About 33,000 independent agents sell products distributed by the Foremost and Bristol West brands. That means that not only do those agents generate a lot of policies, they also, of course, have their share of claims. Unfortunately, some generate questions about coverage due to agent processes or documentation.
We investigate every claim, and we find that there are occasions when looking to an agency for recovery may not be warranted. In those situations, if our claims department has determined that a payment to a client is in order, we move forward on that basis.
Often, however, it’s pretty much a black-and-white situation. The agency appears to have made an error and will be held responsible for payment. Thus, we’re having a conversation around something like a missing or unsigned uninsured motorist rejection form that’s going to require a payment from us but also pursuing a claim against the agency’s errors & omissions carrier.
That’s not a pleasant call to have to make. And the agency’s E&O premiums inevitably increase.
Alarming Surge in Claims
Because I see the problematic claims, I can notice trends quickly. About two years ago, claims that we were forced to send for agency E&O coverage began increasing rapidly, in fact, to several per week. And that rate hasn’t slowed.
Swiss Re Corporate Solutions is a front-line carrier writing E&O for agencies, and Richard Lund, risk management coordinator, confirms a corresponding uptick in E&O claims among its agency clients.
Having identified the three most common causes of those claims, Foremost and Swiss Re Corporate Solutions want to alert agencies to their risks—and offer solutions.
1) Inadequate training, particularly with new employees. Poorly trained employees are the leading cause of the proliferation of agency E&O claims, and it’s occurring mostly among small- to medium-sized agencies. One of the biggest difficulties for today’s agencies is finding and retaining good people, which tempts them to rely on a new employee before they’re fully trained or to take chances on someone they wouldn’t normally hire because they need a replacement quickly.
Things fall through the cracks when staff are overworked and undertrained. Smaller agencies, even though they may not have the same capacity for quality control as larger agencies, still must find ways to train, monitor and coach newbies.
Lund of Swiss Re agrees. He has worked on agency E&O for 27 years and “from our standpoint, we see a new batch of people who are committing the same old errors,” he says. “They’re not getting adequate training on agency processes and procedures or they’re not getting the opportunity for knowledge-based education on the products they’re selling.”
Make training in product knowledge and procedures a top priority. Any team member who participates in the sale of a product must receive product-specific education. Take advantage of carrier-provided training.
The International Risk Management Institute (IRMI) offers E&O risk management seminars, which include Big “I”-supplied materials and are organized through Big “I” state association education departments. The training can satisfy CE credits in some states and qualifies for Swiss Re policyholder premium credits. For information, contact your state association.
The American Insurance Marketing and Sales Society offers an advanced seminar on the development of an internal E&O loss control program.
Mandate E&O training. Make it part of every team member’s state continuing education credits.
Mandate the use of coverage checklists. “One of the biggest helps for agencies when they’re running too fast and furious is to use a coverage checklist when dealing with clients,” says Lund. “So many times, agents rely on their memories, and they miss things.”
Various commercially available sources offer checklists, such as the E&O Happens website, which is co-branded between the Big “I” and Swiss Re. Some information on the site is open to everyone, and all of its resources are available to Big “I” member firms that also are insured by Swiss Re Corporate Solutions.
2) Imperfect transfer and review of information during M&A.
Mergers & acquisitions have occurred for decades in the independent channel, but never at today’s pace. The sheer number of them creates opportunities for errors. M&As are causing the second-highest number of E&O claims we see, primarily from large agencies that normally have excellent quality control.
A merger or acquisition opens an agency to numerous risks. Errors happen easily when people are shuffled between firms. Acquired staff may be joining a firm with different procedures, and training can be an issue.
Furthermore, agencies are working to complete M&A transactions so fast that they may overlook a key part of due diligence: ensuring complete file histories are transferred from one management system to the next and then evaluated. Whether the acquiring agency purchases the legal entity or only a book of business, we see the same recurring errors, particularly with longstanding accounts from the acquired firm. These include incomplete forms, missing original applications, rejections, forms and so on. An acquiring agency must take care to verify that it transfers the complete history of each individual account or obtains that missing information.
In addition, each acquired account must be reviewed individually. “You don’t necessarily want to rewrite the book the same way it was written by the acquired agency, because that agency may have been wrong,” Lund says.
“When you acquire or merge with another firm, you must invest the time to understand the business you’re buying,” Lund says. “Get into the depths of the book and what each customer’s needs and wants are. If you don’t intimately understand what you’ve purchased, you’re prone to errors and omissions.”
Finally, Lund advises agencies to consider this lesson from a classic film: “Scientist Ian Malcolm told the owner of Jurassic Park, ‘Your scientists were so preoccupied with whether or not they could, they didn’t stop to think whether or not they should.’ Yes, you can acquire another firm, but should you?”
3) Flawed rollout and processes with new technology. It’s intended to increase efficiency, lower expenses and reduce E&O exposures, but new technology, unfortunately, can create E&O exposures.
Electronic signature technology is a good example. Agencies want to use the technology from their management system, but that means the agency also is responsible for acquiring and storing the signatures. We’ve had to return claims for E&O coverage because agencies requested signatures but didn’t receive them or could not locate them. The easy solution? Use the signature service your carrier provides you. Doing so makes your carrier responsible, so you don’t have to worry about an avoidable E&O exposure.
Problems also arise when new technology is not onboarded or integrated properly. “The biggest new tech E&O claims we see result when agency staff try to use both the former system, which may be paper-based, and the new digitized management system. Between the old and the new, they lose track of data,” says Lund. “The system itself is not the problem. Everybody needs to be doing the same thing. Consistency is the remedy.”
Agencies also must take care not to adopt new technology haphazardly. Consider carefully how any new tech purchase will synthesize with your agency management system. If data does not populate and update flawlessly between the tech solution and your system, you may be vulnerable to errors and omissions.
E&O Considerations with New Tech
Inadequate integration of systems and lack of training aren’t the only ways in which a technology purchase can increase E&O risk, says Michael Howe, senior vice president of product management of Applied Systems. On-premise software, as opposed to cloud-based software, could expose an agency, since it handles its own updates and upgrades, creating risk for incomplete or incorrect transitions of processes and data, he says. With cloud-based software, updates and system testing are completed by the technology provider, ensuring the agency has data security and optimized performance.
Technology eliminates paper-driven tasks and manual data entry, removing the potential for human errors in those tasks that can lead to E&O exposure, Howe says. “As humans are imperfect beings, there inevitably will be mistakes leading to E&O exposure.”
“Technology that is seamlessly connected throughout the agency—to the insured and to the insurer—will allow data to be shared securely and accurately,” he says.
Applied recently purchased InsurTech Indio (useindio.com) and its digital smart form applications for 9,800 insurer forms that use automapping to reduce rekeying of data. Common answers, such as names and dates, automatically map from one form to another. This reduces the chance that the agent or insured will fill out forms incorrectly or incompletely.
Tech’s Impact on Agency Value
E&O issues aside, does investing in technology before a merger or acquisition add to agency value?
Yes, according to Howe. “Agencies with a foundational management system are presumably managed well, have accurate data and lower operating expenses, lending themselves to be valued higher,” he says. “The agency can take on technology with automated workflows rather than having to hire a new employee for the same tasks.
“Technology also can increase profitability by allowing staff to focus less on time-consuming administrative tasks and more on revenue-generating activities, such as prospecting and identifying opportunities for cross-selling and upselling,” Howe adds.
Acquiring firms also “evaluate the tech stack as part of agency valuation,” Howe notes.
But it may not always be advisable to jump into new technology when looking to sell, says Tom Doran, a Reagan Consulting partner. “Tech purchases are a wise long-term investment, but agents should be cautious regarding any major investments if they’re considering going to market in the next year or two, as these investments may depress earnings in the near term when the focus becomes maximizing profitability.”
Bob Sadler is head of independent agency operations at Foremost Insurance Group.