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Agents E&O Loss Prevention

Security guards and alarm installers

Improper handling can lead agents into an E&O problem

By Curtis M. Pearsall, CPCU, AIAF, ARM, CPIA


Security guard and alarm installation firms can be desirable and profitable accounts—provided you do your homework on a number of fronts.

When a building burns, the efficacy of the fire alarm or fire suppression system often is called into question. When there is a theft or altercation, did the security force perform as expected? Both of these classes present a severity as well as a frequency exposure, and losses can be significant.

If you don't have specific, current expertise in these classes, you can start with your Exposure Analysis Checklists. These lists will provide insights into the exposures that are specific to these classes, and they also will help you identify the correct general liability and workers compensation codes for these classes.

The next step is to ascertain whether you have a market that is receptive to these classes.Although many standard carriers write these risks, you also should consider dealing with an MGA or other intermediary that specializes in these classes. To identify appropriate intermediaries, consult the current edition of The Insurance Marketplace or search the Internet.

There are many advantages to working with a specialty intermediary. These firms understand the exposures of security guard and alarm installation companies and are familiar with the coverages that are needed to address these exposures. They know the marketplace and can assist you in evaluating your client or prospect's current coverage and in creating a competitive proposal.Specialty wholesalers have access to carriers that know these classes and that likely will be able to offer the various "bells and whistles" that can help you land the account.

These carriers also provide resources and services that can support your client's loss control and risk management efforts, as well as tools for education and training.Most carriers also publish online newsletters and host online question-and-answer forums, as well as provide links to relevant Web sites.

As in any class, some security guard and alarm installation accounts will be difficult to place because of their loss history or other factors.After meeting with your prospect, contact the intermediary to discuss the account to see if there are any red flags.If the account cannot be placed with an admitted carrier, the intermediary will find a qualified nonadmitted market that can write the account.

Big loss potential

The following story illustrates the kind of losses that can occur in this line of business and the E&O implications for agents.

The ABC Agency's client was in the business of installing fire alarm and fire suppression systems. The agency secured coverage for the client with a surplus lines carrier through an intermediary. The policy had a $2 million limit for bodily injury and property damage. When the policy was renewed the next year, the carrier placed an endorsement on the policy that reduced the property damage coverage from $2 million to $1 million per occurrence. As a surplus lines carrier, it had no duty to formally advise of the reduction in coverage.

The agent didn't notice the change, and several weeks later a building in which the client had done work suffered extensive damage after a minor fire. The underlying loss was caused in part by the installation of a fire suppression system that had no release system for excess pressure buildup.The front of the building collapsed as a result of the pressure buildup, and there was more than $10 million worth of damage to a computer system owned by one of the tenants in the building. A trial resulted in a $4 million verdict against the agency's client. After the trial, the claim against the agency was settled for $950,000.

Lessons from this claim

• These types of risks can present significant loss potential. There should be extensive discussion on the issue of limits. An umbrella policy with multiple limit options should be the norm.

• Excess-surplus carriers are not required to provide conditional renewal notices advising you of any changes from the expiring policy. Although you should always review the renewal policy and compare it against the expiring one, this is even more critical when an account is placed in the E&S marketplace. Any differences between the expiring and renewal should be brought to your client's attention. If coverage is being reduced or eliminated, discuss this with your client and document the discussion accordingly.

• When dealing with an intermediary, document all discussions and save copies of all faxes, e-mails, and other communications. As a retailer, you do not have binding authority with nonadmitted carriers, but never tell your client that coverage has been bound until you are confident it has been.

• Based on the type of an account you are handling, you may need to be aware of the exposures of other tenants in the building when discussing limits.

Although the main focus of this column is the liability exposure, be aware that for some accounts in these classes, the placement of workers compensation may present some significant challenges. Also, an equipment floater is essential to insure the equipment these accounts use.

Security guard and alarm installation firms are not typical Main Street businesses. By doing your homework on the risks and exposures as well as the marketplace, you can write these accounts successfully and manage your agency's E&O exposure.

 
 
 

Do the proper homework on the risk and the marketplace.

 
 
 

 

 
 
 

 

 
 
 

 

 
 
 
 
 
 
 

 

 
 
 

 


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