In the independent insurance agency professional liability market, what once seemed routine—a carrier's forgiveness for an agency's errors & omissions claims—is no longer a reliable expectation. The standards have soared, placing unprecedented demands on today's insurance agencies. 

“Insurance agencies today are being held to a much higher standard than ever before relative to their carrier relationships," says Chris Burand, CEO, Burand & Associates LLC. 

Additionally, “while surplus lines carriers, and even standard carriers in the past, were more likely to 'throw some money' at an uncovered claim to avoid an E&O situation for the agent, that is no longer the case," according to Big “I" Technical Affairs Committee (TAC) members. 

The agency E&O environment has become more complicated, and the result has led to several implications for independent agencies. 

In some instances, agencies have settled for paying smaller E&O claims to avoid bringing the claim to their E&O carrier in an effort to maintain their E&O premium rate. While this may solve a problem initially, the practice could potentially lead to larger, more significant claims in the longer term if the circumstances reveal themselves to be more complicated. 

“Making the decision to pay smaller E&O claims is potentially dangerous," says Frederick Fisher, president, Fisher Consulting Group Inc. “If the agency is unsuccessful, it may blow the time limit to report a claim. If it fails to meet that deadline, it could be without coverage if the claim 'gets out of control.'" 

A further complication of this practice is whether the agency discloses it paid the claim at renewal. If not, “that's a misrepresentation on the application, and while it may be difficult for an insurer to prove there was misrepresentation, what can go wrong will go wrong," Fisher says. 

A consequence of agencies settling claims is “the objective data is not showing the full increase in E&O claims against agencies because, in my experience, there's been an increase in agents paying smaller claims," Burand says. “This is not a good idea, but definitely I'm seeing an increase in that." 

Secondly, while a carrier may decide to pay a policyholder claim, it may then go back and sue the agent for incorrect information, leaving the agency in a significantly worse predicament. 

“Recently, I saw an example where the agency had violated the binding guidelines in their contract," Burand says. “It was a big claim and the carrier went ahead and paid the claim to make the insured happy, but then turned around and subrogated against the agent." In instances where there is a clear violation of the contract, agencies can be held liable. 

“Two areas that seem to be causing the most claims are the issuance of improper certificates of insurance and the failure to procure what it was that the insured needed to cover a claim," says Michael Gay, insurance expert consultant, Michael Gay Consulting LLC. “In the hard market, if roofs have not been updated, carriers are issuing quotes and renewals at actual cash value (ACV) which for a 20-year-old roof, is basically worth nothing and could lead to a claim if the agent doesn't point this out." 

Unfortunately, in many agencies, “an agent is simply taking information over the phone independently and putting it into a computer system," Fisher says. “ACORD forms are done on a computer system with entry by someone at the agency, and this is where the documentation fails. It should be noted by the inputter that the information was provided to them over the phone by the client or even better, have the insured review a copy of the information input into the system and confirm its accuracy." 

Further, today it has become even easier for clients to identify if an agency has been negligent. “Agencies have got to understand that the plaintiff attorneys are really elevating their game," Burand says. “There are programs out there that are specifically aimed at training plaintiff expert witnesseses on business income and when claims are not addressed correctly there's a whole army of extremely well-trained experts to identify this." 

In light of the changing E&O environment, here are three ways independent insurance agency owners and their staff can mitigate and manage their agency E&O exposures: 

1) Training. “Training needs to be significantly improved," Burand says. “And it has to be in person, rather than completed virtually." Additionally, this training should be kept up to date to ensure changes in policies and procedures are compliant as the market evolves. 

The problem arises when agents are not aware of E&O standards coming down the pike because their training is not consistently updated. 

The key elements agents need to be aware of to avoid E&O claims include “documentation; communication; effective loss control, including well-managed renewal processes; documented conversations; management monitoring; and confirming standard market declinations," says Jane M. Downey, principal risk consultant, Clarity Concepts Inc. 

“If you have the knowledge about the coverage, use it, and make reasonable recommendations and document you did so," Fisher says. “If the customer declines, document that too. After all, what's better, defending a lawsuit or not having one at all?" 

2) Maintain consistency. The processes and procedures followed by both agents and producers should be consistent. Depending on the individual state and the circumstance of the case, different standards will apply to the various entities.  

Without written guidelines, agency personnel are forced to use their best judgment in a variety of circumstances. And while their judgment may generally be sound, problems occur when each person develops their own system of operation, according to Agents of America.  

Adopting and updating an agency manual of procedures is key. 

3) Complete audits. Many agencies do not spend the time to have E&O audits of their agencies completed. This is unfortunate, particularly as “we uncover a lot of things and we provide a lot of training during the audit that agents and staff wouldn't know to do themselves," Burand says. “In fact, 90% of all agencies have never had any E&O audit done whatsoever." 

Big “I" members enrolled with the professional liability program through Swiss Re can take advantage of “discounts to agencies that agree to be audited, pass the audit, and follow the recommendations made by the auditor," Burand says. “It's one of the few E&O programs of which I'm aware of that provides such a phenomenal incentive to be audited." 

Olivia Overman is IA content editor.