Agents E&O Loss Prevention
Potential pitfalls with workers comp—
. . .including state law variations, sole proprietor rules, MGA hazards and WC trusts
By Curtis M. Pearsall, CPCU, AIAF, CPIA
Each year, the sales and service of workers compensation produces approximately 10% of all errors & omissions claims, with many well in excess of $100,000. This class has some significant E&O potential, yet there are some easily implemented solutions to address many of the issues causing these claims.
One of the main issues is ensuring that you, as the agent, have identified and addressed providing this coverage for all of the states in which your client does business. Many E&O claims have occurred when the client had employees in states not covered by the workers compensation policy.
When meeting with your account to secure the necessary information, we highly recommend that you bring the necessary workers compensation application so that specific risk questions can be asked and documented. Obviously, answers to these questions could determine the acceptability of the risk and what endorsements are provided. It would be prudent to discuss with your clients what their future plans are and to impress upon them that if they will be "expanding" to other states, absent the policy reflecting the additional state(s), there would be no coverage.
It is probably best to add the Other States endorsement to the policy to ensure that injuries to employees in the other states will be fully covered. One exception to this involves the monopolistic states, in which private insurers are not allowed to provide coverage. Explain and document this discussion with your clients.
Do not just renew as is!
If you have issued the policy with specific states listed and no other states coverage, secure an update each year from your client regarding what their work plans will be for the next policy term. Plus, when moving the account to another carrier, be certain the coverage is at least equal.
Numerous states have enacted regulations requiring that a state be listed even if the exposure may be incidental. One such state is New York, where it is mandatory to have New York listed if the insured has any New York exposure. Make the necessary effort to keep up with, and comply with, the various state regulations!
Insuring any sole proprietors? Do they want coverage for themselves?
This has become a real issue for clients of this corporate structure. If you are insuring any sole proprietors or partnerships, be aware how your state addresses this issue. If you are insuring these types of risks in other states, understand that there is no uniformity in how different states handle this.
In many states, coverage for the sole proprietor/partner is excluded; they can "opt in" if they elect coverage. In other states, they are covered but can opt out. Again, knowing how your state handles this issue is critical. In addition, explain the issue to your clients and let them make the decision. Don't make it for them—and don't wait for an on-the-job accident to occur for the client to find out they were not covered.
There is the potential for the staff to receive inquiries from clients, so dedicate time at an upcoming staff meeting to educate agency employees on this issue. This will enable them to correctly advise clients.
Certificates of Insurance
There is a question on Certificates of Insurance under the Workers Compensation section that must be answered either way—"yes" or "no." The question is, "Any proprietor or partners or executive officer or member excluded?" How this is addressed on the certificate could come into play if a problem develops. Ensure that the certificate is completed correctly.
Make sure coverage has been placed
Over the years, there have been a significant number of E&O claims where it was discovered, at the time of an accident/injury, that coverage was actually not in effect. Typically, these involve placing the coverage through an MGA or intermediary of some type. When using these intermediaries, your agency will probably not have any binding authority, so stay on top of these placements until you are confident everything is in order. Plus, if one of your clients has coverage non-renewed, work diligently to secure replacement coverage. These matters may take some time, so don't delay. Bottom line: Do not state that workers compensation coverage is in place on a certificate unless you have verified that it is in place.
U.S. Longshoremen and Harbor Workers coverage
Does your client have a U.S. Longshoremen & Harbor exposure? The U.S. Longshore and Harbor Workers Compensation Act, administered by the U.S. Department of Labor, provides medical benefits, compensation for lost wages and rehabilitation services to longshoremen, harbor workers and other maritime workers injured during the course of employment or who suffer from diseases caused or worsened by conditions of employment. Because there is no guarantee that placing this coverage will be easy, extra caution should be exercised.
Workers compensation trusts/alternative programs
Due to financial concerns with these types of entities, perform the necessary due diligence to understand all of these issues, including how the trust operates, its financials and any potential for assessments. A number of trusts have declared insolvency over the last several years and without a Guaranty Fund to provide protection, these present a wide variety of potential E&O problems. Many E&O carriers do not provide coverage for placing coverage with trusts, so check your E&O coverage before proceeding.
Workers compensation has a host of potential issues
There is a definite need for attention to detail when placing workers compensation. Using the available resources, along with a solid commitment to education of the agency staff and customers, should significantly minimize the chances of its becoming an E&O issue in your agency.
Curtis M. Pearsall, CPCU, AIAF, CPIA, is president of Pearsall Associates, Inc., and a special consultant to the Utica National E&O Program.