A Winning E&O Defensive Strategy: How Agents Can Block Claims

In sports, the best offense is a great defense, right? When it comes to preventing errors and omissions claims defensive measures are also the best offense in protecting an insurance agency. Defensive strategies, or risk management practices, that can give an agency a significant advantage on the E&O playing field include having standard agency procedures in place, documenting everything and following through on customers’ requests.

The majority of claims filed against agents stem from the failure to place coverage that was requested by a customer, according to Sabrena Sally, senior vice president and underwriting leader for Swiss Re’s U.S. Insurance Agency E&O unit. The next most common source of claims is when an agent has placed coverage for a customer and that customer suffers a loss, he or she alleges the limit of liability wasn’t high enough to cover the loss and blames the agent.

“You’ve probably heard this before many times that it comes down to the basics of E&O prevention. … Have a standard process in the agency for every procedure, whether it’s issuing a quote, or a binder, or handling a mid-term change. And document that process each step of the way,” said Sally. Put procedures in writing and audit staff periodically to make sure those procedures are being followed.

It’s also important to update those procedures on a regular basis, she said. “This is a rapidly changing industry and what might have been an excellent procedure five years ago, with the way automation has changed or a practice of carriers might change, an agency’s procedures need to be updated to reflect that to remain current.”

“Failure to procure” is the number one cause of loss for agents, agreed agency risk management consultant Eric Moberg, president and CEO of the Moberg Group. But, he asked, “What does that really mean? Failure to procure could be, ‘I didn’t even know you had that exposure, so obviously I didn’t advise you that you needed the coverage.'”

Producers and customer service representatives (CSRs) can get into serious foul trouble if they don’t take the time to assess all of a customer’s risk, Moberg said.

Technology can be a huge advantage in keeping an agency at the top of its game, according to Moberg. “The better the agency uses technology, normally the better the documentation that I see in an agency,” Moberg said.

Carrier Claims
While the bulk of E&O claims come from customers, Sally says she’s seen in the last three to five years an uptick in claims coming from carriers. Moberg agreed that suits against agents generated by carriers don’t often happen, but they do occur. “I have to point that out to a lot of my clients — you potentially have two adversaries if you make a mistake. The client, if it’s a direct loss that’s denied by the carrier. But if a carrier has to claim on behalf of a client because of something an agency did that they shouldn’t have done, then [the carrier] can come back and subrogate against the agent as well,” he said.

It’s important for agencies to “make sure that everyone in their agency understands binding authority,” Moberg said. “And keep a log of binding authority current so that everyone is aware of it. So they don’t bind coverage for something they don’t have authority to do, or change a policy in a way that would expose the carrier to something that the agent doesn’t have the authority to do.”

Christopher Boggs, associate editor for Insurance Journal’s MyNewMarkets.com, and a former insurance agent and insurance educator, says agencies can get into a lot of trouble with certificates of insurance, especially if they insert wording on a certificate that’s not allowed by the insurer. “Certificates have been and always will be a major E&O exposure for agents,” he said.

Future Risks
Moberg and Sally both commented that the current financial environment could place agents at risk for E&O claims. In a precarious economy, many insureds may be “reducing coverages or eliminating some of their coverages to try and save some money,” Moberg said. “I think that does pose a large risk to some of the agencies, especially some of those that are not good at documenting change.”

Sally pointed out the possibility that some carriers’ A.M. Best ratings could change as a result of recent events in the financial markets. The situation creates more pressure on agents to keep current on “the financial conditions of their carriers and, as appropriate, communicate those conditions to those customers,” she said.

To increase revenues and add value for their customers, agencies may be expanding into new ventures, such as risk management and loss control consulting services. Boggs says he sees potential problems with that, especially if the agent is not qualified to offer such services.

“I would recommend to an agency, if you’re doing consulting, whether it’s on a fee basis or included in your servicing of an account, certainly look at the definition of professional services in your E&O policy and see if that’s addressed,” said Swiss Re’s Sally. “And the same would apply with loss control and risk management.”

“If they have any question about what they are doing and whether it’s covered, then go back to their carrier and have a dialogue about that,” Sally added.

Still, Moberg says he sees more problems with the other side of the coin — when the producer does an inadequate job of risk evaluation. “This will offend many producers but I’ve seen so many of them doing it in a competitive environment especially in the soft market, trying to beat the price rather than the quality of the assessment,” he said.

This is an edited version of a special report from Insurance Journal magazine’s Nov. 3 issue, which also includes results from the exclusive 2008 Insurance Journal Agency E&O Survey.