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Avoiding E&O Claims -
it is all about the details
Curtis M. Pearsall , CPCU, CPIA, AIAF Pearsall Associates Inc.
Special Consultant to Utica Mutual E&O program James T. Scamby, Esquire
Heifetz Rose LLP
` General overview of the E&O Climate / stats / claims trends
` Dissection of two E&O claims involving: Pollution & Ordinance of Law coverage
x What were the key issues that determined the direction of the E&O claim
x What did the agent do well
Included will be the impact (positive and negative) of:
` Documentation
` Electronic Signature
` The agency proposal / the E&S proposal
` Industry Designations – does it raise the standard ?
` Exposure Analysis Checklists
` “Special Relationship” – is it “special” in a “bad way” ?
` Application misrepresentation
` The importance of policy checking and prompt policy delivery
` Claims frequency…what are main drivers ?
` Who in the agency is “causing” the claims?
` Any trends on the horizon?
` Claims severity – a significant issue and what you need to do about it
` Frequency — nationally 6.2 claims per 100
policies – 1 out of every 16 - generally flat over the last 5 years or so…
` In Mass, frequency is 6.2% (2014 ytd),
down from 6.4% in 2013…
` Severity- Average (national) is $60,000 +
`
50% by producers
`
50% by the rest of the staff (CSR’s,
receptionist, claims staff, etc.)
`
Is anyone in your agency immune from
causing an E&O claim?
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 than it was
last year at this time?
What is the
Standard of Care
of a Mass agent
Foundation of Legal Liability of the
agent / broker / the insured - MA
An overview on the
responsibilities of the
Insurance Producer
and
the Client
in obtaining an Insurance Policy
Standard of care
y An insurance agent is not required to:
- provide an insurance policy that would cover all possible contingencies
- advise an insured with respect to coverage options
- advise the insured as to every exclusion contained in the policy Ordinarily, of course, an insurance agent assumed only those duties normally found in an agency relationship, including the obligation to deal with his principle in good faith and to carry out instructions, and he assumes no duty to advise merely by such a relationship.
Standard of care
Absent an agreement to the contrary, an agent has no duty beyond what he or she has specifically undertaken to perform on behalf of the client.
An agent does have a duty to inform their client if they cannot obtain the requested coverage.
Legal Liability of the Client
y Upon receipt of the insurance policy –
- A client must read and understand the policy content, provisions, duties and exclusions
- A client should contact the agent to make any additions, alterations, and modifications to the policy
Insurance Consumer Duties
` To bolster this presumption of the insured’s assent to the terms of a policy, the agent/broker should promptly send the complete policy to the insured and in the cover letter urge the insured to fully review the policy including the declarations and endorsements for accuracy and to the extent that the insured has any questions on the policy contents, the policyholder should immediately contact the producer.
Special relationship
If a “special circumstance” is present in the agency relationship, the insurance agent may possibly be under a duty to take some sort of affirmative action, rather than just follow the instructions of the client. What could constitute a Special Relationship?
- Intimate knowledge of a client’s personal and business endeavors
- Where a client has multiple business’s and agency writes all of the exposures
- Where a social relationship exists – frequent interaction - Where additional compensation is involved
E&O
Claim # 1
Pollution
FACTS OF THE CASE:
• Agent places commercial auto coverage for a local fuel dealer.
• The policy contains a pollution exclusion.
• Agent offered pollution coverage to the customer but the customer declined to purchase it. Agent’s file includes a quote for the coverage and file notes reflecting a discussion with the customer where coverage was declined, but nothing else on this issue.
FACTS OF THE CASE:
• Many months later, after making a delivery, customer is notified that oil has leaked from the property owner’s tank and into the foundation.
• Customer later receives a Notice of Responsibility letter from the Massachusetts Department of Environmental Protection, demanding participation in cleanup efforts. Agency reports the claim and the insurer denies coverage.
• Customer then sues the agency for failing to obtain pollution coverage.
Pollution
Could this type of issue / claim occur in your agency? If so, what have you done to minimize the potential for an E&O claim like this
occurring?
What did the agent do well?
What should the agent have done better?
What was the outcome of this claim?
E&O
Claim # 2
Ordinance or Law
FACTS OF THE CASE:
• Agency procures a businessowners’ policy for an apartment complex built in the early 1970s.
• Upon the agency’s recommendation, the customer agrees to purchase additional ordinance or law coverage in the amount of $100,000 (the base policy provided $25,000).
FACTS OF THE CASE:
• The complex is completely destroyed by fire.
• During the adjustment of the claim, the town determines that the entire foundation must be rebuilt because it does not comply with the State Building Code. The cost for the new foundation, together with other code upgrades, approaches $300,000. The insurer agrees to pay only its policy limit.
• Customer then files an E&O case against the agency for failing to recommend higher limits.
Ordinance or Law
Could this type of issue / claim occur in your agency? If so, what have you done to minimize the potential for an E&O claim like this
occurring?
What did the agent do well?
What should the agent have done better?
What was the outcome of this claim?
Excess & Surplus
Lines
…the good, the
bad and the
ugly…
Has consistently been a segment of the market for coverage not generally available
Has tremendous flexibility in pricing and coverage form
Solid market for professional liability and D&O coverage
Known for their high degree of specialization – this allows for customized coverages and innovative underwriting
Many of these benefits present some issues that agents need to be aware of
The benefits
The Excess and Surplus lines marketplace is a great segment of our industry
Just because the risk is in the E&S market does not mean that the risk is bad
It is different
It is critical that agents
(producers, CSRs, claims staff, accounting staff) understand the E&S marketplace
The difference can hopefully help you write an account
The difference also carries with it some E&O concerns
The need for a wholesaler (or 2 or 3)
Accessing the E&S market requires dealing with entities that have an E&S license – typically this is through the use of a wholesaler
The wholesalers that you deal with will usually be somewhat determined by the type of business you are trying to place
The Guarantee Fund issue
In the standard marketplace, states have a Guarantee Fund which protects insureds in the event of a carrier insolvency. The Guarantee Fund has limitations but still
serves a key role
In the E&S market, there is no Guarantee Fund protection for the insolvency of a carrier (except NJ – there is some protection)….actually the track record for solvency is very good
Potentially opens up some liability for insurance agents if the carrier you placed coverage with is declared insolvent
The issues
Can handle a wide array of customer needs
Not just for commercial lines
Can handle personal lines needs such as a personal umbrella for a high profile individual / celebrity / athlete
Has been known to be a development “breeding” ground for new products (such as EPLI, day care centers, etc.)
The agreement with your wholesaler
Know what is says – what authority does your agency have. Probably will be limited but it is important to know
What is the premium payment expectation? (per account / account current)
Typically your wholesaler will want evidence of your E&O. This is standard. Not a bad idea to ask them
for evidence of their E&O coverage (what if they don’t have any?)
The time line needed to get a proposal (hopefully)
Based on the time of the market (hard or soft) or the time of the year (1/1 and 7/1 are busy times), a wholesaler is going to need varying
amounts of time…
While you may be used to getting a proposal from the standard market in a couple of days / week etc., count on at least 30-45 days
for the E&S market. Don’t wait until you get a declination from the standard market.
The app needed to get (hopefully) a proposal
Many wholesalers / E&S carriers may be able to quote based on an ACORD app or a competitors app but will you be able to bind?
Probably best to find out what app is needed and get that one completed…will save you from running around at the last minute to get
the proper app completed…also helps to address any specific carriers underwriting / informational needs
Ask the wholesaler what markets they are going to use – want to avoid using two wholesalers
with the same markets
The placement
Follow up / communication is critical
Be sure that the application is accurate and complete …nothings kills an agent’s chances of getting an E&S proposal as much as an incomplete app. Also any misrepresentations could cause
some serious consequences, including rescission of policy.
Have some documentation on when the app was sent – it is suggested you contact the wholesaler to make sure that they received the app
Find out who is going to be handling the app in the wholesaler’s shop
Follow up / communication is critical
Follow up again to make sure that all of the necessary information has been provided
Great opportunity to advise the wholesaler their chances of writing the account – wholesalers want / need to write business
Follow up again before your “due date” to make sure that everything is on track to get the proposal with enough time to spare
On line quoting
Many E&S carriers have developed on line quoting capabilities. This definitely speeds up the process
When inputting information, accuracy is still the key
- Is the “quote” really a “quote” or a ballpark # (a/k/a an “indication”)? - Is additional underwriting information required?
- Is the on-line quote “bindable”?
Important to realize that an on-line quote does not
The E&S proposal
“Proposal” vs “Indication” - know “what it is”…
Indication is a “ballpark” number – not bindable
Goal is to determine whether the numbers on the “indication” would be acceptable…before any further underwriting is done
Might be appropriate to review the indication with the customer
The placement
The E&S proposal
Don’t expect consistency in the underwriting of the account by the E&S carriers – the approach / appetite may vary
from one E&S carrier to another
Proposal needs to be reviewed in depth - Secure a specimen policy including endorsements
-Is the coverage “everything you asked for”?
-What are the coverage differences between the various E&S carriers? -Are you moving the account from the standard market
The E&S proposal
What are the conditions / requirements to bind the account?
-Specific app -Premium -Key dates
-Who has authority to bind (the wholesaler vs the E&S carrier)? -Loss control requirements / expectations
The review of the various E&S proposals
For the same exposure, you can expect a difference among the various E&S proposals…be sure to review them to
determine the differences…you will need a specimen policy to do a full review
If you are proposing multiple E&S proposal options, the differences among them should be specifically noted on
the client proposal
Coverage / deductibles / covered services /
Some of the common issues
Complete assault & battery exclusions for hospitality industry clients
Complete exclusions for BI to subcontractors on policies issued to owners, developers, contractors, etc.
Lack of theft and vandalism for vacant properties
Stricter requirements regarding security service and other protective controls when vacancy is involved
The placement
The agency’s proposal
Look to include:
-The carrier and the fact it is an E&S carrier
(include financial rating)
-Non-admitted issues associated with an E&S carrier
(affidavits / taxes / lack of Guarantee Fund, etc.)
-Specific applicable minimum premiums
The agency’s proposal
Look to include:
-Key “need by” dates to ensure coverage can be bound timely
-Requirements / conditions to bind (account may be able to
be bound “subject to” the receipt / completion of various items) – be sure to honor these dates to avoid cancellation
-Good idea to collect premium (at least a down payment)
…this could be based on what agreement you have with the wholesaler regarding payment
Backdating – typically not allowed with E&S business
Within the agency, E&S business may require some unique handling / priorities
Need to factor this in when dealing with the customer. Make sure that you allow time to contact the wholesaler to bind. They may need to
contact the E&S carrier ….
Agencies should look to get the order from the customer at least 3 days before the effective date
Does your agency have the authority to issue?
You are technically not the agent
If the wholesaler is willing to allow your agency to issue the certificates,
this authority should be addressed in a written document that spells out the expectations of each party
Certificates
Be on the lookout for this form especially on your GL coverages
Only covers those exposures that are identified
Agency should include this “limitation” on the proposal (with copy of form)…highly recommended to have
insured sign form acknowledging their review / understanding / acceptance
Key issues
They are not automatic….E&S carrier / wholesaler might need additional information (new app) to renew…might not be able to
renew…or anywhere in between
Don’t expect the renewal to look like the expiring
There is the potential that the renewal can look drastically different than the expiring
Conditional renewal notice WILL NOT be issued
60-90 days from expiration date, check with wholesaler on any information needs…
Good to ask “do you anticipate any changes / reductions in coverage or limits” – may need to consider pursuing coverage with
other wholesalers / E&S carriers
Follow up periodically for status
When you receive the renewal proposal, it is the retail agent’s responsibility to compare (proposed vs expiring) and to
identify any changes (especially the reductions)
Renewals
For any changes in coverage, be sure to secure specimen policies / forms
Provide these specimen forms with proposal
There is the possibility that the insured may not want the coverage…don’t request that coverage be bound
until insured makes decision
When the policy is received from the wholesaler / E&S carrier, check to verify that it matches the coverage / terms you requested
Don’t assume that it is correct
