identify the difference on the renewal policy and

notify the customer

Best to do that before you bind the coverage to avoid any minimum premium issues if the customer advises you

that they don’t want the coverage

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HOTSPOT

# 6

Why Documentation really

is the key

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Nothing impacts the resolution of an Agents E&O claim as much as the documentation in the file in question.

What is the commitment to documentation in your agency? Is it documented?

Does every member of your staff know what is expected of them in this area?

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When an E&O claim is made against your agency, your E&O carrier is going to ask for your agency file.

A well documented file (timely and accurate) provides the tools for a solid defense.

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Documentation

There are a host of areas where the issue of documentation is extremely important… Some situations to be on the lookout for…

Customer interactions

Availability of coverage

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Documentation

The best type of documentation involves something with the insured’s signature on it.

This is certainly realistic if the customer is in your office or you are personally meeting with them.

If you are not physically meeting with them, it is advisable to send the client a note / an e-mail stating:

“per our conversation, we are deleting coverage for “x” today. If this is contrary to your understanding,

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Documentation

Customer Interactions

Examples:

Phone calls where the customer brought some issue to your attention (i.e. Do I need to tell you if my son

is taking the car to college?)

Questions on coverage (i.e. how does co-insurance work)

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Documentation

Availability of coverage

Where the issue involves limits or additional coverages, the insured should be informed of the options to enable

them to make an educated decision. Rejections of coverage / limits available should be signed off.

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Documentation

Exclusions

Where the insured is advised of various exclusions, the file should be noted that this was done. This documentation will be extremely valuable if the insured alleges that they

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Documentation

Deletions of coverage

When an insured requests coverage be deleted, the insured should be asked to send a note advising you of their wishes. If not, confirm back to them in writing your

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Documentation

Important information

If the insured contacts you to advise information that is of value, this should be noted in the file and confirmed back

to them.

Example: Insured calls to tell you that they did not have any losses over the past 5 years, this should be

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Documentation

Moving the account to another carrier and the

coverage is not of the same level

Very important to document when this occurs as after a claim, the customer may disavow any knowledge that

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Documentation

Interaction with your carriers / wholesalers

Extremely important to document these conversations as there have been numerous E&O claims where there was

a dispute as to who said what

Example: Account is outside of the carrier binding

guidelines – the underwriter okays your agency binding the account. This should be noted in the file and

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HOTSPOT

# 7

“Using” words / phrases

that could get you into

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Impacted by not only what you say

verbally

but also what you say about the agency

in print

The words / phrases you

use

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What words / phrases

could get you

into trouble?

The words / phrases you

use

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Words:

“expert” / “specialist”

Phrases:

“We will make sure that you are properly covered”

“Nothing can happen that you won’t be insured

for”

The words / phrases you

use

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What are the consequences – could they be

taking your relationship to the next level?

Legal Liability

(standard vs.. special relationship)

The words / phrases you

use

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An overview on the

responsibilities of the

Insurance Producer

and

the Client

in obtaining

an Insurance Policy

Foundation of Legal Liability of the

agent / broker / the insured - NC

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Legal Liability - Agent

An insurance agent has a duty to exercise reasonable diligence in discharging his duties to his principal, and one such duty is for the agent to devote his/her time and

energies with that degree of diligence and attention usual among industrious business men engaged in a like

business; breach of such a duty subjects the agent to liability for resulting damage to his/her principal.

NC law regarding liability of an

agent in procuring insurance for a

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An insurance agent owes his/her clients a duty of reasonable

care and diligence, but absent a special relationship, that duty

does not

include an affirmative, continuing

obligation to inform or advise an insured regarding the availability or sufficiency of insurance coverage.

While an insurance agent owes a duty of reasonable care, an agent can not be held liable for failing to provide

unsolicited advice regarding a client’s ever-changing insurance needs

Where a specific request is made for a particular type of

insurance coverage, an insurance agent owes a duty to provide such coverage or inform the insured that such coverage is not available/excluded

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An insured’s request for “full coverage” or the best policy does not place an insurance agent under a duty to determine the insured’s full insurance needs, to advise the insured about coverage, or to use his/her discretion and expertise to determine what coverage the

insured should purchase.

North Carolina law does not dwell on the term “special relationship” but the law works the same way, and the cause of action would be deemed a

breach of fiduciary duty.

An insured can demonstrate a special relationship by showing that there exists something more than the standard agent-insured

relationship. This depends upon the particular relationship between the parties and is determined on a case by case basis.

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Express agreement between the parties

Long established relationship or entrustment in which the agent clearly appreciates the duty of giving advice.

Additional compensation apart from premium payments

Agent holding his/herself out as a highly-skilled expert coupled with reliance by the client insured

If a special relationship exists, the client must demonstrate not only the existence of the relationship, but also that he/she justifiably relied upon the relationship.

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HOTSPOT

# 8

Homeowners issues:

Dogs

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According to I.I.I., dog bites cost the insurance Industry $489 million in 2012 – avg $29,700 !!

Carriers are filing endorsements to:

- exclude various breeds - include sub-limits

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Problem: One of the issues is the unknown type of breed

(customer may not know)

Solution: Provide your customers with the list of the

“prohibited” dog breeds / post the latest list on your website.

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 Issues

◦ Calculating the right amount…easier said than done!

◦ Lack of understanding on the importance of co-insurance by customers (and agency staff?) What does it mean and how does it work?

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 Due to the importance of co-insurance and how it can

significantly impact a claims settlement, be certain the staff (CSR / Producers) is knowledgeable

 Utilize an upcoming staff meeting to discuss this and talk

thru the importance. Discuss how to respond to a

customer that asks “I see that my policy has a 80% co-insurance clause…what does that mean?”

 The loss does not have to be a total loss for

co-insurance to apply

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How about something like this?

VisualizingCoinsurance.xls

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 Educate your customers on the concept

 If your property proposal contains co-insurance, include

a claim example on how this work. Impress upon the customer the importance of ITV (Insurance to Value).

 Also include definitions on ACV (Actual Cash Value) or

RC (Replacement Cost) so that your customer understands how these will apply at claims time

 Include the spreadsheet (visualizing coinsurance.xls) on

your website when providing a full explanation on the concept

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 Calculating the correct amount.

◦ Take the time to do this at the onset of coverage (and any subsequent anniversaries).

 Using the company approximator tool (MSB is very common). These are a great starting point and

proper use should result in a quality output.

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 Company approximator.

◦ The quality of the output is directly attributable to the quality of the input. Ensuring that you have full and correct information is key. Take the time to secure the necessary data…if possible, visit the property personally and ask the necessary questions regarding construction. ◦ Incorrect square footage, construction type can lead to a

questionable output. Also, the answers to questions dealing with quality of construction (customized vs..

standard) will also produce a questionable output. If the building has a degree of uniqueness, the use of a

licensed appraiser may be the best solution.

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 Include a disclaimer that the limit determined is based on

the information provided and that the agency cannot attest that this limit will be sufficient to pay the full amount of a loss.

 For the agency staff: Be extremely careful (and

document your discussions) if you are asked whether the property limit is sufficient. In the event of an

underlying claim where it was determined that the limits were inadequate, the client will allege that they relied on your advice to their detriment.

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Let’s take a

10 minute break

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HOTSPOT

# 9

-

Excess & Surplus Lines

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This segment of our industry serves a vital role but….. There are some real issues that have

the potential to cause major problems

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Among those issues:

 Classification Limitation endorsement  Binding / minimum earned premiums

 Lack of conditional renewal notices  No back dating

 How well do you know the carrier / no Guaranty Fund

(except in NJ)

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Classification Limitation endorsement

This form is very common on GL policies

Coverage is restricted and applies only for those activities included under the listed classification.

If you are insuring a painting business and they only handle inside painting, the Classification Limitation endorsement would limit

coverage only to that type of work. If they performed some

outside painting (a separate SIC code), there would be no coverage for any claims arising out of the outside painting exposure.

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Binding / Lack of authority

You do not have the authority to bind risks – only the wholesaler / carrier can

Ensure that it is bound with the wholesaler / carrier before you advise the customer

Once it’s bound, there will probably be a minimum earned premium – make sure your customer wants the coverage

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Lack of conditional renewal notices

Unlike the admitted marketplace, E&S carriers do not have to provide advance notice of policy form changes or limits changes

Your agency needs to be proactive in this area

- Ask the wholesaler in advance whether they anticipate any changes

and if so, what are they

- When you receive the renewal terms, ask them if there are

differences (document what they tell you)

- Be on the lookout yourself

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Lack of conditional renewal notices

Don’t expect the renewal policy to look like the expiring – chances are it doesn’t

If there are changes, bring these changes to the customer’s attention and secure their approval (preferably in writing)

before you bind the coverage

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No back dating of coverage Meeting deadlines is key!

You need to bind the coverage before the expiration date. If you bind it after the x-date, the day you bind it will be

the new effective date.

If a loss occurred in the interim, there will probably not be any coverage

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The carriers

Except for NJ, the State Guaranty Fund does not provide protection if E&S carrier is declared insolvent –

need to know the financial condition of the carrier

When you receive proposals from your wholesaler, be sure you know who the carrier is / what their rating (AM Best)

is!

Is insolvency of E&S carriers covered by your E&O carrier?

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FUTURE

HOTSPOT ?

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The Power

of

Social Media

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This media has tremendous

marketing potential

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The Issues

to be

on the Lookout For

Social Media

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The rules:

There are “rules” ??

Social Media

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There is no norm to

the look and feel of a site –

may be limited or very robust

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Can contain videos, photos, links as well as

your content

Can involve chat rooms, blogs, forums, etc.

Social Media

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Proper planning

and

Execution

are key !

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Let a guide be your guide

Should include any media you use (e-mail,

face-to-face, online forums, chat rooms,

blogs, etc.)

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Guide should include:

-

do’s and don’ts

-

who has permission to use it on behalf of

the agency

-

acceptable behavior

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Guide should include:

-

A very strong statement that employees

are not to reveal secrets about the agency

or to speak ill of the competition

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As with e-mail,

correspondence via social media exists

forever

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Education is a common objective

- Information needs to be carefully constructed / proofed for content, accuracy, professionalism and legality

- Inappropriate / defamatory comments involving specific people / organizations must be avoided - Very negative to your reputation

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Guide should be prepared to advise your customers on the role of social media in the agency

Notify them upfront the do’s and don’ts of using

social media to communicate with the agency

Advise them not to make any policy change requests or provide key information via social media

Advise them that they cannot bind, modify or delete coverage via social media

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Marketing your agency using social media

–

a very common objective / a form of advertising

To give you a positive brand, content needs to be accurate, truthful, professional and positive Ensure that you comply with state statutory and

regulatory guidelines

Appoint a “point person” to oversee / proof the material

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Avoid stating that you are an expert –

has the potential to raise the standard that

you will be held to

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If you are posting articles on the web,

ensure that they are from reliable sources

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Blogging?

Comments should be accurate and proofread

“Homeowners policies do

not

cover

flood claims”

vs..

“Homeowners policies do

now

cover

flood claims”

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Blogging?

Advise your employees not to blog about

something disclosed to them

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Reminder:

Proper planning

and

Execution

are key

Social Media

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Super Storm

Sandy

(123)

What has been the E&O activity?

What did some agents do well - is there anything

that some agents could have done better?

(124)

Where will the next catastrophe be

and

what will it look like?

(125)

No one knows !

This is why we all need to be proactive in

minimizing the E&O potential when it does strike

!

(126)

Nothing brings out an agents

“mistake” as quick

as a catastrophe !

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What is the potential that your office could actually

be affected ?

Will your files / records survive ?

(128)

There has been some definite E&O activity to date

Flood is the # 1 line of business most affected

(personal & commercial)

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“Failure to place” / “Failure to provide”

the most common allegations

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Some of the specific “allegations”:

- Wrong address / location was listed

-

No coverage as property was in

known flood zone

-

Telling customers flood policy was in force

when it was not

-

Writing excess flood with no primary policy

in effect

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Many agents took some great steps to:

Educate

then

document

(132)

Unfortunately, this does not stop some customers

from bringing E&O litigation against their agent

Why does this happen?

(133)

You don’t have to do anything wrong

to get sued !!

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Some of the good “stuff…

Client was advised in writing that the flood policy provided coverage for building but not contents