Insurance agents do not want their own errors
and omissions (E&O) claims denied or their policies canceled because of the
way they have handled E&O incidents. To avoid that situation, agents should
overcome their fear of reporting E&O claims and potential claims and be
careful not to violate the other requirements in their own policies.
The claims manager for a surplus lines broker that specializes in
professional liability policies told me, "When it comes to E&O claims
against themselves, retail insurance agents are unrealistic. They downplay the
severity of the problem and overestimate their own ability to solve it."
That rose-colored glasses approach often leads to the following
mistakes—mistakes that can have severe consequences.
Failing To Comply with Claim Reporting Requirements
You would think that insurance agents would never violate this prime
directive of claims-made policies. But agents often think that they can resolve
the problem themselves through the use of the "Agency Pressure
Endorsement." Then when those efforts fail, they may face a denial under
their own coverage for late reporting.
For example, Susan's agency had been a preferred producer with Big Moose
Insurance Company for decades. So she was confident she could get them to pay a
$75,000 business interruption claim, even though her new producer had not
realized that the policy he sold did not automatically include it. She
pressured the Big Moose regional manager for months but never reported it as a
claim. When Big Moose issued a final denial, she was stunned—and stuck with a
$75,000 claim.
Here are three simple rules for agents to follow when deciding whether or
not to report an incident to their E&O insurer:
- When you are having a discussion with someone in the office about whether
or not to report an incident, report it.
- When there is a claim, and you discover that the policyholder had
requested coverage that was not provided, report it.
- When there is a denial on a claim, and you want to write to the insurance
company and argue that it should pay the claim, report it.
The third point may make agents scratch their heads. Why should they report
a potential claim to their E&O insurer before they advocate for their
client's claim in writing? Surprisingly, agent defense attorneys say that,
from an E&O standpoint, such advocating is one of the most hazardous moves
an agent can make. By seeking counsel from their E&O insurer first, agents
can enlist their E&O insurer's advice and assistance in resolving the
issue without putting themselves at risk in the process. For a fuller
explanation of this issue, see "Avoid Agent E&O
When Handling Problem Claims" at www.IRMI.com.
Agents are afraid that reporting many E&O "incidents" will
result in higher rates, more restrictive terms, or nonrenewals. While it varies
by E&O insurer, E&O underwriters tell me that, generally, incident
reports do not get much attention. They are clear that the dangers of not
reporting are much greater than the dangers of overreporting. Mary Salerno,
Claims Manager for Axis Insurance Services, a surplus lines broker with
extensive experience in agent E&O, added, "It is still a very soft
market for agent E&O. We have yet to come across an account that we cannot
place. Most underwriters do not pay any attention to incidents that did not
result in claim payments."
While that may generally be true in today's market, I am not suggesting
that all E&O insurance underwriters view incidents and claims in the same
way. Just as with other lines of business, some E&O insurers seek to find
coverage for their policyholders while others use the policy as a weapon
against them. If an agency believes that its current insurer is the harsher
type, it should find a better insurer, even if it means paying a higher premium
for the more liberal claims philosophy. The same company that is likely to
penalize an agent for reporting many incidents is probably also the company
that is likely to deny coverage when reporting requirements have not been
strictly followed.
A "sister" mistake to not reporting potential claims promptly is
to not disclose them on new E&O applications. Some insurers now even
require that they be disclosed on renewal applications. A surplus lines broker
commented, "If an agent doesn't provide an accurate incident and claim
history on the application, the insurer has the right to rescind the policy.
Then the agent has no coverage, no retroactive date, and cannot buy a tail, and
that is a real problem. I've seen it happen."
Failing To Comply with Other Prohibitions
Not all agent E&O policies prohibit the following actions, but many do.
Even if these actions are not expressly prohibited in the policy, avoiding them
makes good sense.
Admitting Liability, Especially in Writing
Most agents feel a deep sense of responsibility to their clients and are
horrified if their error has contributed to their client's lack of
coverage. They want to admit their mistake and try to make it right. That is
commendable but hazardous since many E&O policies prohibit the agent from
admitting liability.
An in-house claims attorney for one prominent insurer told me, "Agents
need to be careful to make a distinction between acknowledging a mistake and
admitting liability. An agent's mistake may be part of the reason why the
desired coverage was not in place, but it is seldom the only reason. The
policyholder or others may share responsibility. When agents 'fall on the
sword' and assume all the blame, they usually do so without the benefit of
a full investigation of the facts or full knowledge of how others may have
contributed. Nevertheless, their statements, especially ones in writing, may
make it difficult to defend them."
A defense attorney and consultant on E&O claims went even further:
"Keep in mind that, even if an agent only acknowledges a mistake, in a
lawsuit, the insured will testify that the agent admitted liability, even if
that were not the case. Better for the agent to keep his mouth zipped and
report the claim immediately to the insured. Then let the insurer handle it.
Very serious harm can be done to the defense of a claim by ANY discussions with
the client about the claim after the problem has been discovered."
Here is an example. Six months after firing Amber for poor work performance,
Ken received a call from the CFO of a large company reporting a claim on the
personal boat he said he had insured with them over a year before. He had hit a
submerged stump over the weekend and his $87,000 boat was at the bottom. The
notes in the agency system showed that Amber had given the policyholder a quote
on the boat and had gotten an order to bind the coverage, but she had not
obtained a signed application or a check and had not instructed the company to
bind coverage. Horrified, Ken quickly wrote his policyholder an email, "I
am so sorry to report that Amber, who we let go 6 months ago, never bound your
boat coverage with the company. This was totally her fault, and we will press
the company to make it right and honor the claim."
Unfortunately, the boat insurance company was not sympathetic. When the
investigation was completed, it became apparent that the CFO was a
sophisticated insurance buyer who had never signed an application or paid a
premium and had not received a policy more than a year after he had called.
Still, Ken's email hamstrung his attorney's attempt to show that the
policyholder may have shared some responsibility.
It would have been much better if Ken had said (not written), "We are
sorry this has happened and are investigating the situation further. We have
reported this incident to our own errors and omissions insurance company, and
its adjuster will be contacting you shortly to get more information. If you
would like, you may contact her directly. Here is her phone number and email
address."
Negotiating or Agreeing to a Settlement
To avoid submitting a claim to their E&O companies, agents sometimes try
to settle small claims themselves. Just like paying out of pocket for a small
fender bender, that is a great idea until it backfires, as illustrated in the
following case.
Kendra's agency had written the general liability insurance for We Can
Do Anything Contractors, Inc., for years. She had to place their coverage with
a new insurer at the last renewal because the old company was no longer writing
that class of business. Unfortunately, she did not notice that the new policy
excluded work on buildings over 3 stories tall. When the client reported a
small medical payments claim arising from its work on a high-rise, the insurer
denied coverage. Since the claim for $5,000 was less than her E&O
deductible, Kendra decided to settle it herself. But after she wrote the check,
the injured party retained an attorney and sued for $500,000.
Agents need to realize that the payment of a small claim is usually the same
as admitting liability and may result in the E&O insurer denying coverage.
Even if a claim falls within the agent's deductible, it still must be
reported to the E&O insurer, both for guidance and for permission to
settle.
Incurring Expenses on a Claim or Potential Claim
Benjamin received a demand letter from one of his insureds alleging that an
error on the agency's part had resulted in the denial of coverage on a
$150,000 water damage claim. Because Benjamin thought the claim was frivolous,
and he did not want to report it to his E&O insurer, he paid the
agency's business attorney to respond to the letter. Big mistake. When the
client subsequently filed suit, the agent's E&O insurer defended under
a reservation of rights. While it did later settle the case, it did not renew
the agent's policy because of the claim and his lack of judgment.
Providing Documents and Recorded Statements or Giving a Deposition
Policyholders' attorneys sometimes ask the agent to provide documents
and give a deposition to help them develop their case against the insurance
company. Many E&O policies prohibit the agent from doing so. In addition,
agents should understand that they are often a secondary target in such
situations. Once they are under oath, they may find the attorney asks them
questions about their own culpability. In the heat of the moment, they may
incriminate themselves and jeopardize their own E&O defense. If they put
their E&O insurer on notice when they receive such a request, the E&O
insurer will be able to provide well-informed advice on how to respond.
Agents should also be wary of requests for documents and recorded statements
from the insurance companies they represent. Agency contracts require agents to
cooperate with their insurers on claims, but in recent years, many insurers
have shown that they are more than willing to use the information they get from
their agents to sue the agents. The moment an agent receives such a request
from one of its insurers, it should put its E&O insurer on notice. Then the
E&O insurer can appoint counsel to intercede on the agency's behalf and
keep the agency from doing something it will regret, such as giving a recorded
statement.
Summary
Retail agents often overestimate their ability to handle E&O claims
themselves, may fear reporting potential claims, and may not be as careful as
they should be when admitting mistakes to their policyholders. As a result,
they may violate the requirements of their E&O policies. That may cause
small claims to become large claims, and the large claims may be denied because
of the agents' actions. The danger of reporting potential incidents to
E&O insurers is generally overstated. The greater danger is not to report
them.