Agents E&O: The cobbler's kids
Too busy serving clients, agents may neglect their own insurance needs
By Dave Willis
When it comes to agents and brokers protecting themselves against errors and omissions claims, one of two things often happens, says Linda Blechman, assistant vice president and insurance agents professional liability underwriter for Lee & Mason Financial Services. "Either the agency revenues are dropping, so cost is an issue," she says, "or agents think, 'Well, I've never had a claim, so I won't pay a lot of money for a better product, because I really just need proof of E&O coverage.'"
The irony isn't lost on Blechman. "Of all classes of business to be looking at professional liability like that, it shouldn't be insurance agents and brokers. However, when it becomes their money, it's sometimes a different story. It's the same with filling out their applications—they often wait until the last minute because they're working on their clients' insurance, which is a source of revenue."
Bernard Geis, president of H&W Insurance Services, also sees the cost issue arise. "Many agencies are more concerned about price and less about the coverage details," he says. "They need to read their policy forms and endorsements to make sure the coverage they think they have is in force."
For instance, from time to time, Geis's company will lose an account, only to have the agent or broker come back a month or two later, asking for coverage reinstatement. "What happened was they received a very attractive quote, accepted it and ordered the policy," he explains. "Later, they realized the reason the quote was so cheap was that coverage was quoted with a retro inception. Once the retro date is lost, it's generally very difficult to get it reinstated. This happens a few times a year."
Skimping on coverage makes no sense, according to Curt Pearsall, CPCU, CPIA, president of Pearsall Associates and president of the American Insurance Marketing & Sales (AMIS) Society. "The purchase of E&O is one of the most important business decisions an agent makes during the year," he says. "Agents should realize that no two E&O policies are the same. While price is an important consideration, breadth and depth of coverage should be most important."
Pearsall encourages agents to review and understand their coverage—making sure they're insured for activities they perform—and their limits. "While there is no magic formula for determining proper limits, agents must understand that agency size has no correlation to the limit. Small agents can experience significant E&O claims."
According to Glenn Clark, CPCU, president of Rockwood Programs, legal action can result from any of a number of things, including "failure to procure adequate coverage, misrepresentation of information, cancellation errors, and the poor handling of policy applications. Failure to fully explain the potential downside risk of a financial product, or providing misleading or erroneous information, can also result in a suit."
Clark cites a recent trade magazine article that profiled results of an internal audit conducted by a nationally recognized insurance broker. "The review determined that nearly 60% of their policy files were found to contain errors," he explains. "Most had to do with schedules, forms, coverages, and policy dates."
He also points to an E&O case in which a retail agent was sued for failure to procure a surety bond in a timely manner. The case was settled for $366,000. "In another case, suit was brought against an Indiana-based agent, alleging that he did not fully explain the importance of a retroactive date," Clark adds. "That case was settled for $50,000."
During his time as senior vice president of the Utica National Agents E&O program, Pearsall saw his fair share of E&O cases, too. "Of two that come to mind, one involved a four-person Midwest agency that experienced a significant E&O claim when an employee of a contractor had a workers compensation claim, only to find out no coverage was in effect, since that state was not specifically listed," he notes. "The agency, which only had $1 million of E&O coverage, was sued for more than $3 million. Fortunately, due to the E&O carrier's aggressive claims handling, the matter was settled for just over $600,000."
The other situation involved an agency that sold its business and bought extended reporting period coverage (commonly called the "tail") for only three years. "A claim was made against the agency for more than $5 million and, unfortunately, the claim was made after the expiration of the tail and thus the agent had no E&O coverage," Pearsall says. "When an agency sells its business, it should buy the maximum tail possible, typically 10 years."
Read the fine print
To help avoid coverage gaps, Geis says, "Always check policy wording, endorsements, retro date, policy limits and deductible." If you are considering moving coverage, obtain a complete copy of the policy and all endorsements that have been attached to the quote. Never consider moving your E&O without this procedure."
Pearsall concurs. "If agencies shop their E&O coverage, they should request specimen policies so they can review them," he says. "Again, the decision can't be based strictly on price because, as the adage goes, 'If the price sounds too good to be true, it probably is.'"
Be sure to recognize changes in agency activities and exposures, too. "In today's soft insurance market, more firms are expanding their product portfolio or services offered in order to generate more revenue," notes Clark. "It is essential that the agent periodically confirm that these expanded offerings are covered under the E&O policy. For example, some basic insurance agent E&O policies do not provide coverage for loss prevention consulting, third-party claims administration, or actuary services."
Blechman encourages agents and brokers to understand not only the extra features but also the basic coverage. "People come to me and say they have defense outside and first dollar and B+ in solvency," she says. "I turn around and say, 'Okay, defense outside of what?' You can have the defense outside, but if the basic coverage isn't there, it doesn't matter."
Too often, Blechman adds, agents simply don't read the policy. "Or sometimes they skim it," she adds. "I'm always impressed when someone has actually read the policy and asks questions. It makes me feel like, if there is a claim, they know what they have and don't have."
Minimizing risk
Beyond understanding—and arranging for—proper protection, agents and brokers must work to reduce the likelihood of claims. Pearsall suggests starting at the beginning. "Hiring the right people is key," he says. "Professionalism and ethical behavior should be heavily factored in."
According to Pam Hausermann, chief underwriter of E&O for Rockwood Programs, there are several other things agents and brokers should do:
• Thoroughly understand the products you are selling. Become knowledgeable in all aspects of the policy form—coverages, conditions, exclusions, etc.
• Be selective in choosing the carriers with which you do business. Make sure the company is licensed to do business in your sales territory. Also, check the carrier's financial rating. This data can be obtained from several sources, including Best's, Moody's and Standard & Poor's.
• Maintain fully documented policy files. Recording key information now may help reduce the chances of a successful case being made against you, especially if it is brought years in the future.
• Audit your internal sales process. Look at your internal policies and procedures. Conduct periodic reviews of your marketing message. Impress upon your sales staff the need to not "cut corners" when it comes to explaining benefits or coverages.
Changing carriers represents another potential problem area. "Whether it's because a carrier exited a line of business or the agent or broker thought the policy should be placed with a different carrier, you need to be careful," explains Geis. "Several times a year, claims come in where coverage was switched but an endorsement was attached to the policy excluding coverage that had been provided under the old policy. Read those endorsements—carefully."
Look inside as well. "All agencies, regardless of size, should always have a workflow manual and a procedures manual for each desk in their office," Geis says. "This will reduce misunderstandings about who does what and in what order.
"Review internal procedures at least once a year," he adds. "Have someone sit down at each desk and have the person working the desk explain what they do to the manager or supervisor. Then the reviewer can check to make sure procedures are being followed."
Pearsall concurs. "Developing proper procedures is extremely important," he says. However, it doesn't need to be a solo venture. "Many agencies would benefit by reaching out to experts in various areas to help develop these procedures."
Outside experts can provide counsel in other areas as well. "We offer, as part of our agents E&O insurance program, hotlines agents can call for advice or answers," says Blechman. "Other carriers do as well." The hotlines offer access to legal counsel at no additional charge. "What surprises me is that more agents don't make use of these," she adds. "It's included in the price of the insurance program, so you're wasting money if you don't use it."
Where agents shouldn't rely totally on outside help is on renewals, Geis says. Agencies should not rely 100% on carriers to handle automatic renewals, " he explains. "Agencies should have their own procedures in place to make certain that renewals have been handled."
Carrier choice
While the E&O policy coverage is extremely important, Pearsall notes, a key consideration in choosing an E&O carrier is the quality of claims handling. "Look at the experience of defense counsel that would be assigned if a claim were to happen, and find out how many claims actually get paid," he says. "These both point to the professionalism and aggressiveness of the carrier. Claims handling is serious business, and E&O carriers that are extremely experienced and committed to this class of business know this is where the rubber hits the road."
Consider staying power and commitment as well, Blechman says. "Some carriers in the market are not going to last very long," she notes. "If one carrier went out of business or stopped writing because it was too cheap, the next one coming in with cheaper pricing won't last any longer—maybe even less.
"Agents should develop a relationship with a carrier, stick with it and have some kind of continuity," she adds. "If you look like you're just moving for price year after year, once the hard market hits, underwriters will take notice of who jumped ship several times and opt instead for the agent or broker who has shown some loyalty."
Interestingly, this is the exact same kind of advice agents and brokers give their own clients. "Agents are preparing clients for a hardening market," Blechman says. "They need to be preparing themselves. Listen to what you're telling your insureds, and then take your own advice."
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