The following article was adapted from Mr. Pearsall'spresentation at the AMS Users' Group's 29th National Conference,which was held in April in Nashville, Tenn.)

IN RECENT years, advances in automation and technology haveimproved agencies' efficiency and greatly increased theircapabilities. The advances also have affected agents' E&Oexposures. When implemented properly, automation can significantlydecrease agents' odds of being sued. But when automation is nothandled well, it can be your worst E&O nightmare. In thisarticle, we'll take a look at how automation can help an agencyavoid trouble–or lead it right into it.

Before getting into automation and E&O exposures, let's takea brief look at the E&O marketplace. In the mid-1990s, therewere probably some 30 carriers writing agents E&O. Now thereare maybe a dozen. Insurance agents E&O is not for the faint ofheart. Million-dollar claims are somewhat common. We recently hadone for $3.6 million.

Our company has about 12,000 agent E&O customers. In thelate 1990s, we averaged about 12 claims per 100. In other words,roughly one in eight agents in the country was having a claim,based on our statistics. That frequency dropped to one in 12 in2004. So far in 2005, it's been about one in every 15 agents.Possibly, the increased use of automation in agencies is one reasonfor the lower claims frequency.

In regard to severity, the average claim runs about $40,000 inlosses, plus around $12,000 in defense costs. Most agents E&Opolicies, incidentally, provide unlimited defense coverage. In2004, we closed 86% of our claims for no payment. That shows youdon't have to do anything wrong to get sued–and also the importanceof defense coverage.

Some agents may conclude from the figures above that they canget by with perhaps a $500,000 limit, but that wouldn't be prudent.Any agent can get hit with a $1 million claim. For instance,suppose you write the auto and homeowners insurance for a client,but not an umbrella. The client is involved in a major accident andsues you for $1 million for not offering the additional protection.Despite the relatively low average cost of an E&O claim, $1million losses occur with some regularity, and you want to protectyourself from that possibility. It doesn't hurt to have even higherlimits. You can double the limits of a $1 million policy withoutcoming close to doubling the premium.

Where do E&O claims come from? About half arise fromproducers' activities and half from the work of CSRs. Most claimsare caused by one of two errors: failure to obtain proper coverageand failure to place coverage after agreeing to do so. Anothermajor loss cause is failure to renew or service policies.

Agents should be mindful that their carriers, as well as theirclients, can sue them for errors and omissions. Insurer suitsagainst agents appear to be on the rise. Your insurance companieshold you to a standard–and you had better know what it is. Oftenthe standard will be spelled out in your contract in regard tomatters like binding authority. If you violate that contract, oddsare that you will be sued. Some companies seem willing to takeagents to court for even the smallest infraction of theircontracts, so be careful. It's often said the agency-companyrelationship is a “partnership,” which sounds warm and fuzzy. Butif a company you represent pays a claim because of what it believeswas your error, it may well come after you to recoup itsexpenses.

Contracts between carriers and agents often contain what oneinsurer calls a “terms of use” agreement. When you get intoautomation, what are the expectations of each party? You need toknow what the agreement says. Make sure your staff knows too. Onceagain: these are the expectations that you're going to be held to.The agreement may spell out expectations in regard to how you useinformation and how it is to be retained when relationships withinsureds are terminated. Often the agreement will contain ahold-harmless provision, which essentially says that if you commitan error and the insurer gets dragged into the case, you'rerequired to defend them. (Typically it will be a two-wayobligation. If they make an error and you're brought into the case,they would defend you.)

Agency principals who have been around awhile probably havenoticed the difference between today's company contracts and thoseof 15 or 20 years ago. Once, marketing people prepared many ofthese agreements, but these days lawyers draft them all, so youneed to examine them carefully for things like hold-harmlessagreements.

What happens when you get hit with an E&O claim? The E&Ocarrier assigns counsel, who will talk to anybody involved in theincident: the bookkeeper, the receptionist, the producer, agencyprincipals, etc. It's important to report a claim as soon aspossible, so the event still will be fresh in everybody's mind whencounsel arrives. That way the E&O carrier will have the bestpossible data on the event and can make an informed estimate of howthe claim will play out.

The E&O carrier will ask for the agency's files pertainingto the incident. This leads into the issue of computer systems anddocumentation. In setting up your system, think of what you'd wantit to contain if you were handed a subpoena. You should want to besatisfied that the file accurately reflects your ongoing dialoguewith your clients. Among other things, the file should includerecords of transaction dates and correspondence, both regular mailand e-mail. By examining a comprehensive, updated file, yourE&O carrier will be better able to ascertain what reallyhappened–and better able to defend you.

Downloading and uploading

Downloading is perhaps the most common form of agency-companyinterface. It takes place when an insurer sends you informationelectronically. Download is used predominantly in personal lines,although it also is becoming more widely used in commercial lines,particularly for BOP business.

When an insurer downloads client information into your agencymanagement system, it must match the fields you have set up in yourelectronic files; otherwise, your data will not be accurate. So youwant to ensure that when information is downloaded to you, it fillsyour data fields properly, and that no information is missing.Insurers also use download to update agents' billing and claimsinformation, among other things.

Insurers should update your files via download every night, soyou start each day with accurate information. If you go a couple ofdays before accepting a company download, you could wind up givinga client inaccurate information. That could come back to hauntyou.

As part of the download, the company typically will let you knowwhat transactions have been processed, via a list. By checking it,you can determine which tasks have been taken care of, and whichones you still need to diary.

An agency should make someone responsible for the download andshould designate a backup person as well. Monitoring the downloadshould be part of someone's job description, be it the agencymanager's, an IT person's or someone else's. Make someoneaccountable for this task; don't just assign it to whoever has thetime to look after it on a particular day.

Companies typically assign passwords to agencies to use whenretrieving downloaded data. If the person who looks after downloadleaves the agency, you should make sure the password is changed.This is a matter of ensuring the data remains confidential.

Download doesn't free you from the obligation to ensure thattransactions are processed accurately. If you ask for a particularcoinsurance amount on a policy, and the company sends back adifferent figure, you need to catch the discrepancy. So what if itwas the company that made the mistake? You still need proceduresfor detecting it, because information isn't much good if it isn'taccurate.

Let's turn to the subject of upload. If handled properly, it canbe a great help in reducing an agency's E&O exposure. When yousend information to insurers by regular mail, there can be someuncertainty about when they get it and when you sent it. Theseissues can have a bearing on claims processing. With upload, on theother hand, you will have a hard-coded date stamp documenting whenmaterials left your agency. That can be a big help in fightingcertain E&O claims. When you upload data to a carrier, it willlet you know that the upload was successful and give you aconfirmation number. You should file that confirmation number.

When information is uploaded, policies are issued quicker,particularly in personal lines. In many states, the law saysinsureds have a responsibility to read their policies. After lastyear's hurricanes in Florida, we wound up defending about 30E&O claims made against agents who were sued by their clientsover lack of wind coverage for pool enclosures. In some cases, theinsureds hadn't yet received their policies before the damageoccurred. “Well, how was I to know about the exclusion?” an insuredcould say. “I still don't have my policy.” So the quicker you canget a policy issued–and upload can help you speed the process–thestronger your E&O defense.

Transactional filing

Some 20 years ago, most agencies kept a folder for each account,and all paper associated with the account went into it. Afterautomation became widespread, agencies began using transactionalfiling. The dates on which correspondence and other documents werereceived were noted in the computerized customer files, and thedocuments themselves–for all accounts–were kept in a single paperfile for each date.

I think there are a lot of benefits to transactional filing.Agents have told us it enhances morale–maybe because when peoplecome to work in the morning, they don't see a stack of paper fileson their desks anymore. With T-filing, anyone can respond tocustomers' calls. A paper file doesn't have to be found first,because everything needed to respond to the call is likely to be inthe computer file. So T-filing has enhanced customer service. Howlong should you retain T-filed correspondence? We say seven yearsin general, but you need to look at the statute of limitations inyour state and the type of coverage you're dealing with.

We've heard that T-filing has increased efficiency. Agents havetold us it enables them to handle work in less time, and thatthey're more current as a result. In our view, the more current anagency is in the processing of its work, the lower its E&Oexposure. When folks are just buried under a mound of work, claimsare more likely to arise.

Make sure you are backing up your automation system. In somecases, this may need to be done hourly to make sure you are notlosing either temporary or permanent records. In most cases, itshould be done at least daily. Make sure you have a disaster planthat protects your data, too. In this regard, it is essential thata set of backed up data is stored off premises.

Exposure analysis checklists

I'm a big fan of automated exposure analysis checklists, likethose in AMS' PS4 product. In fact, our company gives a credit toour E&O insureds who use such checklists. That's becausefailure to arrange the proper coverage is the No. 1 cause ofE&O claims. Using an exposure analysis checklist is a great wayto make sure all your clients' needs have been identified and thatyou've at least offered them coverage. You certainly should notjust ask for a copy of the prospect's current policies and assumethe incumbent agent identified all the exposures. In duplicatingwhat the pros-pect previously was offered, you also might wind upduplicating someone else's errors.

Following 9/11, we experienced eight E&O claims. The mostcommon was for failure to obtain business interruption coverage. Achecklist can ensure that you talk with prospects about BI andother exposures and at least give them the chance to insure them.If they decline the opportunity, be sure to obtain the prospect'ssigned acknowledgement. Without such documentation, the issue inany ensuing litigation becomes whether you or your prospect hasgreater credibility. Unfortunately, agents tend to lose more ofthose contests than they win.

How often should you ask clients to sign statementsacknowledging that they decline recommended coverage? Ideally,every year. That means we also recommend that you do some sort ofannual exposure analysis. You might not find that realistic,particularly for personal-lines accounts, but it's the safest wayto go.

We had a claim several years ago involving a Californiarestaurant. The agent offered the restaurant liquor-liabilityinsurance three years in a row–but didn't offer it the fourth year.The restaurant sustained an uncovered liquor-liability claim andsued the agent. We had to pay the claim, because the agent hadn'trecommended liquor liability at the fourth renewal. This is anextreme case, but it demonstrates the advisability of getting awritten acknowledgement every year.

I was in a car with one of our insureds a couple of years ago,and we drove by a building owned by one of his clients. An additionwas going up. “I'm waiting for them to call me,” he said. I waspleased to hear he was on top of the issue but told him not towait. If you know a client is adding more space, you have aresponsibility to call and say, for example, “I see you're puttingon an addition, and you don't have enough coverage for it.” If aclient has an uncovered claim, and it can be shown that you knewabout the exposure but said nothing, you could find it difficult todefend an E&O claim.

Annual coverage reviews (completed with the help of a goodcoverage checklist), are important in personal lines as well ascommercial lines. Following such a review, you may learn thatsomeone has inherited some heirlooms–or acquired a pit bull. Youcan make the appropriate coverage recommendations or point out anyexclusions or limitations in their coverage.

If you can't get a client to sign a statement, the next bestthing is to send the client a letter documenting that the clientdeclined to follow your recommendations. Such a letter could state,for example: “Per our conversation, you do not want the personalumbrella liability policy we talked about. If this is contrary toyour understanding, please let me know as soon as possible.” Thatway, you have at least something in the file.

There should be something to document that the letter was senton a given day. Faxing the letter is better than sending it byregular mail, because the fax report can provide good documentationthat the letter was sent and received. When sending a letter byregular mail or even e-mail all you have is “presumeddelivery.”

Automated coverage checklists can make producers moreknowledgeable about specific risks. Someone may want to go afterdry cleaners, for instance, but may not be sure what the exposuresare. A lot of information can be found about those exposures in agood coverage checklist. They also can help ensure the producergets the right class codes. The more accurate the submission, thelower the E&O risk.

Newsletters, which you easily can prepare with desktoppublishing systems, can be powerful tools for defending E&Olawsuits. An insured in Florida would find it more difficult topursue an E&O claim for wind damage to a pool enclosure if theagency used its last three newsletters to stress the exposure isn'tcovered.

E&O and the Internet

When an errors and omissions claim is made against one of ourinsureds, our claims people visit the agent's Web site to ensure itaccurately describes the scope of the agency's services. If it sayssomething like, “We make sure all clients are fully covered for alltheir exposures,” we could have a problem. And, yes, we've seensites that make claims of that sort–and they can come back to biteyou.

As agencies promote “24/7″ service through their Web sites andvoice-mail systems, they also must take care to inform clients ofany limitations. Suppose an insured buys his wife a $25,000anniversary ring–which you don't have the authority to bind withoutdocumentation–and requests an endorsement for it via your Web site.Your insured may well think coverage is bound. To avoid giving thatimpression, make sure your Web site informs visitors that coveragecannot be bound, deleted or modified without talking to someone atthe agency. (The same caveat, of course, should be recorded in yourvoice-mail system.)

Some agencies also are opening their doors on Saturdays to gaina competitive edge. That's fine, but if your carriers' underwritersare not also available on Saturdays, be aware of the implications.If you can't bind a particular risk without an underwriter'sapproval, don't give the client the impression that he or she hascoverage over the weekend. If you send a client an e-mail messageon a Saturday that doesn't explicitly point out this limitation,and a loss occurs Sunday, you could have a problem. And remember:The e-mail message will precisely document the date and time yousent the message.

One way that technology can help you lower your E&O exposureis by making it easier for you to track your insurers' financialcondition. For instance, you can make ambest.com one of yourfavorite sites. Then be sure to visit it once a month. This is alot easier than picking up the phone once a month and calling amarketing rep at each of your companies. Many insurance agentsE&O policies state that if a carrier's rating drops below acertain level, you no longer have solvency coverage for themfollowing the next renewal. The Internet can help you keep abreastof these rating downgrades.

More agencies are scanning documents these days and storing the“paper” electronically. Such document imaging and managementsystems certainly make it easier to retrieve information. Be aware,however, that some states require you to retain original documentsin a paper file. Make sure you check with your state insurancedepartment or state agents association. They should be able to giveyou some guidance on this issue.

On the whole, automation has had a positive effect on agents'E&O exposures. But I hope you now see that automation can be adouble-edge sword. I hope this article will help you become moreadept at using that sword to cut away your E&O risks–withoutalso nicking yourself.

Curt Pearsall is vice president of Utica National InsuranceGroup and since 1987 has been responsible for the day-to-daymanagement of Utica's errors and omissions program. He joined thecompany in 1981 after working five years as an independent agent.He can be reached at[email protected].