Risky business

With E&O claims on the rise, agents find solutions at Business Risk Partners

By Elisabeth Boone, CPCU

These days, it's hard to find a business that isn't risky. The struggling economy, the expanding worlds of Internet marketing and social media, and the ever-present threat of legal action pose daunting challenges for every business professional—and for independent agents and brokers, it's a double whammy. Agents need to be sure that their clients are adequately insured for a host of liability exposures, and they themselves require protection against potential errors and omissions claims.

Even coverage-savvy agents and brokers may need help to identify their own E&O exposures and obtain appropriate insurance. Providing this expertise is Business Risk Partners, a managing general agency based in Windsor, Connecticut, that specializes in arranging liability coverage for over 100 classes of service professionals.

Established in 2000 by sisters Lisa Doherty and Linda Boborodea, Business Risk Partners (BRP) draws on Lisa's experience as a professional liability underwriter and broker and Linda's background with leading financial institutions. (See "Service Can Be a Risky Business" in the May 2001 issue of Rough Notes.) Lisa is president and chief executive officer of BRP, and Linda serves as chief operating officer. They head up a 19-member team of seasoned underwriters and service professionals who work with brokers and clients across the country. Lisa will be leading a session on emerging E&O exposures for insurance agents at next month's PLUS meeting.

Over the 20 years of her career as a professional liability underwriter, Doherty has seen significant changes in agents' E&O exposures and also in the coverages available to address those exposures.

"The biggest change I've seen in that time frame is the raised expectations of clients," Doherty says. "Technology plays a big role here. For example, clients used to wait two weeks to get a certificate of insurance in the mail, and now if they don't have it via e-mail the same afternoon, they think something is wrong."

Another factor, Doherty notes, is the trend toward specialization in the agent and broker community. "When you bring in specialists in particular lines or classes, clients assume that those specialists are very well versed in those areas. Again, you've raised expectations, so when something goes wrong, a client is more likely to come after you."

In terms of agents' E&O exposures, Doherty says, "We're seeing that these increased expectations are translating into increased severity."

Agents also face exposures that arise from the need to protect clients' data and from their use of e-commerce to sell certain lines of coverage like personal auto insurance, Doherty points out. "E&O policies are being modified to address those exposures," she says.

High stakes

BRP's Web site offers this stark statement: "One out of eight insurance agencies will get sued for mistakes this year."

Given that alarming declaration, to what extent can agents and brokers manage their E&O exposure to reduce or prevent claims?

"Most E&O claims may be preventable, but human beings make mistakes—and even claims that have no merit must be defended," Doherty remarks. "I put agent E&O claims into two broad categories: substantive and administrative. A substantive error would be the agency's failure to procure the right coverage and/or an adequate amount of coverage. The insured has a loss, and the policy doesn't respond because the agent told him either that he didn't need this particular coverage or that a limit of $1 million was sufficient and the claim is for $3 million. That's the core E&O issue for agents and brokers: lack of expertise or lack of due care," Doherty asserts.

Genuine misunderstandings and differences in interpretation also give rise to substantive E&O claims against agents and brokers, Doherty points out. Everyone's heard it a million times before, but it bears repeating, she says: "Document every conversation that relates to coverages and limits. If you recommend that the insured purchase employment practices liability limits of $5 million and she decides that $1 million or $3 million is enough, have her sign a document to that effect," Doherty advises. "When you don't have it in writing, it becomes a question of what coverage or limits you offered and what the insured decided. There's too much at stake to rely on memory."

Even when the insured and the agency agree on coverages, limits, and endorsements, problems can arise from the agency's failure to document on a consistent basis.

Doherty cites a real-life example to make this point:

"A company employed a driver who had a really bad record, and they knew they'd have trouble getting him on the auto policy. They told the agent that they didn't want this person on the policy, and the policy was written with a specific exclusion for him. The company's representative signed the endorsement that specifically excluded this driver.

"Next year at renewal time," Doherty continues, "the company told the agent that it still didn't want this person on the policy. The agency attached the same endorsement to the policy, but this time they didn't have the client sign it. The bad driver got into a serious accident where he hit a vehicle full of people.

"The claim was for close to $1 million, and the company started singing a completely different tune, saying 'Of course we wanted coverage for this driver; if we hadn't wanted coverage, we would have signed the endorsement.'"

The take-home point, Doherty says, is: "Documentation is great, but once you start it, you have to keep it up, because when you don't, you actually put yourself in a worse position."

Turning to administrative claims, Doherty says, "These are almost always related to certificates of insurance or cancellation errors." She offers a typical scenario: "On a contractor account, the agent or CSR adds an entity like a subcontractor to the certificate of insurance who is not actually an insured under the policy. The sub believes it is insured, and then there's an accident on the work site for which it turns out there is no coverage."

On the cancellation issue, Doherty describes this common mistake: "The insured's auto policy was canceled and the agent didn't notify the insured, so when the insured's daughter was driving the car and had an accident, no coverage was in place."

The best way to prevent administrative-type E&O claims, Doherty explains, is to have a system of checks and balances. "Technology is proving to be a great tool in this effort, but having a second set of eyes can also be helpful," she remarks. To prevent errors with certificates of insurance, she says, "The agency might establish a rule that only producers can do certs, rather than customer service reps, because the producers are more likely to know who the insureds are. Procedures like this can be put in place to reduce the administrative errors that can give rise to claims." 

New ventures, new risks

Like most entrepreneurs, independent agents and brokers are still dealing with the fallout from the financial meltdown of 2008. Simultaneously facing the pressure of trying to compete in a perennially soft market, many agents are trying new ways to boost their bottom line: diversifying their offerings, merging with or acquiring other agencies, outsourcing back office functions, and jazzing up their Web sites to appeal to new prospects.

Each of these is a worthwhile pursuit, Doherty comments, but agents need to know how such activities may affect their E&O exposures and coverage. The agent E&O applications of most carriers contain questions about mergers, acquisitions, or plans to sell part of the agency's business, she says, and they also ask how much business the agency does with independent contractors. "For example, if last year you used no independent contractors and this year you have eight, the carrier will want to know what's changed in your business that you're now working with so many contractors."

The typical application doesn't ask for information about the agency's Web site, Doherty says, "so we visit the site ourselves and make sure that what's on the site is in sync with what's on the application. For example, if the agency says in the application that it's a 100% primary property/casualty operation and on the Web site it mentions reinsurance deals, that significantly changes the exposure."

An attractive Web site is a great marketing tool for agents and brokers, Doherty observes, "but it can also be your worst enemy." A site may tout an agency's expertise in a certain specialty niche or make promises about fast turnarounds and hassle-free service. If the agency doesn't deliver on those promises, a disgruntled client may cite such self-promoting verbiage in an E&O action.

Other key issues

The degree of care to which an agent or broker is held is a vital concern, Doherty asserts. It varies by state and also depends on the nature of the relationship between the producer and the carrier and that between the producer and the insured.

Certain states, she points out, treat agents differently from brokers in statues and legal actions, usually because an agent is considered to represent a carrier whereas a broker represents the client.

Doherty estimates that about 65% of agents errors and omissions coverage is written by admitted carriers, with the remaining 35% being placed in excess-surplus and specialty markets. Larger agencies and brokerages, she says, typically expect to obtain insurance in the admitted market. An agency may seek coverage in the E&S market because of loss history or because it is a highly specialized operation that requires customized protection.

"Some carriers don't want to write reinsurance intermediaries, and sometimes the mega-brokers want to buy so much capacity that it puts a strain on the market," Doherty remarks.

Another factor is geographic location, Doherty comments. "More business goes to the nonadmitted market in states like California and Florida because they're more litigious than other jurisdictions," she says. Many agents and brokers obtain E&O coverage through the programs sponsored by IIABA and PIA, she notes.

Doherty points to a significant way in which agents E&O differs from most miscellaneous liability classes. "Agents E&O has a much longer tail. When an insured sustains a loss under his policy and the claim goes bad because of an alleged mistake made by the agency, that claim has to play out before the agents E&O claim can be resolved," she explains. "It's easy for an agency to look at its three-year E&O history and say, 'We're in great shape'—but eight years later, it may be a completely different story."

As with many specialty niches, the market for agents E&O remains extremely competitive, Doherty notes. "Today there are about 30 carriers writing the coverage, so there's plenty of capacity and pricing is very affordable," she says.

Going into its second decade of successful operation in the challenging professional liability market, Business Risk Partners lives up to its name with E&O coverage tailored to a myriad of exposures for retail and wholesale agents or brokers and MGAs, operating in both surplus lines or standard markets.

For more information: 

Business Risk Partners

Web site: www.businessriskpartners.com