Hidden E&O Problems May Lurk In Agent/Broker Deals

While errors and omissions concerns can often be an afterthought, they shouldn't be. Like a latent defect in a piece of expensive machinery, E&O issues can result in substantial unanticipated and unplanned for costs and exposures. With the cost of E&O coverage remaining high, and the consequent need to retain larger deductibles, such unanticipated costs and exposures can be painful.

How should this issue be dealt with?

Well, certainly, you need to make sure that the acquired entity has extended coverage in place so that claims which arise and are reported after the agency is acquired are covered under the acquired agency/brokerage's E&O policy.

Additionally, you can structure the deal so that only the assets are being acquired, and not the liabilities. However, courts will look past the manner in which the deal is technically structured and impose liability upon the acquiring entity in circumstances evidencing that more is involved than just a mere asset purchase.

For example, if the ABC Agency acquires the assets of the Smith & Jones Agency, but it turns out that Smith and Jones are still producers, they still have the same compensation structure, and the business continues to operate out of the same building, using all the same people, with the same clients, etc., it is possible that a court may view this as more of a merger than a strict asset purchase.

Moreover, while these actions may, indeed, succeed in protecting you from exposure for existing liabilities, there are other E&O concerns you need to bear in mind. In particular, you need to be cognizant of the fact that while you may have successfully developed procedures and guidelines to follow to avoid future E&O occurrences, and while you may have established a culture attuned to avoiding E&O issues in your existing office locations, newly acquired offices are often not as likely to adapt as quickly and as enthusiastically as you would hope.

For example, you may find that newly acquired offices don't fax copies of notices of claim or otherwise develop written confirmation that notice was sent and received. You may find that brokers who are sent subpoenas for records concerning the placement of particular coverages fail to notify the legal department or the agency/brokerage's counsel. Instead, they may simply hand the entire file over to the insured. That action provides a greater potential for the insured to find a basis for not only carrying on a fight with its insurer on a coverage issue, but for suing the agent/broker as well, in the alternative, for failing to take appropriate steps to obtain the required coverage.

Numerous other specific policies and procedures you might take for granted may be completely foreign to the people in your newly acquired office.

Additionally, there are regulatory issues to be concerned with. This is especially true when you acquire new agencies or brokerages in different states. For example, different states have different requirements regarding the length of time records must be kept, and when service fees in addition to commissions may be charged. Similarly, different states have different rules regarding what licensed and unlicensed personnel can do with respect to solicitation of business and reporting of claims.

In New York, unlicensed employees may not accept a customer's information on the telephone to be used for completing application forms for insurance or assist a customer in preparing a claim in the form required by that customer's particular insurer. In contrast, an unlicensed employee in New Jersey may receive and record information from an applicant or policyholder and take factual information relative to a claim.

Another issue to bear in mind is that while the acquired agency or broker's past mistakes should for a time be covered under that entity's E&O coverage, these problems will ultimately become your problems. For example, if you acquire an agency with thousands of life policies, upon renewal it is your firm that will be responsible if the requested coverages are not actually in place and you simply renew the existing coverages without first confirming that they match the client's expressed coverage requests. Ultimately, you're picking up the ball.

While the cost of unanticipated E&O claims may not be considered all that significant in the overall business plan, such costs can be more significant than you might imagine. Indeed, even where a claim is ultimately dismissed after trial, the cost in dollars and time lost can be substantial.

With ever-growing deductibles, the costs of numerous E&O claims can be potentially very large in terms of dollars. Simply stated, litigation is a costly endeavor. Even where cases are dismissed early on in the litigation process, the cost of having a lawyer review the claims, review the relevant legal issues, review the relevant documents, interview witnesses, prepare an answer, prepare discovery requests, conduct depositions of witnesses, etc., will quickly become a sizeable expense.

In terms of time and lost business opportunities, moreover, the cost can be even greater. To bring the lawyer representing your firm up to speed, time has to be devoted to reviewing the files, finding all relevant materials and meeting the lawyer to discuss the issues. Then time must be spent preparing for and submitting to depositions.

Assuming the case goes to trial, the agency/brokerage must present a human face for the jury to identify with as the defendant. Your lawyer can't just hang a sign on the defense chair saying "XYZ Agency" and refer to the sign when making remarks to the jury about his "client."

And trials can last weeks. All this time, your producers can't work on generating new business or even tending to the needs of existing clients. And if a trial is lost, the agency/brokerage's reputation can be adversely impacted.

The lesson, therefore, is that while basic business considerations will necessarily drive mergers and acquisitions, it is dangerous to fail to give consideration to E&O issues as part of the mix. The costs and the risks are simply too substantial to ignore.

Peter J. Biging, Esq. is a partner in the New York office of Lewis Brisbois Bisgaard & Smith LLP. He can be reached at BIGING@lbbslaw.com

Reproduced from National Underwriter Edition, July 22, 2004. Copyright 2004 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.