Avoid Agent E&O Claim Denial

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:

1. When you are having a discussion with someone in the office about whether or not to report an incident, report it.
2. When there is a claim, and you discover that the policyholder had requested coverage that was not provided, report it.
3. 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.