ERRORS and omissions claims are originating from two sources for which many agencies are unprepared: brokers and carriers.

For many years, agents have concentrated on minimizing the odds that their clients would sue them. Generally speaking, they have done a good job addressing this exposure. While more could be done, agencies probably are less vulnerable to client litigation than they've been in the past.

However, it seems agents are facing more E&O claims from the brokers and carriers with whom they work. In the September 2005 issue of American Agent & Broker, Curtis Pearsall, E&O coordinator for Utica Mutual Insurance Co., said companies increasingly are suing their agents when things go wrong. My colleagues who do a lot of E&O expert witness work have told me that approximately 50% of their work stems from such litigation. In my own experience, around 40% of the E&O claims I see involve carriers suing their own agents.

In his article, Mr. Pearsall went on to say that one in 12 agents was sued in 2004. Given that fact, think of the risk like this:

–If 12 agencies had an average of 20 company contracts, their total number of company contracts would be 240.

–If the 12 agencies had an average of 5,000 clients, their total number of clients would be 60,000.

–Over a year's time, one of these 12 agencies will be sued by either a company or a client. These agencies, however, have 250 times more clients than companies. So on a per-relationship basis, an agency is 250 times more likely to be sued by a company than an insured!

How can an agency minimize this exposure?

1) Have binding authority guidelines. The agency must give everyone permitted to bind risks a matrix showing how much binding authority the agency has with each carrier in every category. Few agencies create such guidelines, so they are asking the impossible of their staffs and producers. How can they comply with instructions to not exceed binding authorities when no one has told them the agency's limits?

2) Implement binding rules. Far too often producers and CSRs tell me they have bound risks for which the agency has no binding authority. For example, a CSR might tell a client who has just been placed with an E&S market, “We've bound your application, so we're set to go.” That is unquestionably an incorrect statement. The agency does not have the authority to bind in this situation. Instead, the CSR should advise the client that the company or MGA has bound the risk.

3) Take care with binding semantics. Many agency employees assume that because a company's online system accepts an application or because an underwriter agrees to write a risk, the employee can conclude the company has agreed to bind the risk. This is not accurate. Unless the company has specifically said it will “bind the risk,” the business is not bound. Agreeing to write a risk and agreeing to bind it are two different things. (For those of you who think a company would say there's a difference only as an excuse to weasel out of an actual or potential claim, I agree. But that does not change the reality.)

4) Prepare honest, correct and complete submissions. If an agent does not provide material information about a risk, and the insured suffers a major claim, the carrier may consider suing the agency. Sometimes it may even be wise to go beyond the application and prepare a full submission package, possibly even a proprietary agency submission package. Besides reducing your E&O exposure, you'll impress underwriters with your completeness and professionalism, leading them to put your submissions ahead of others.

5) Know your coverages. It is important to know your coverages, so the agency does not try to bind coverage that does not exist. That may sound farfetched, but it happens. Obviously, the better you know the products you're selling, the less likely you are to make an error in either explaining coverage to clients or placing it with carriers.

6) Perform due diligence on your brokers. An increasing number of claims seem to arise from transactions with intermediaries. Between 2000 and 2004, E&S premiums increased almost 300%, according to A.M. Best. Most agencies are not structured to place so much additional business through brokers. Additionally, with that kind of increase in business, the number of less-than-desirable brokers will rise. Add to these factors producers' ability to find brokers of all shapes and sizes on the Internet, and we have E&O disasters waiting to happen. To prevent them from occurring, agents need to perform competent due diligence on their brokers. This entails, among other things, obtaining certificates of E&O insurance from them and verifying that brokers/MGAs have appropriate licenses and the company contracts they say they have.

7) Send carriers certificates of insurance. Many insurers are telling–almost forcing–their agents to not send them copies of the certificates of insurance that agents issue to their clients. An agent should stop sending a carrier certificates only if the carrier gives the agency a hold-harmless agreement and the agent consults a lawyer. Companies are trying to have it both ways by telling agents not to send the certificates but not taking responsibility for the certificates either.

The E&O landscape is changing. Today agents must do more than try to keep their clients from suing them and consider the E&O risks they face from carriers and brokers.

Special Reports /

For The Manager: Clients Are Not the Only Source of E&O Claims

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