Agents E&O: Getting it right
Adhering to the agency's own risk management practices
By Dave Willis
As the P-C market continues to firm, agents and brokers are spending more time explaining market changes to clients and exploring alternatives. In such a market, they may have less time to spend on their own business exposures, including their need for adequate E&O protection.
According to E&O experts, when agents and brokers do discuss the coverage, many focus first on price. "Many are just looking for the cheapest price," explains Linda Weir, professional liability broker with Atlantic Specialty Lines of Florida. "Some, especially those with more complex books of business, are looking for broader protection; but, on the whole, most are just looking for the least expensive option."
Linda Blechman, assistant vice president and insurance agents professional liability underwriter at Lee & Mason Financial Services, finds this price sensitivity to be most common among smaller agencies, and among those that are focused on certain market segments. "Agents who focus on a niche that was especially hard hit during the economic downturn found their income negatively impacted," she explains. "They're focused on price, even though they know, in the back of their minds, that low prices aren't sustainable. Many are hoping to, perhaps, deal with it next year."
According to Mark Lann, executive vice president at Rockwood Programs, this obsession with price isn't universal. "My clients are middle market to large retail agencies, and they seem to be more concerned with bettering and increasing their coverage," he explains. "Most E&O premiums have dropped significantly over the last few years, and when the economy was suffering, agents took the savings and reduced their expenses. Now it seems like they are investing the savings in better policies and higher limits."
Blechman acknowledges that some accounts, often larger ones, are more coverage savvy. "They're more conscientious about what they're buying and who they're buying from," she notes. "If they work in an unusual niche, they recall challenges they had getting coverage in the last hard market and remember that it's often good to stay with the same carrier."
Weir sees exceptions to the "price" focus, too. "The better agents definitely look at coverage issues, and if there's a difference in price with them, coverage usually wins," she notes.
Even with the significant attention being paid to price, agents and brokers have other E&O issues on their minds. "I have attended a number of agent seminars this year, and all of them are talking about the changes in the ISO forms and endorsements—GL in particular," says Bernie Geis, president of H&W Insurance Services.
"Most of the national agent associations are hosting educational seminars on these changes," he adds. "It is so important that the agents and their staff all attend these seminars or, at the very least, obtain a summary from ISO on these changes."
There are a number of mistakes agents should avoid when protecting themselves. "Retail agents may view professional liability insurance as similar among carriers offering the product," says Ernie Weeks, AU, resident senior vice president, Errors and Omissions Program, for Utica National Insurance Group. "However, nothing could be further from the truth."
Blechman concurs. "All policies are not the same. Some have very subtle differences and some have very big differences. Each E&O policy probably has something that sounds like it's a not big deal, but it could be." Examples include pollution exclusions, war exclusions and defense outside the limits.
"For instance, if a homeowners client suffers a fire, will a pollution exclusion affect coverage for cleaning up smoke damage?" she asks. "Or would a peaceful protest that gets out of hand fall under a war exclusion? What does defense outside of limits really mean?"
Blechman says agents will tell her: "Well, the carrier doesn't interpret it that way." Her response: "If there's a really big claim or if the company is hurting, what's to keep them from enforcing the exclusion? It's in there, and it says what it says."
She encourages agents who don't like the wording or who believe the carrier doesn't mean it to make the carrier put in writing what it means or change the exclusion. "It's the legal document, even if they say they don't interpret it that way," she adds.
Lann says agents shouldn't buy strictly on price but should look closely at the coverage being offered and the carrier offering it. "There are even some fraudulent companies out there offering what they call coverage, but it isn't insurance," he notes. "Like all insurance, it's just an expense until you have a loss; then you wish you had the best."
He adds, "Treat your E&O like it's valuable and important—because it is. Look at coverages and defense teams, buy limits that will properly cover the agency in the event of a catastrophe, and don't blindly trust a broker or association with your most important business coverage."
Geis warns agents against moving insurance to obtain a lower price. "By doing this, the agent stands the chance of making a mistake on coverages, limits or an incorrect retro date," he explains. "An error or failure to report an incident that could have created an E&O situation could also arise."
Blechman adds, "If it seems too good to be true, it probably is. Stick with someone who gives you a fair price—maybe not the cheapest—because they'll probably be around longer. It's better to have good coverage and more stable pricing than to flip flop all over the place."
According to Weeks, "The cost of an E&O policy should be secondary to the value of the protection afforded. Equally important—and most often overlooked—is the expertise and experience of the individuals entrusted to handle claims that might arise.
"E&O claims can be extremely complicated and, by nature, subject to severity," he says. "Understanding the claims staff's experience, the number of years dedicated specifically to the line of business, expertise of independent counsel, and more, all have a profound impact on the appropriate resolution of an E&O claim."
Weeks adds, "Retail agents work hard to protect their customers from economic ruin. It's critical to approach the purchase of their own professional liability policy the same way. The choice of which E&O policy to purchase comes down to protecting the assets and reputation the retail agent has dedicated his or her life to building and securing. This applies to themselves, their respective organization and their employees."
According to experts, there are a number of easy steps agents and brokers can take to reduce their likelihood of an E&O loss. "Make sure employees are trained well and that they follow certain procedures and guidelines on how to handle the business properly," Blechman notes. "And make sure they know the importance of doing so.
"Management understands this, but front-line employees handling the accounts might not," she adds. They need to document all client communications and, when possible, get client signoffs or send a confirmation letter or e-mail."
Weir agrees. "Make sure everyone knows the basics—beginning with how to complete an ACORD application," she says. "Then make sure they are familiar with common and important coverages, including employment practices liability and cyber liability.
"Be sure to have procedures on how to communicate the importance of certain coverages and sell them," she adds. "I come across agents who say, for instance, 'We ask clients if they want EPL and, if they don't, we have them sign something saying so.'
"Agents need to do more than that," Weir explains. "Put a number in front of them, give an indication, and educate them on what the product covers and, perhaps more important, what consequences they might face by rejecting it.
"Too many agents fail to have a real discussion on important coverages," she says. "And too many agencies fail to educate and train employees on how to have these discussions."
"Stick with what you know best and have expertise in," advises Blechman. "If you're used to doing personal lines and very small commercial and you get an opportunity to quote a very large or unusual risk, consider saying 'no.' If you don't understand the risk, it may not be worth that extra income. If it's a line of business you have no knowledge of, hire someone who does or walk away, which can be hard to do."
"Secure signatures on all applications," says Weeks. "While this sounds easy enough, it's surprising how often this does not occur. Without signatures on applications, the issue comes down to 'he said, she said' once a claim is presented."
He encourages agents to conduct what he calls a mirror test. "Many E&O claims are generated by failing to properly compare coverages when securing new business or moving an existing customer from one carrier to another," he explains. "The 'mirror test' assures that an adequate review is performed."
Geis advises agents to, "Double check all policies for coverages and limits requested against what has been provided. Remember, whenever an account is moved out of the standard market into a brokerage or E&S market, coverage may vary."
Lann encourages the use of checklists and written procedures. "Don't create a situation where the CSR has to figure out how to handle a tricky situation on the fly," he explains, "and don't rely on your or someone's memory as to what endorsements are on that GL policy you're renewing. Write it on a policy endorsement checklist at inception. You'll be happy about it at renewal."
Geis agrees that checklists are important. "Agents need to use a checklist of coverages, not only for new accounts but also for existing accounts," he says.
Weeks says checklists can be helpful for both the agent and customers. "It helps identify exposures that need to be reviewed and considered," he explains. "In essence, a needs analysis provides a clear understanding of the exposures to loss and leads to determining what coverages are desired and rejected."
Lann recommends that agents report potential incidents as soon as possible. "If you receive a summons, deposition request or a subpoena, report it to your E&O carrier," he explains. "Most policies have some coverage in helping agents to respond to these, before a claim is made. Having a carrier or lawyer on your side for these can help to avoid an incident become a claim."
Good documentation is a universally recommend item. "More and better documentation is important," says Lann. "Phone calls, coverage questions, quotes should all be documented thoroughly. We tell agents and brokers, 'Document, document, document.' " Adds Geis, "Be sure to confirm all conversations to customers by e-mail. In this day and age there really is no reason this cannot be done."
"Documentation won't necessarily help you avoid a claim," says Blechman, "but you'll certainly improve your chances in defending them. You'll keep defense costs down because you can probably make the claim go away sooner."
Weeks concurs. "Documentation remains the best defense against E&O claims," he says. "Social media—blogs, tweets, texting, etc.—is a form of communication being used with increased frequency. As alternate means of communication continue to develop through technology, it's essential to continue documenting and confirming important conversations, regardless of how the communication takes place."
He offers agents and brokers an easy rule of thumb to follow: "If the means of communication does not, by itself, create a permanent record of an important conversation, then the retail agent must confirm the conversation in a way that creates a permanent record that can be retrieved whenever it's needed—either now or down the road."