Avoiding E&O Claims In A Hard Market

Avoiding E&O Claims In A Hard Market

Just a few short years ago, competing against a lower priced competitor was one of the top business concerns of insurance agents. Today, agents face a drastically changed environment that presents challenges in handling their agencys errors and omissions exposure.

Its no secret that combined loss ratios of well over 100 percent and the crashing of investment returns have forced insurance carriers to look to pure underwriting results to drive profitability. Add to that social and environmental loss drivers such as skyrocketing medical malpractice awards, mold claims and asbestos liability, and the resulting mixture is a recipe for the hardest insurance market in almost two decades.

As a result of this hard market, agents now face shrinking capacity, shocking rate increases, and reductions in or even complete lack of availability of certain coverages. The increasing numbers of carrier downgrades and an uncertain economic climate add to the E&O risk management challenge.

As an agent in this brave new world, what steps can you take to protect your reputation and livelihood from potential costly E&O claims?

The first step in any risk management program is to identify the exposures. A few of the situations agents need to identify that create opportunities for increased exposure to agent E&O claims are:

Carriers withdrawing from a line of business.

Reduced limits of liability or reductions of coverage at renewal.

Lowering of a carriers financial rating.

Denial of claims by carriers.

Changes in customers buying habits as a result of increased insurance costs or a downturn in the customers economic situation.

The next step is to identify ways to minimize this increased risk by ensuring that adequate agency procedures are in place and documenting those procedures in the agencys procedure manual or updating it as necessary.

It is standard practice for an agency to have a written manual that documents the agencys procedures. Having the procedures in place allows an agency to focus on addressing the needs of the policyholders rather than focusing on developing a process to address needs as they arise.

The manual typically addresses a myriad of the agencys operations including quoting, issuance of certificates, handling of non-renewals and setting financial acceptability guidelines for carriers.

In a typical hard market situation, a carrier the agency uses announces its withdrawal from a line of business. To minimize the impact to your customer and protect against E&O claims there are a number of steps agents can take.

Clear communication and written documentation are the keys. Agents must obtain in writing from the carrier details on the scope of the withdrawal, the exact date this affects new and renewal risks, a list of affected policyholders, and who will be responsible for any required notices of non-renewal.

The producer must verify the policyholder information provided by the carrier against the agencys records.

If the agency will be responsible for non-renewal notifications, agents must review their manuals to ensure that an adequate procedure exists to address this type of block non-renewal, clarify with the carrier the number of days notice that is required and any special mailing requirements.

The next step is to determine whether or not there is replacement coverage available through another carrier, and at what level of coverage.

Then, agents must advise all policyholders in writing of what will be taking place and when.

It is also important to document all communication with the carrier and policyholder in writing and retain this in the policyholder file.

Last but not least, be sure to inform all agency staff of the impending change and their responsibilities in handling the change.

In another instance, the agency may receive renewal quotes with significant changes in coverage terms and conditions.

To mitigate potential E&O claims, the first step is to contact the carrier to determine if this change is account specific or if it is a change in the carriers overall strategy affecting only renewals or all new business as well.

The agent should perform his or her own coverage comparison to verify the scope of the changes being made.

The producer should determine if other markets are willing to match the expiring terms.

The agency needs to identify all accounts affected by the change. Then communicate in writing to the policyholders what changes will take place, when, and any options the agency has to offer.

Again, it is imperative that all agency staff be updated on changes in the carriers underwriting appetite.

Its unfortunate, but it has become more common to see a drop in a carriers financial rating that can affect policyholders. A.M. Best is the most widely used rating service for the insurance industry. The agency should have an established Best rating threshold below which the agency does not consider it prudent to place business with a carrier.

Subscription services are available that automatically provide the agency with notifications of changes in carrier ratings.

To be proactive in managing this event, the agencys procedure manual should document what will take place should the rating of one of the agencys carriers drop.

The procedure should include such things as who in the agency is responsible for monitoring changes in a carrier's rating; identifying affected policyholders; the process to identify a replacement carrier if necessary; the type of notification to be sent to the policyholder; and checking to see if the state guaranty fund covers the carrier in question.

When a policyholder contacts your agency about a claim denied by a carrier, take a minute to refresh yourself on agency E&O exposures.

While it is an agents role to facilitate claims service to the policyholder, do not step outside that role by making any coverage statements.

A standard method of documenting claims inquiries should be part of the agency procedure manual and be used by all agency staff. Should the policyholder indicate that the agency is responsible for the claim denial, or should the agency receive a request from the carrier to make a formal statement or to provide copies of the agency file, the first response should be to contact the agencys E&O carrier for advice on how to best proceed.

Carriers are not the only source of changes in policy terms and conditions. The policyholder, due to higher insurance costs or a change in their own financial results, may opt to lower coverage limits, choose a less broad form of coverage or even drop coverage altogether.

To protect the agency from potential E&O claims in this scenario, take the opportunity to review coverage needs with the policyholder. Agents should explain, and document in writing, the scope of the coverage change requested and how it differs from the coverage carried in the past.

The producer should ask the policyholder to acknowledge the change request in writing and retain the documentation as a permanent part of the file.

This is not a comprehensive agency risk management plan, but does highlight some of the E&O exposures brought on by the hard market. While it is impossible to prevent all claims, strong agency procedures for communication and documentation can help provide a viable defense against E&O claims that do arise, and can also serve to contribute to the overall professional reputation of the agency.

Sabrena R. Sally is second vice president, underwriting manager of Insurance Industry Professionals program for GE Commercial Insurance in Chicago.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, June 30, 2003. Copyright 2003 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.