That doesn't mean an agency should dispense with precautions and let fate take its course. Conscientious use of the agency management system, coupled with diligent monitoring of procedures, can go a long way toward shielding an agency from E&O claims. In this article, I'll discuss ways to reduce your E&O exposure and present some real-life claims.
The playing field
E&O claims are on the rise. As of two years ago, the average claim exceeded $25,000. The good news is that the insurance industry is placing a greater emphasis on licensing and continuing education, which should enable us to better serve and educate our clients. Most agencies now require all employees who have direct client contact to be licensed. (Some even require the receptionist to be licensed.)
All things being equal, the better educated and trained your staff, the lower your E&O exposure. You should be prudent in how you promote your staff's credentials, however. Recently I asked an attorney who specializes in E&O claims what single piece of advice he would give an insurance agent. It was to refrain from using the terms "professional" or "expertise" on a Web site or business card. He said he sees more claims stemming from a client's heightened expectations of performance than from any other cause.
For many agencies, E&O coverage is their second-largest expense, after payroll. For several years, many agencies saw their E&O premium double or even triple. Fortunately, premiums appear to be leveling off. The typical agency E&O deductible is around $50,000 but can be substantially higher. Because of expensive premiums, large deductibles and increased claims, some agencies have begun charging producers who are substantially at fault in an E&O claim for a portion of the deductible.
Additionally, more E&O policies now include defense costs within the policy limit. Since it doesn't take long to exhaust your money on defense, this could pose a real problem. Many policies also contain an insolvency exclusion. If an agent places a client with an insurer whose rating is below a certain grade (usually B+), the E&O carrier will not cover any subsequent claims stemming from the insurer's insolvency. If it's been a while since you've reviewed your E&O policy for insolvency exclusions or other limitations, it might be worth your time to do so.
The most frequent E&O allegations are:
o Failure to place or provide coverage.
o Failure to provide adequate coverage.
o Creation of a gap in coverage.
o Stating coverage exists when it does not.
o Failure to notify clients of cancellation, nonrenewal or new coverage restrictions.
o Failure to review or explain coverage, or advise clients about it.
o Failure to obtain excess coverage.
Document, document, document
Your best defense against an E&O claim is adequate documentation. From the day you first turn on your agency management system until the day you retire, the rule should be the same: document, document, document. There's a lot of truth to the saying, "If it isn't documented in the system, it didn't happen."
It's estimated that 90% of E&O claims are settled by mediation and so don't go to trial. (Wouldn't it be great to have documentation so iron-clad that it could almost guarantee you'd never have to go to court?) Those claims that aren't settled usually don't make it to court until two or three years after the original incident. Once there, a battle of testimony takes place. It's hard enough to recall in detail what you told a client three weeks ago, let alone three years ago. Since memories fade, documentation becomes extremely valuable to your agency's defense.
Without documentation supporting the agent or carrier, a judge hearing a case will likely side with the insured. Documentation is equally important if the case goes to a jury. In many states, jurors do not receive copies of testimony to review during the deliberation process. All they receive are copies of the evidence that was submitted during the trial. Would your agency be able to provide documentation to help you prove your case? When documenting your files, it's important to remember that what you enter may someday be read by a roomful of strangers–i.e., a jury. Therefore, it's important to keep your documentation factual and professional.
I encourage everyone to employ the "Mack Truck" rule, which challenges agency employees to ask themselves at the end of each day, "If I get hit by a truck on the way home, is there adequate information in the system for anyone to pick up the accounts where I left off?" That pertains to service needs, follow-ups–everything. The "Mack Truck" rule may sound a bit extreme, but if everyone followed it, E&O exposure could be reduced drastically.
An agency's procedures, and the degree to which they are followed, will determine how useful its documentation will be for E&O defense. When using the agency management system, everyone on staff should document logged phone calls, issued certificates and everything else in the same place and in the same way–every time. If the staff uses abbreviations, for example, make sure everyone uses the same set.
The electronic trail has to be clear, consistent and complete. Does it show what transpired and who is responsible for the next step? Are there open activities to trigger a follow-up?
When seeking a coverage interpretation from a carrier, be sure to get it in writing. If the carrier is reluctant to send an e-mail confirmation to you, send one to them confirming your understanding of the conversation. Make sure all communications are attached to the client file. Everything that pertains to coverage recommendations or transactions should be documented in the agency management system.
E&O prevention
There are many other practices and procedures that can help ensure that your agency management system is properly documented and that E&O exposures in general are minimized. Here are a few suggestions.
o Have clearly defined job descriptions. This helps reduce "assumptions" of who is responsible for a specific task or item. Clearly defined job descriptions can prevent items from falling through the cracks.
o Use checklists. Good checklists can help ensure that no one drops the ball. At our agency, for example, we use a dual checklist that clearly delineates the respective responsibilities of technicians and CSRs. When the tech finishes his or her part of the checklist, he or she initials it, dates it and gives it to the CSR. When the CSR is done, he or she initials and dates the document, and has it scanned into the system. The form also includes a reminder of the agency's processing-time standards.
o Don't use multiple follow-up systems. Your agency management systems should be used exclusively for follow-ups and diaries. Employees should not use Microsoft Outlook or other programs that others in the agency more than likely can't access. To ensure that all items are viewable, retrievable and documented, everyone should use the agency management system as the sole source for follow-ups.
o Make sure producers document their conversations. Producers, whether in or out of the office, are constantly speaking with clients and underwriters. Unfortunately for most agencies, these conversations are rarely documented. One way to address this problem is to have producers e-mail recaps of their conversations to CSRs, who then could attach them to client files in the agency management system.
o Update proposal dates. Date every page of a proposal, and revise the date if the proposal is revised. Here's why: Suppose an agency offers a client a proposal, which includes the date on the front page. The client asks for additional quotes. The agent updates the proposal and even shows the revised proposal date on the front page. However, the subsequent pages do not have a date on them. The client declines the additional coverage. Six months later, a claim occurs that the declined coverage would have covered. The plaintiff's attorney then combines the two versions of the proposal, and the insured claims she thought she had bought the enhanced coverage. The agent has no evidence with which to refute the bogus proposal. This may sound too bizarre to happen–but it has.
o Centralize your procedures manual. Post your procedures manual on your agency intranet. A procedures manual is a living, breathing document; it frequently changes. Keeping the manual in a single place, where it is available to all and can be easily updated, can help you reduce your E&O exposure.
Simply having a manual isn't enough. Make sure the staff knows the manual must be followed. Make sure it is updated and that employees know where to access it.
Monitor, monitor, monitor
According to a great old saying, "You can't expect what you don't inspect." The purpose of monitoring is to ensure compliance with your agency's procedures as well as to continually assess training needs. Managers often resist monitoring because it can be time-consuming, but it doesn't have to be. Identify the key areas of workflow, such as new business, renewals, endorsements, audits and cancellations. Choose one workflow topic and focus on one account per person on a quarterly basis. Our service staff receives a quarterly bonus based upon their compliance with the agency's procedures. The quarterly file reviews are then tied to the annual performance review. By monitoring quarterly you can address problems as they occur. By providing tangible incentives, you increase compliance.
Whatever you monitor, the documentation that you see should be coherent and consistent. Can you match the documentation with activities? Can you answer who, what, when and why? Details count. Does an activity include the first and last name of a person contacted? "Sally from Travelers" will likely mean nothing in court three years from now. Are there attachments? Are the binders being replaced and updated? Does the invoicing reflect the correct premium and commission amounts?
It's also important to examine turnaround time. If your agency still functions in a paper environment, conduct periodic desk reviews to ensure that things are not getting buried or lost. If you're using both paper and computers, it's time to let go of the paper. A dual system almost guarantees inconsistency.
Another way to reduce E&O exposure is to train your employees to not answer hypothetical questions. These can lead insureds to believe they have coverage where none exists. Proper training will enable employees to skillfully deflect "what if" questions.
Monitor the use of binding authority. Sometimes employees think their agency has the same binding authority for all of the carriers it represents. Usually that isn't the case. Devise a spreadsheet that shows the agency's binding authority for each carrier. It can provide a helpful, quick reference for your staff–and possibly reduce your E&O exposure.
People are going to make mistakes, and the most experienced employees can sometimes make the biggest ones. Everyone gets busy, and things happen. This is why it's important to create an atmosphere in which employees who believe they have made a mistake can report it without fearing dire consequences. You don't want employees to feel they must slip even small mistakes under the rug (where they may grow into big errors). Encourage people to come forward, so problems can be rectified and learned from–immediately.
Fool me once
Now for some real-life examples of easily preventable E&O claims, and what they can teach us.
o Example: A gentleman advised a CSR that he and his wife were divorcing. He wanted to remove her and one vehicle from the auto policy. The CSR complied, without getting anything in writing from the client or attempting to contact the wife. A few months later, the wife had an accident. When she reported the claim she learned that she (and her vehicle) had been deleted from the policy. She sued the agency for removing coverage without notifying her.
Lesson learned: Never remove a spouse from an insurance policy without written consent from both parties. Ensure that everyone in the agency knows to get written confirmation whenever coverage or an insured is deleted.
o Example: A manufacturer had five locations. The agency always dealt with the manufacturer's office manager for policy changes. The office manager informed the agency that the manufacturer was selling one location and asked to have it removed from the policy. Due to a disagreement with management, the office manager was terminated. The sale of the deleted location fell through. Since the agency had not sent a confirmation of the change, the manufacturer was unaware that coverage for the location had been dropped. The deleted location had a fire which resulted in $1.5 million in damage. In the ensuing lawsuit, the court ruled against the agency, stating that it should never have taken a deletion from someone who was not the first named insured on the policy.
Lesson learned: Obtain signed documentation from commercial clients identifying who is authorized to act on behalf of the "Named Insureds." We use a form with multiple slots for the list of various authorized personnel. The form states that the client must notify us in writing if there is a change in authorized individuals. Once we get the completed form from the insured, we enter the authorized contacts into the agency management system and scan the document itself.
o Example: An agent wrote a homeowners policy and gave the client and mortgage company an evidence-of-property-insurance form. The agent placed the signed application and payment on his desk–where they still were three months later when a lightning strike burned down the house. The agency contacted the carrier, only to learn that they did not show receipt of the application. At that point, the agent began to "dig" through his desk and found the application that he had failed to submit. The carrier eventually denied the claim because it took place outside the agency's 30-day binding authority. The E&O loss was $150,000.
Lesson learned: Make sure you have a standard turnaround time for submitting applications and that agents are meeting it. This is where desk monitoring comes in. After issuing the evidence-of-property-insurance form, the agent unfortunately did not keep the activity open to remind himself (or anyone else in the agency) that he had bound coverage. Activities need to remain open until the policies come in and are processed.
o Example: A business whose sales had fallen off decided to reduce its liability insurance costs by dropping the policy limits to $500,000 from $1 million. The agent amended the policy without obtaining a written request from the client. Later, the business sustained a slip-and-fall claim. The agent was sued after the client's limits proved inadequate. The final E&O settlement was $800,000; the agency's deductible was $50,000.
Lesson learned: Never reduce coverage without getting the request in writing. Usually there is such a small premium difference between a $500,000 and $1 million liability limit that an agent should always advise the client to maintain the higher limit. Many agencies today use $1 million as their standard minimum liability insurance limit for businesses. If your client insists upon lower limits, be sure to obtain their written request.
o Example: A widow, wishing to increase her income, began doing alterations out of her home. Her insurance agent was one of her clients. An elderly client slipped and fell in the driveway. The widow's homeowners insurer denied the claim because it arose from an in-home business. She sued the agency. The parties reached an out-of-court settlement for $100,000. The agency's E&O deductible was $50,000.
Lesson learned: Since the agent was fully aware of the in-home business, she should have offered the woman coverage for it.
It's been estimated that more than 11 million home-based businesses now exist and that 60% of them aren't insured. Furthermore, 40% mistakenly believe they're covered under their homeowners insurance policy and 60% of those who are covered are underinsured. Are you asking your clients if they're running a home-based business? Consider sending your personal-lines clients an annual letter asking not only if they've started an in-home business but also whether they've remodeled their home, added a swimming pool or hot tub, changed their marital status, etc. By sending clients such letters, you may uncover new sales opportunities. At the least, you will be able to demonstrate that you've tried to keep current with clients' exposures.
The effects of an E&O claim can be devastating. Under the best of circumstances, it creates a drain on time, money and agency morale. Under the worst, it can destroy your reputation and maybe even your business. Claims may be inevitable, but there are steps you can take to help reduce your exposure. Careful and ongoing attention to documentation, procedures and monitoring can help you improve your service to clients while lowering the odds of litigation. Cindy English, CIC, is a vice president and manager of commercial operations at Gregory & Appel, a 12-year-old agency that has over 100 employees. Her duties include working with the agency on E&O reduction as well as managing 30 commercial-lines service professionals. Prior to joining Gregory & Appel in 2004, Ms. English was an operational consultant for Marsh, Berry & Co. Inc., where she worked with agencies on procedures and workflow, merger and acquisition integration, E&O reviews, and operational reviews and assessments. She is a licensed agent and holds the Certified Insurance Counselor designation.

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