New Sales Strategies Raise E&O Risk

Scottsdale, Arizona

As commercial lines insurance pricing stabilizes and sales revenue growth flattens, agents and brokers will step up their efforts to compete with more customer service offerings, but such activities are at odds with the rules of safe selling, according to experts.

Agents and brokers who are going the extra mile for their customers can open themselves up to possible errors and omissions claims, according to Wayne Cesario, director of claims for Western Heritage Insurance Company in Scottsdale, Ariz.

Mr. Cesario illustrated the point during a presentation at the Mid-Year Educational Workshop of the Kansas City, Mo.-based National Association of Professional Surplus Lines Offices, Ltd last month with a description of a “war story”–an actual claim that developed from well-intentioned efforts by a producer to help a customer.

The customer, an aviation company, had been a big account for the producer for many years, and the producer had even helped the customer get premium financing. Because the customer was “notoriously late in making payments,” the producer would frequently receive notices of cancellation from the premium finance company, and the producer got into the habit of reminding the customer when his payments were due, Mr. Cesario explained.

This behavior continued without fail until a junior member of the agency made an innocent error. The staffer received a cancellation notice, date stamped it, and put it into the customers file. No one called the customer as was the practice in the past, Mr. Cesario continued, adding that “Murphys law” for insurance played out. “If youre going to have a loss, its going to be when the policy is cancelled.”

The customer had a catastrophic accident on the day of the cancellationa helicopter crash that involved two fatalities. The situation worsened when news of the crash and the coverage cancellation spread through the close-knit aviation industry, Mr. Cesario said. The aviation firms “other accounts dropped him immediately,” he said, adding that the firm eventually filed for bankruptcy.

A subsequent trial, he said, “resulted in a $15 million verdict against the agent for the damages that resulted from assuming the simple duty of reminding a customer of when his premium was due.”

“The lesson I want to impart is that no good deed shall go unpunished,” he said.

The good deed in this case (and in many agent and broker E&O situations) involved a producer assuming duties that werent his or her responsibility under the law.

“I understand in the business context why you would want to do that,” Mr. Cesario acknowledged. But “if youre going to assume some duties that arent yours, you must perform them correctly.”

Particularly pertinent to his war story example, he said, “I recommend that you assume only duties you have control over. Making payment on a premium finance arrangement is not one of them.”

During the session, Mr. Cesario told agents and brokers that, legally, they actually only owe two duties to their customers:

To follow the customers coverage instructions with reasonable care.

Not to intentionally or negligently misrepresent the scope of coverage procured.

Thats it, he said, giving a few practical tips for carrying out the two duties.

With respect to the first duty, he reminded producers that they are not guaranteeing theyll place coverage. “If you cant, you need to let customers know that.”

As for the second, he advised, “Dont play lawyer. Seek corporate legal advice or contact the carrier” on coverage questions. Theyre the ones who know better than anybody what the coverage includes.”

Referring to the fact that the list of producer duties only contains two items, Mr. Cesario said, “Weve got the deck stacked in our favor,” noting that the customer involved in an insurance transaction has six duties. (See list accompanying this article.)

“So if you just stick to the script, youre in a real good spot” with respect to potential E&O claims, he said. But “in a competitive market, many producers will look to go the extra mile,” accepting one or more of the six customer duties in addition to the two they have.

“Theres an expiration date on that policy. Its not your obligation to automatically renew it without word from your customer,” he said, noting, for example, that producers instinctively ignore the fact that its the customers duty to tell the producer that the policy needs to be renewed.

“They rationalize this by saying theyre providing good customer service,” he said. “What I would challenge you with is: Is it good customer service or is it really a trap for the unwary producer?” he asked, conceding that there are good business reasons to try to gain a competitive advantage.

“The producer winds up taking on some of the customers duties and stands in their shoes. Thats when you have a problem,” he said, adding that while there are two ways to take on someone elses dutieseither expressly or implicitlythe “war story” example highlighted the second, “more problematic” way.

An “implied duty,” Mr. Cesario explained, is one that is typically taken on through “custom and practice.” That was the situation in the $15 million E&O claim he described. By repeating the same activities over the course of many months, the behavior “clearly established an assumption of a duty,” he said.

Another way an implied duty manifests itself is in your advertising, he said. Agents might hold themselves out as “experts” or “specialists,” implicitly expanding the scope of their duties beyond their legal duties.

Andrew Forstenzer, senior litigation counsel for Marsh & McLennan in New York, also hammered this point home to the NAPSLO crowd.

“If you sell yourself as being the best, you had better be the best,” he said, dramatically painting a picture of a plaintiffs lawyer blowing up a huge reproduction of an advertisement, brochure or Web site page and placing it in front of a jury trying an agents E&O case.

Pointing to an ad that says, “Were the primary choice in the XYZ marketplace [or] We have the best experts,” Mr. Forstenzer suggested that the hypothetical plaintiffs lawyer would say, “Ladies and gentleman of the jury, Id like to introduce you to XYZ Insurance Agency. When they first came to my client, they told my client they were the worlds best. Well ladies and gentlemen, we could have gone to the average broker, but we wanted the best.”

Describing how this might play out, he noted that even though it is the customers duty to read and understand his or her policy, once the plaintiff establishes that a producer held himself or herself out as an expert, courts will compare the levels of expertise of the insured and the agent.

“Yes, we read the insurance policy, but your honor, have you ever read your auto policy? Your homeowners policy?” he said, imagining a hypothetical courtroom argument. In such a scenario, “more often than not, the expert is going to lose on balance,” he predicted.

Similarly, Mr. Cesario suggested that differing levels of expertise would be weighed in cases where the insured vaguely asks a producer for “complete coverage” or “full coverage.” If a subsequent E&O claim arises, then in spite of the fact that requesting “specific” coverage is the customers duty, courts will rule that the producer “expertshould have known what complete meant, or should have asked.”

With respect to the customers duty to read and understand the policy, both Mr. Forstenzer and Mr. Cesario suggested that agents and brokers attach reminders to the policies they deliver to their customers, telling them to look the policies over and to call with any questions. Mr. Forstenzer said its also a good idea to specifically list major changes in coverage from prior policies.

“Its almost impossible to avoid an E&O claim altogether if you practice long enough,” Mr. Cesario said. “But we can do things to help minimize the risk of losing cases. Documentation will go a long way in saying what the experts did and what the customers told them to do.”

In addition to documentation, the men stressed the need to give senior-level attention to certain producer tasks.

“Too often, in too many companies, senior people dont have the time” to compare policies or identify new policy exclusions and limitations, Mr. Forstenzer said, noting that failure to disclose policy exclusions and failure to disclose limitations are among the top 10 allegations in E&O claims.

If a customer says, “Just get us what we had before,” he said, “you need to know that the policy is or is not the same” when the insurer delivers it. Assigning policy comparisons “down the chain to the new people in the office” is just about the “biggest mistake you can make,” he said.

“If you want to have the junior people read documents side-by-side and circle differences, thats OK. But let them show you what those differences are so you, in turn, can interpret and educate them on what differences are substantive or not.” Otherwise, he said, “youre opening the door for potential future problems.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 27, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.

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