Avoiding E&O Claims In A Hard Market

Just a few short years ago, competing against a lower pricedcompetitor was one of the top business concerns of insuranceagents. Today, agents face a drastically changed environment thatpresents challenges in handling their agencys errors and omissionsexposure.

Its no secret that combined loss ratios ofwell over 100 percent and the crashing of investment returns haveforced insurance carriers to look to pure underwriting results todrive profitability. Add to that social and environmental lossdrivers such as skyrocketing medical malpractice awards, moldclaims and asbestos liability, and the resulting mixture is arecipe for the hardest insurance market in almost two decades.

As a result of this hard market, agents now face shrinkingcapacity, shocking rate increases, and reductions in or evencomplete lack of availability of certain coverages. The increasingnumbers of carrier downgrades and an uncertain economic climate addto the E&O risk management challenge.

As an agent in this brave new world, what steps can you take toprotect your reputation and livelihood from potential costlyE&O claims?

The first step in any risk management program is to identify theexposures. A few of the situations agents need to identify thatcreate opportunities for increased exposure to agent E&O claimsare:

Carriers withdrawing from a line of business.

Reduced limits of liability or reductions of coverage atrenewal.

Lowering of a carriers financial rating.

Denial of claims by carriers.

Changes in customers buying habits as a result of increasedinsurance costs or a downturn in the customers economicsituation.

The next step is to identify ways to minimize this increasedrisk by ensuring that adequate agency procedures are in place anddocumenting those procedures in the agencys procedure manual orupdating it as necessary.

It is standard practice for an agency to have a written manualthat documents the agencys procedures. Having the procedures inplace allows an agency to focus on addressing the needs of thepolicyholders rather than focusing on developing a process toaddress needs as they arise.

The manual typically addresses a myriad of the agencysoperations including quoting, issuance of certificates, handling ofnon-renewals and setting financial acceptability guidelines forcarriers.

In a typical hard market situation, a carrier the agency usesannounces its withdrawal from a line of business. To minimize theimpact to your customer and protect against E&O claims thereare a number of steps agents can take.

Clear communication and written documentation are the keys.Agents must obtain in writing from the carrier details on the scopeof the withdrawal, the exact date this affects new and renewalrisks, a list of affected policyholders, and who will beresponsible for any required notices of non-renewal.

The producer must verify the policyholder information providedby the carrier against the agencys records.

If the agency will be responsible for non-renewal notifications,agents must review their manuals to ensure that an adequateprocedure exists to address this type of block non-renewal, clarifywith the carrier the number of days notice that is required and anyspecial mailing requirements.

The next step is to determine whether or not there isreplacement coverage available through another carrier, and at whatlevel of coverage.

Then, agents must advise all policyholders in writing of whatwill be taking place and when.

It is also important to document all communication with thecarrier and policyholder in writing and retain this in thepolicyholder file.

Last but not least, be sure to inform all agency staff of theimpending change and their responsibilities in handling thechange.

In another instance, the agency may receive renewal quotes withsignificant changes in coverage terms and conditions.

To mitigate potential E&O claims, the first step is tocontact the carrier to determine if this change is account specificor if it is a change in the carriers overall strategy affectingonly renewals or all new business as well.

The agent should perform his or her own coverage comparison toverify the scope of the changes being made.

The producer should determine if other markets are willing tomatch the expiring terms.

The agency needs to identify all accounts affected by thechange. Then communicate in writing to the policyholders whatchanges will take place, when, and any options the agency has tooffer.

Again, it is imperative that all agency staff be updated onchanges in the carriers underwriting appetite.

Its unfortunate, but it has become more common to see a drop ina carriers financial rating that can affect policyholders. A.M.Best is the most widely used rating service for the insuranceindustry. The agency should have an established Best ratingthreshold below which the agency does not consider it prudent toplace business with a carrier.

Subscription services are available that automatically providethe agency with notifications of changes in carrier ratings.

To be proactive in managing this event, the agencys proceduremanual should document what will take place should the rating ofone of the agencys carriers drop.

The procedure should include such things as who in the agency isresponsible for monitoring changes in a carrier's rating;identifying affected policyholders; the process to identify areplacement carrier if necessary; the type of notification to besent to the policyholder; and checking to see if the state guarantyfund covers the carrier in question.

When a policyholder contacts your agency about a claim denied bya carrier, take a minute to refresh yourself on agency E&Oexposures.

While it is an agents role to facilitate claims service to thepolicyholder, do not step outside that role by making any coveragestatements.

A standard method of documenting claims inquiries should be partof the agency procedure manual and be used by all agency staff.Should the policyholder indicate that the agency is responsible forthe claim denial, or should the agency receive a request from thecarrier to make a formal statement or to provide copies of theagency file, the first response should be to contact the agencysE&O carrier for advice on how to best proceed.

Carriers are not the only source of changes in policy terms andconditions. The policyholder, due to higher insurance costs or achange in their own financial results, may opt to lower coveragelimits, choose a less broad form of coverage or even drop coveragealtogether.

To protect the agency from potential E&O claims in thisscenario, take the opportunity to review coverage needs with thepolicyholder. Agents should explain, and document in writing, thescope of the coverage change requested and how it differs from thecoverage carried in the past.

The producer should ask the policyholder to acknowledge thechange request in writing and retain the documentation as apermanent part of the file.

This is not a comprehensive agency risk management plan, butdoes highlight some of the E&O exposures brought on by the hardmarket. While it is impossible to prevent all claims, strong agencyprocedures for communication and documentation can help provide aviable defense against E&O claims that do arise, and can alsoserve to contribute to the overall professional reputation of theagency.

Sabrena R. Sally is second vice president, underwritingmanager of Insurance Industry Professionals program for GECommercial Insurance in Chicago.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, June 30, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.