Agent: Heal thyself
Subtle shifts call for greater agent E&O diligence
By Dave Willis
For the most part, agent E&O claims have not changed much in the past few years. "We haven't seen major changes in claims trends," explains Karen Lombardo, product manager for Business Risk Partners, which manages an insurance agents E&O program for Liberty International. Linda Blechman, assistant vice president at Lee & Mason Financial Services, says, "Frequency tends to be the same although claims seem to be getting larger. Severity is somewhat greater and legal costs have gone up." Bernie Geis, president of H&W Insurance Services, adds, "We've seen an increase in cost to defend claims."
The types of claims track those from prior years. "Claims come from alleged failure to provide proper coverage and sufficient limits on both property and casualty exposures," Geis says, adding that there must be a clear understanding by agent and staff about what authority they have with each insurance company. "We are seeing losses where the agent issued a binder or additional insured endorsement, when, in fact, he had no authority to do either. We also receive claims where a certificate was issued, only to learn later that either the coverage wasn't offered or the policy was no longer in effect."
Ryan Turner, a partner at Wilson Elser, a law firm with broad E&O expertise, sees similar issues. "Agent and broker E&O claims largely arise from 'failure to procure' allegations," he explains. "These include disputes regarding limits, types of coverage and scheduling of risks." Claims typically occur when insureds suffer a loss that's not covered or has insufficient limits, he adds, and insureds blame the agent or broker under a theory of failure to obtain the coverage requested.
Glenn Clark, CPCU, president of Rockwood Programs, says his firm responded to this issue by suggesting that agents methodically offer EPLI coverage on every new and renewal quote. "The agent can demonstrate his or her own 'good practice' as a defense," he explains. "We also recommend agents have insureds sign off that they declined the purchase, if they choose not to buy."
The E&O market
According to Lombardo, some ºtightening has occurred in the last 12 months. "Several carriers have filed rate increases," she says, "and this is playing out in renewal pricing. Also, we've seen more non-renewals than in the past, with claims and areas of practice being the primary drivers."
Blechman describes the market as stable. "We're not seeing a big drop in rates like we had," she explains. "Prices have stabilized, but I wouldn't call it a hard market. There are still a lot of players out there, many writing agents on a miscellaneous professional liability form. For a hard market to materialize, some players would need to drop out."
Geis believes something has to give. "Insurance companies are looking at lower investment income and higher losses, not just in this field but across the board," he says. "Underwriting will need to become stricter going forward. Underwriters will look at prior loss history, class of business the agency writes, agency management, training and overall care in agency operations." Geis doesn't envision sweeping policy form restrictions. "That's not to say this won't happen on a case-by-case basis," he adds.
Clark has seen "the demise of some association programs in individual states that may have had bad loss experience, as well as a proliferation of group policies offering cheap insurance. Our research shows that agents often unwittingly surrender their valuable retro date and individual policy in exchange for a slightly reduced rate and policy aggregate shared with other members of a group plan. Some of these cut-rate offerings are not even insurance at all, but are actually risk-sharing pools."
On the high end, Clark finds many agencies offering new services, such as captives, TPAs and other fee-based services. "These really need to be analyzed," he says. "Agents need to be sure their E&O coverage will respond to non-insurance agency activities."
Several emerging issues need agent and broker attention. "One is cyber-liability," says Blechman. "Agents need to address this with clients. If they don't discuss exposures and let clients know coverage is available, they could be sued." Getting customers to buy in a tough economy may be difficult. "Still, the agent should address it, at least from a risk management standpoint," she adds. "There is an exposure, so clients must take precautions."
Geis says data breach and EPL coverage are particularly important. "Review these and other coverages whenever a client moves from one carrier to another carrier," he explains. "It may be an ISO form, but each company has manuscript endorsements agents must review." He sees coverage claims each year, particularly when insureds go from an admitted carrier to the more restrictive surplus lines market.
Lombardo agrees. "As the market firms, terms and conditions may be tightened or, if coverage is moved, changed completely," she says. "The revised or new policy form may be more restrictive and agents must communicate the differences."
Another challenge involves continued movement in the courts to expand agents' duties. "With the prolonged economic downturn we've seen over the past few years, this pressure is even much more evident," Geis notes.
He also warns of issues related to carrier/agency relationships. "We're seeing more insurance carriers not supporting their agents," he says. "They either won't reform a contract or they won't defend the agent when a dispute arises which is based on the carrier's action."
Finally, he says, agency-against-agency issues are more prevalent. "We have seen more of these in the last few years," he explains. "One agency hires an agent from another firm, and a lawsuit is filed for breach of a no-compete contract, alleging the hired agent poached the previous employer's client list."
Another issue is the "receipt and reporting of non-party subpoenas for documents or deposition testimony in connection with a dispute between an insured and the carrier," says Turner, whose firm provides support for the Rockwood Defender MGA E&O policy. "To keep these situations from becoming formal claims, agents and brokers should report them to their E&O carrier immediately and disclose the events on their renewal applications.
"Typically, an E&O carrier will work with the agency to 'get ahead' of the issues and resolve them before they escalate," Turner notes. "They may retain counsel to help form a response or to accompany the agent to a deposition." While non-party subpoenas can seem innocuous, he adds, agents and brokers who don't protect themselves and respond with due care can be named in a lawsuit and face potential exposure.
Going forward, Lombardo believes CAT-related issues may pose E&O challenges. "We've experienced an unprecedented amount of natural catastrophes in the last 12 to 18 months," she notes. "We expect some fallout with agents and brokers E&O as claims work their way through the system and insurers sort through coverage issues. There may be pressure on agent E&O policies if client policies don't respond as expected."
Agents and brokers interested in minimizing potential E&O risks should focus on a few things. First, pay attention to details. "Know all of an insured's exposures and advise them of various insurance products available," says Lombardo. "Privacy and cyber exposures and wage and hour claims are relatively new, and some agents may not be familiar with coverages. But that shouldn't stop them from raising the issue." She recommends pulling in a specialist, if needed.
Diligent fact-finding can also help reduce E&O risks. "Failure to update client needs can land an agent in big trouble," explains Geis, "so it's important to use questionnaires to uncover new exposures. Ask about additional cars, boats and buildings and, in the case of commercial accounts, expansion of business into new states or new areas of operations that can involve new equipment or new activities. And double-check the policy file to make sure coverage is in place."
Recordkeeping also is important. "In real estate, it's location, location, location," says Lombardo. "For agents, it's documentation, documentation, documentation! When agents offer certain coverages or higher limits and the insured declines to purchase, document that in case a loss occurs and the insured says the agent failed to advise them properly. Poor documentation consistently plays a role in E&O claims."
Turner agrees. "Document, document, document the file anytime an insured inquires about coverage, whether or not it's ultimately bought or changed," he explains. "Use letters, e-mails and notes to confirm the type of coverage requested, including limits, specific endorsements, and so on. Also, do this for policies quoted but not placed."
Regardless of how strong the agent or broker relationship is with the client, Turner adds, insureds often seek to hold them accountable if an uncovered or under-covered loss occurs. "While the agent or broker may not have made an error of any kind, this doesn't mean he or she won't be named in a lawsuit," he says. "Such suits can be difficult to defend if files don't paint a clear picture of action the agent or broker took and that the insured was made aware of what coverage was and was not procured."
Lombardo recommends having clients physically sign off on recommendations. "Get something in writing from the insured related to a particular placement, noting limits and coverage they selected and those they have not," she says. "Like a car rental, have them initial their selection to protect against an allegation something was not offered."
Turner says agents and brokers should "close the loop" and resolve inquiries. "Leave no doubt as to what type of coverage the insured did or did not request," he explains. "Use the same approach with carriers. If an agent or broker gets an inquiry from a carrier partner about a particular risk, document the file and confirm in writing with the carrier that the issue was addressed and resolved."
Geis also stresses the importance of carrier communication. "This goes a long way in reducing claims," he says. "As much as possible, make sure the communication—with carriers and insureds—is in writing. E-mail is easy to use and it leaves a great paper trail. Send e-mail with a 'receipt required,' and make this part of your file."
For agents not interested in doing any of these, Blechman has other advice: "Close your doors and go fishing. That's the only way to avoid a claim altogether. Of course, most agents have bills to pay and can't do this. What you have to realize is, even great agents can have claims, even when they do everything right. Sometimes the clientele an agent has makes him or her more susceptible to claims than others."
That's where proper coverage comes into play. "Too many agents overlook protecting themselves adequately," Blechman notes. "For whatever reasons, they think all policies are the same, and they just look at price. But the forms aren't all the same, so it's important to read through them carefully. Remember, if the price seems too good to be true, it probably is, and it won't last."
Blechman sees some agents fall short when procuring their E&O coverage. "When you're putting together a submission, make yourself presentable," she explains. "Too often, agents slap together an application. They may stress to clients the importance of a good submission, but then fail to take their own advice. As the market changes, it's even more important to make a good impression on an underwriter."
Be thorough and responsive. "If an application says 'attach something,' then attach it," Blechman advises. "If an agent is difficult to work with during the application process, will he or she be difficult to work with if a claim arises? And make the application legible. You should see some of the applications that come in. If an application is sloppy, should we assume that's how the agent treats clients?"
Blechman says that in a soft market, anyone can get coverage. "As the market changes, you'll have fewer options," she concludes, "and your pricing will be more favorable if the underwriter has a good impression of you."
Dave Willis is a New Hampshire-based insurance freelance writer and regular Rough Notes magazine contributor.