An ancient proverb would have us believe “there’s nothing new under the sun.” That may have been true once upon a time, but it doesn’t apply to modern insurance markets.
As new risks continue to emerge at a dizzying pace, new insurance products are cropping up constantly. And even a veteran insurance agent can run into trouble placing these new coverages.
Here are three ways to protect yourself from an errors & omissions claim when dealing with new products:
Understand your client’s changing needs. This means asking the right questions, listening to the answers and following up appropriately.
It also means documenting every time you recommend a new insurance coverage or limit to a client, along with the client’s response. Clients often use questions left hanging to hang E&O claims on agents.
Consider this example: An association filed a construction defect lawsuit against a client roofing company. The lawsuit alleged that the client was hired to provide roof and structural engineering consulting, assist in preparing bid documents, select contractors, select types of products and select the installation process for the new roof.
A few years after the work was completed, numerous defects appeared in the work and materials used. A claim was submitted to the client's general liability carrier, which denied the claim on the basis that there was no coverage for breach of contract, breach of express warranty and professional malpractice, as they were not caused by an "occurrence" as defined by the GL policy. The client proceeded to file an E&O claim against the agent for failure to recommend and procure a professional liability policy.
The agent was able to defeat the client's claim by providing evidence from its documented files, which reflected that the agent actually offered professional liability coverage on numerous occasions. The client rejected it every time.
Study the policy terms and conditions. How do they affect the insured’s business? In jurisdictions and situations that involve a “duty to advise,” the agent-insured relationship cannot operate in a vacuum. Communication is always a two-way street.
Context is key here. Is this a new business or an ongoing concern? A new policy or a replacement? If the latter, think about how the new policy will address old business. Review coverage differences between the expiring and new policies, paying particular attention to gaps and changes. Then, communicate and document that you discussed these differences with the client, and that they selected them.
For example, when dealing with “claims made and reported” professional liability policies, encourage clients to list all incidents on the application. That way, if an incident needs to be reported to an expiring carrier, such notice is timely. In order to keep lines of communication open with clients, be responsive and helpful to all client inquiries.
Consider this example: An insured's architect client designed a truck terminal for its owner. During the construction of the project, the owner alleged that the architect's design contained mistakes that resulted in construction delays and additional costs for the customer.
After some time had passed, the architect asked his agent to procure a “claims made and reported” professional liability policy. The agent and architect agreed to move the coverage to a new carrier, for which the client completed a new application. The architect failed to disclose, however, a potential “negligent design” claim by the truck terminal's owner.
The new carrier bound and issued a “claims made and reported” professional liability policy. A few months later, the owner made a demand on the architect, who reported a claim to his new carrier. The carrier promptly denied coverage for the claim on the basis of prior knowledge—the architect knew about the possibility of a claim by the truck terminal owner prior to the policy inception.
The architect then brought an E&O claim against the agent for negligent procurement and breach of contract, claiming that the agent not only failed to provide him with matching and continuous coverage, but also failed to advise him that the new policy did not contain first-dollar defense.
Report claims to all carriers. What if you and your client only meet about a new risk after a loss has already occurred? Existing coverages and policy forms can be slow to adapt to new exposures, so even after a loss has occurred, it can be hard to determine what will cover it and what will not.
Don’t try to answer those questions yourself. Instead, simply direct the insured to submit the claim to every carrier that might provide coverage.
Consider this example: A company that designs and builds industrial production facilities submitted a bid for a redesign of a cement facility. The bid was accepted and the facility built. After completion, the property owner alleged significant movement and deformation of certain tunnels. The owner alleging construction and design defects filed a lawsuit.
The agency had procured commercial general liability and professional liability policies for this new client. When the claim was first reported to the agency, the natural reaction was to report the claim to the CGL carrier. The CGL carrier provided coverage under a reservation of rights and filed a separate lawsuit against the client to determine coverage. A few months later, the agency reported the claim to the professional liability carrier, which declined coverage because the claim was not reported within the effective dates of the policy period or within 60 days of policy expiration.
Ultimately, the coverage lawsuit was decided in favor of the CGL carrier, leaving the client without coverage. The client then filed a lawsuit against the agency, alleging failure to report the claim to the professional liability carrier when they were first notified.
It’s the carrier's duty to determine coverage availability for the policyholder. If the professional liability carrier had notice of the lawsuit when the client first notified the agency, the client would have had coverage for the claim, and the agency would not have faced litigation.
Barbara Rocco and Kristina Miller are assistant vicepresidents and claims specialists with Swiss Re Corporate Solutions and work out of the Chicago office. Insurance products underwritten by Westport Insurance Corporation, Overland Park, Kansas, a member of Swiss Re.
