A report issued last year by Marsh & McLennan warned of a growing gap between insureds' liability risk and their corresponding levels of insurance coverage. An article in the Sept. 8, 2003, issue of Insurance Day stated, “According to the report, companies covered in the survey reduced insurance limits by an average of 9.4% over a 12-month period ending in January 2003.”

Since the number and size of claims do not appear to be decreasing, companies that reduce limits are taking a gamble. Some will win. Others will roll snake eyes. In the latter case, it's not just the companies who lose; many agencies will inherit problems and incur E&O claims as a result. Firms that gamble, lose and end up with uncovered claims may look for someone to bail them out and decide to sue their insurance agents. After all, they have nothing to lose by doing so.

Agencies may not be able to prevent lawsuits from occurring, but they can improve their odds of winning with good E&O preventive measures. Here are a few recommendations:

? When a prospect does not accept your proposal, send a letter stating that your agency has not placed the coverage per the prospect's request. This prevents the prospect from later claiming it asked the agency to ar-range certain coverage, but the agency failed to do so. Such a scenario may seem far-fetched, but it has happened.

? Do not accept any oral requests to decrease coverage. Insist that all such requests be submitted in writing. E-mail will suffice.

? Review exposures regularly. Do not depend on clients to give you accurate values or schedules.

? Use coverage checklists to ascertain which coverages a client needs, and have the client sign the checklist. This measure places responsibility on the client, rather than the agency, for accepting or declining recommended coverages.

Coverage checklists are great tools for decreasing E&O exposures, but few producers use them. Risking E&O claims by shunning coverage checklists is like walking into a burning building without a fire suit even though one is readily available.

One reason agents may choose to face the flames unprotected is that they perceive their risk to be low. A producer may experience an E&O claim only once or twice, if ever, and thus may reason that the slight risk involved does not warrant the time it takes to complete a coverage checklist, especially if his or her employer, rather than the producer, is responsible for paying any claims that might arise.

When interviewed, many producers say they fear that clients will refuse to take the time to complete a coverage checklist. With some clients, this may be true. However, insured surveys indicate that the majority of commercial clients will give producers the time to go through a checklist. In fact, most insureds consider the time well-spent and appreciate the agent's added-value service. Also, since it is in a client's best interest to carefully review its coverages and assess its insurance needs, a producer should think twice about continuing to solicit clients who refuse to do so. A coverage checklist signed by a client can help stave off future E&O claims-as can walking away from a prospect who won't complete one.

Some producers do not use coverage checklists because they fear the documents will prompt clients to ask coverage questions that they cannot answer. Insurance is a complicated subject, and few agents have in-depth knowledge of all available coverages. Instead of hiding from this fact, when faced with a question to which you don't know the answer, simply say, “That is an excellent question. I'll research it as it pertains to your situation and get back to you.”

Using coverage checklists is a win-win solution for both clients and producers. It helps ensure that clients obtain the coverages they need and allows producers to minimize their E&O exposure and often to sell more insurance. (When insureds are asked to sign statements acknowledging that they've declined certain coverages, they often realize how important the coverages must be and decide to buy them after all.) Remember the Marsh & McLennan study showing insureds are not buying as much coverage as they need? Unless clients are presented with coverage checklists and asked to sign off when declining coverages their insurance agents recommend, they may feel, consciously or subconsciously, that if they experience an uninsured or underinsured loss, they can always sue their agents. On the other hand, a coverage checklist makes them face the fact that the responsibility for buying all the coverages they need is theirs, and insureds tend to better protect themselves.

Let's face it. Losses occur whether or not insureds are covered. As long as insureds resist buying all the coverages they need, agents' E&O exposures will continue to increase. But if you take preventive measures to protect yourself and your clients, you can avoid getting burned.

Special Reports /

For The Manager: Don't get burned when clients opt to reduce limits

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