Day By Day: How to Avoid Everyday E&O Exposures

Running a successful insurance agency is akin to putting together a winning sports team: You want to get the best athletes available and ensure that those players perform at a high level by implementing a well-conceived regime of skill development.

But athletic prowess, by itself, is not enough. Nothing is more frustrating than seeing an undisciplined player get penalized during a game for failing to follow an established rule. In the sports world, these errors routinely end up changing the outcome of the game.

Likewise, in insurance, an agency can have great producers and a solid marketing plan in place, but if key agency processes aren’t being followed, the resulting errors & omissions claims can be painful.

Consider the following:

Claims Scenario 1

An agency has specific procedures in place for issuing cert-ificates of insurance. When providing a COI for an additional insured, the agency manual requires notifying the carrier and issuing an endorsement for the COI holder.

A well-respected CSR is faced with multiple COI requests. Due to a heavy workload, the CSR delays notifying the carrier of one of the issued COIs, then forgets to follow up.

Later, a lawsuit is filed against the COI holder after an accident on a jobsite. The COI holder demands a defense from the insured’s general liability carrier, but the carrier declines to defend or indemnify because the COI holder was not an insured. The agency ends up facing an E&O claim.

TOTAL COST: $180,000

Claims Scenario 2

A prospect contacts an agency for homeowners coverage. The agency manual requires all files to include a completed application. The producer inputs information into the carrier’s web portal for a quote with a plan to update the inputted information as needed upon receipt of the application. The policy is bound.

Several months later, a fire occurs and the agency cannot locate the application. The carrier pays the claim, but then sues the agency on the theory that the agency failed to follow its own guidelines by not securing an application, insisting it never would have written the policy had the correct information been relayed.

At deposition, the producer has no choice but to admit that the procedure was to secure the completed application before binding coverage, and has no explanation regarding the whereabouts of the missing application.

TOTAL COST: $500,000

Claims Scenario 3

A producer procures coverage on multiple commercial properties for a long-time client. At the client’s request, the producer asks the carrier to remove property coverage for one of the properties, as it was to be leased to a tenant. Although the agency manual requires a deletion/reduction request in writing, the producer does not get one.

When a vandalism claim occurs on the property, the carrier denies it due to lack of coverage. The client then files suit against the agency for the uncovered vandalism loss, maintaining that the property was supposed to have coverage.

TOTAL COST: $470,000

Claims Scenario 4

An agency procures commercial auto coverage for a client whose principal is “John Doe, Sr.” The agency manual specifies that an insured’s complete legal name must be entered on all applications. The application includes a list of individuals who would be covered by a Broad Form Drive Other Car endorsement. The producer lists “John Doe” as a covered person.

Subsequently, the principal’s son and former employee, John Doe, Jr., is involved in a car accident. He seeks coverage under the policy based on the theory that he was covered as “John Doe.” The court ultimately agrees that, due to “ambiguity” regarding the intended insured, the carrier must cover John Doe, Jr.

The carrier pays its limits and then seeks this sum from the agency for causing the ambiguity, asserting that the agency violated its own guidelines in not using the legal name of the insured.

TOTAL COST: more than $1 million

Best Practices

Mistakes happen—after all, that’s what insurance is for. But here are six simple ways to reduce claims arising from procedural errors:

The “four eye” approach. Before issuing any policy, have another staff member review it to make sure nothing was missed.

Random reviews. Select a number of files to review on a periodic basis. Do not limit this audit to new or junior employees. Often, senior staff members are the ones who forget to follow the rules.

Periodic refresher sessions. Require all staff to attend. Make what can be dry and boring more appealing by trying a game show format that offers prizes for answering questions correctly. This can be a great team-building exercise as well.

Checklists. Develop a checklist for every staff member to use every time—no exceptions. There is nothing more demoralizing than finding out the rules only apply to certain people.

Workload management. It’s much harder to follow expected procedures when you’re overburdened. That’s when you start cutting corners.

Audits. Retain an outside auditor to review the agency from top to bottom. Worried about the price tag? Check out the declarations page of your E&O policy and compare the cost of an audit to your deductible on even a single E&O claim—not to mention the corresponding premium increase and loss of customer confidence.

Procedural errors have proven to be just as costly as substantive mistakes, particularly when the plaintiff is able to highlight the agency’s failure to follow its own rules. An agency may have good procedures in place and principals may be confident that those processes are being followed. Sometimes, it’s only when an E&O claim comes to light that an agency realizes its rule book is being ignored.

Legendary wrestling coach and Olympic gold medalist Dan Gable once offered a simple path to success: “If it’s important, do it every day.” The ramifications of failure underscore how important it is for everyone on your team to comply with established agency procedures—every day.

Ellen McCarthy is a vice president and claim expert at Swiss Re Corporate Solutions and teleworks out of the office in Overland Park, Kansas.