Avoiding E&O Claims Education...Virtually all insurance agent E & O policies are written on a...

Avoiding E&O Claims

A.D.Banker&Company®

TABLE OF CONTENTS

Avoiding E & O Claims

Introduction ............................................................................1Course Objectives

Chapter 1 The E & O Landscape ............................................5Frequency and Severity; Who is Responsible for E & O Claims?; Recurring Factors; Review Ques-tions

Chapter 2 Behaviors to Avoid .............................................31Recurrent Behaviors; Emerging Behaviors to Watch Out For; Review Questions

Chapter 3 Insurance: Agent E & O Policy Provisions ........51Claims-made Forms; Submission of a Claim; Costs and Consequences; Review Questions

Review Questions Answer Key ............................................75

Copyright 2016 © A.D. Banker & Company®, L.L.C.

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Disclaimer: This course, seminar, or publication provides general information regarding the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. The publisher hereby expressly excludes all warranties. The information in this text is current as of the date of publication

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Introduction

When insurance producers and agencies are named in E & O claims and lawsuits, certain components of those claims and lawsuits seem to recur with regularity. In some cases, the periodic behavior is not flagged as a potential E & O issue until after a claim has been filed. In other cases, recurrent behavior waves a red flag and shouts, “Sue me!”

If chronic behaviors can be identified before a loss takes place, and are thereby avoided, far fewer E & O claims will result. Producers need access to tools and knowledge that will help them prevent the adoption of behaviors that result in the submission of E & O claims. Unknown to some producers, certain types of unintentional behaviors actually invite allegations of wrongful acts or negligent inaction.

A number of national insurance agent E & O insurance carriers have shared with us statistics, trends, claims scenarios, and other data that spotlight behaviors producers should avoid. Some trends have remained constant over the years and others fade away or jump to the head of the class based upon criteria pertaining to the current insurance marketplace. When producers familiarize themselves with the E & O climate in the sections of the insurance industry in which they are licensed, they are better equipped to not only avoid the behaviors that invite the submission of E & O claims but also to improve their relationships with clients and insurance carriers.

One national insurance risk management firm found that potential errors and omissions exposures existed in nearly all the insurance agencies it reviewed nationwide. The firm also found the majority of insurance agencies do not have a written procedures manual, an internal audit system, or consistent file organization. It estimated that half of all E & O claims evaluated could have been dismissed or defended successfully with proper file documentation.

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INTRODUCTION

E & O claims fall into three basic categories:

1. Negligence: The failure or lack of the insurance producer to transact insurance in the same fashion a reasonable and prudent insurance producer would, given the same knowledge and level of experience as the producer alleged of wrongdoing. This failure or lack can be the result of an error, an oversight, or actually doing the right thing but not properly documenting the insurance transaction.

2. Unethical or illegal actions (or inactions): The producer commits an act or fails to act in such a way that results in unethical or illegal conduct. This conduct can be deliberate or unintentional, although most producers against whom E & O claims are submitted are not found guilty of crimes.

3. Unfounded allegations: A client or insurance company makes an unfounded allegation the producer committed a wrongful act that resulted in financial loss to the claimant or plaintiff.

Virtually all insurance agent E & O policies are written on a claims-made basis; therefore, it is essential for all producers to understand how these contracts work. Claims-made E & O policies include definitions and provisions that are not found in the majority of other property and casualty insurance policies.

Failing to report a loss according to the terms of the E & O policy often precludes coverage. This means the carrier will deny coverage, even if it would otherwise be provided, solely because the producer did not submit a loss notice in the fashion outlined in the policy … or within the specified timeframe.

As with any type of insurance liability claim, the processing and settlement of an E & O claim requires the insurance company to conduct an investigation. The process, even if a claim is settled without having to go to trial, usually requires the assistance of an attorney and a legal defense team. Depositions are often required and a great deal of

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INTRODUCTION

time, energy, and expense is expended during the process of handling and settling a claim.

If producers transact insurance without having E & O insurance coverage in place, they are personally responsible for providing their own investigation and legal defense—as are other individuals who find themselves uninsured when faced with a liability claim or lawsuit. Uninsured producers are also personally responsible for all expenses that pertain to the claim or lawsuit, as well as any final judgment entered against them.

Course ObjectivesThe purpose of this course is to serve as a resource to agents, brokers, producers, adjusters, and other insurance professionals—all of whom are referred to as “producers” in this content. We review and evaluate recurrent behavior that has been reported by a number of national errors and omissions (E & O) insurance companies and risk management professionals with respect to actual insurance agent E & O claims.

E & O claims and lawsuits have a tremendous impact on insurance producers and agencies; it is for this reason our course reviews and discusses a number of consequences producers can expect to experience if an E & O claim is submitted against them or their employers. The outcome of E & O claims—aside from defense costs and potential judgments—range from lost income to loss of reputation. Some producers and agencies never recover fully from the submission of an E & O claim.

Because producers may not know what types of activities and performance result in E & O claims, this material reviews, discusses, and explains the types of behavior from which the majority of E & O claims arise. When producers armed themselves with knowledge, they are better able to avoid actions and/or inaction that are the most likely to precipitate litigation.


INTRODUCTION

Finally, this material reviews and discusses some of the more commonly found E & O policy provisions. Our focus is on the basic workings of the claims-made E & O coverage form, essential policy definitions and provisions, and the claims process, including emphasis on how crucial it is for producers to understand when and how to report losses.


1The E & O Landscape

E & O insurance carriers constantly evaluate claims data, especially in the early months of each calendar year, after collecting all pertinent data from the previous year’s claims, to identify emerging trends. Certain trends remain constant over the years—and across the board among all insurance carriers offering the same lines of insurance.

Other trends surface based on changes within the insurance industry, modification of policy language and forms, revisions to insurance company underwriting appetite, the ever-changing economy, and a number of other factors. Monitoring statistics and trends is a proactive way for insurance companies, as well as producers and agencies, to avoid behaviors that leave them vulnerable to E & O claims.

Curtis Pearsall of Pearsall Associates, Inc.—one of the nation’s leading insurers of agent E & O insurance and former vice-president of Utica National—claims that some recent E & O “hotspots” include:

■ Certificates of insurance■ Additional insured endorsements■ Personal liability issues concerning dogs

Mr. Pearsall also reports that other issues of special concern to insurance producers in the current insurance marketplace are:

■ Documentation (or lack thereof)■ Applicant signatures on insurance applications■ The value of the aggregate limits on the E & O policy■ Social media


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Frequency and SeverityClaim frequency is the calculation of how often claims occur. Claim severity is the calculation of the financial significance of claims. Claims in personal lines tend to occur with more frequency; however, commercial lines claims tend to be more severe. A commercial lines E & O claim is often two to three times more costly than a personal lines claim.

If an insurance producer submits three E & O claims within a two-year period, he has a problem with frequency.

If an insurance producer submits a single $1,000,000 claim, he has a problem with severity.

If an insurance producer submits four claims within a four-year period in amounts of $1,000, $2,000, $200,000, and $500,000, he has a problem with both frequency and severity.

More claims are submitted in commercial lines than in personal lines. This statistic is directly related to the lack of standardization in commercial lines coverages and the greater variety of available coverages. Because personal lines coverages tend to be more uniform and more easily understood, fewer claims are filed; and of those that are filed, fewer are severe.

Who is Responsible for E & O Claims?The majority of all E & O claims submitted nationally allege negligence on the part of producers. Although customer service representatives (CSRs) outnumber producers in the agency workforce, and most CSRS are also licensed producers, individuals who serve as outside sales producers are responsible for the submission of E & O claims far more often than any other member of the agency workforce.

Why are E & O claims brought against producers more often than against other insurance professionals?

It could be that producers are the frontline representation of the insurance industry: they are more visible and,

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sometimes, more memorable when policyholders find themselves in need … or when they are displeased. It could be that because producers are sales-driven, they spend less time reading policies and working with underwriting and claims guidelines than CSRs, underwriters, and adjusters do. It could also be that many producers, because they spend the majority of their time outside the office, do not understand the true importance of documentation and the accuracy required on insurance forms and documents.

Whatever the reason, producers should be especially careful and attentive to detail when it comes to documenting client conversations, phone calls, preparing and transmitting fax and email communications, reviewing and verifying information obtained during the process of taking an insurance application, and processing client payments. Insurance professionals should remember that it is highly unlikely they will find themselves on the wrong side of an E & O claim because they provided too much documentation!

Recurring FactorsAlthough E & O prevention focuses on problematic areas that invite or result in the submission of claims and lawsuits, certain types of conduct actually diminish the likelihood producers will be charged with an allegation they committed a wrongful act. Most E & O insurance carriers offer premium discounts to producers and agencies that comply with procedures proven to reduce the likelihood of an E & O claim submission.

For example, if a certain percentage of agency owners, members of management, producers, and customer service representatives attend E & O seminars on an annual basis, a carrier may discount the annual E & O policy premium by 10 percent. Historically, certain factors have generated premium discounts:

■ Attendance at approved E & O seminars■ Attainment of insurance designations■ Use of experience analysis checklists

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■ Consistent use of internal agency procedures manual

Attendance at E & O SeminarsE & O insurers report that virtually all producers who do not have an E & O claim history attend E & O seminars on a regular basis. When insurance agency employees attend approved seminars on a regular basis, and are trained to understand and predict the types of behaviors to avoid, they are sued less often than their counterparts who do not complete similar training.

E & O seminars, often offered by an E & O carrier to any and all producers who market their policies, not only provide students with details about behaviors to sidestep, they also provide them with recent developments in the insurance marketplace that have the potential for future of E & O claim submissions. A significant number of groundless and false E & O claims are submitted each year; when producers understand what prompted those groundless and false allegations, they are better able to avoid or defend them in the future, as well.

Insurance DesignationsThe organizations that sponsor insurance designations require designees to regularly complete hours of insurance continuing education over and above the number of hours required by state insurance regulators. When insurance producers achieve professional insurance designations, they are not only communicating their commitment to ongoing continuing education and to the insurance industry itself but also to providing the best of service to their clients and consumers who seek their advice. Insurance designees exhibit their dedication to continuously building their insurance knowledge, embracing ethical practices, and the insurance industry by spending significant time expanding their expertise and continued growth and development.

For example, the Chartered Life Underwriter (CLU) designation helps individuals make recommendations about aspects of risk management using personal and business

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insurance solutions, provide guidance about legal aspects of life insurance contracts and choosing beneficiaries, and help clients make decisions about estate planning.1

The CLU designation requires individuals to meet the following qualifications, education requirements, and compliance standards:2

■ Three (3) years of full-time business experience within the five (5) years immediately preceding the date the designation is awarded

■ Five (5) essential courses and three optional courses□ The total of the eight (8) courses is the equivalent

of 24 semester credit hours□ Each course requires the designee to pass a

closed book final exam■ The completion of 30 hours of approved continuing

education during every two-year period

Use of Experience Analysis ChecklistsCurtis Pearsall’s blog, Agents E&O Tips, reinforces his well-known viewpoint that experience analysis checklists are “a tool that is considered by many the closest thing to a silver bullet in avoiding E & O claims.” A commercial lines exposure analysis checklist is provided by computer software and provides detailed knowledge and information about more than 650 SIC codes and all related lines of business. It may also provide valuable information for personal lines accounts.

When the software is used, producers are able to supply insurance proposals prepared specifically for the unique risks their prospects face. Most commercial lines insurers offer proprietary versions of these checklists for the specific types of insurance meeting their appetites for new business.

1 http://www.theamericancollege.edu/insurance-education/clu-insurance-specialty#curriculum

2 https://www.finra.org/investors/professional-designations/clu

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ExampleIf ABC Insurance Company seeks to insure restaurants, its underwriting guidelines will specify what kinds of restaurants it wishes to insure (i.e., fine dining) and what kinds of restaurants it will not insure (i.e., fast food).

In addition, the carrier will provide a listing of all applicable coverage options and endorsements in its restaurant program so producers may offer all available coverages when preparing a new business proposal.

For nearly 30 years, the leading cause of E & O claims has been the producer’s failure to provide the proper insurance coverage, which has accounted for just over one-half of all E & O claims in any given year. Exposure analysis checklists provide a tremendous amount of valuable data about each class of business, including an industry overview, and are a crucial tool for use by agencies that hope to avoid the submission of E & O claims

Underwriting characteristics are explained, along with key risks and exposures inherent to the SIC code. These details help educate the producer about the class of business and each specific risk, as well. When a producer provides an applicant or existing policyholder (i.e., at renewal) with one of these checklists, or a proposal prepared using one of these checklists, the applicant or insured is offered all available coverages and options. He or she then affixes a signature to the printed form, after indicating precisely what coverages were accepted and rejected.

Some exposure analysis checklist software programs actually allow the producer to complete the necessary ACORD application and related forms, email it to the appropriate underwriter, and track the application through the underwriting process. In addition to serving applicants and policyholders by using the most applicable and up-to-date information available relating to their business industries, producers and agencies take proactive measures against the submission of E & O claims against them by using exposure analysis checklists.

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Internal Agency Procedures ManualMany years ago, the existence of an internal agency procedures manual was the number one factor contributing to low E & O losses. Unfortunately, several issues became apparent over time and the use of an internal agency procedures manual is not always a good practice. Depending upon how the procedures manual is used, its existence may actually increase E & O losses!

One life insurance company’s Agent Procedure Manual (sub-titled Rules and Regulations contains the following sections (among others):3

■ Authorized and unauthorized acts■ Contracting/licensing■ Marketing

□ Internet□ Advertising approval procedures and guidelines

■ Policy benefits■ Underwriting/New Business

□ Annuity underwriting□ Life underwriting

■ Compliance□ Code of ethics□ Anti-money laundering□ Privacy□ Suitability□ Advertising□ Solicitation□ Replacement□ Claims□ Complaint handling□ Continuing education

3 https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0ahUKEwitooOow7PJAhVIOT4KHYNuCZUQFgg7MAE&url=https%3A%2F%2Fwww.nationalwesternlife.com%2Fbeacon%2Fpdfs%2FSA-8382.pdf&usg=AFQjCNEArI0st3rHjBy4Js9IjG9uXsC4Qg&bvm=bv.108194040,d.eWE

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If an internal agency procedures manual is used consistently by all staff members, and if its provisions are enforced uniformly, a procedures manual can be an extremely valuable E & O prevention tool. However, when an agency procedures manual is not used consistently, or is not used by all staff members, an agency may find itself even more vulnerable to claims than if it did not have a procedures manual at all. The same holds true if enforcement of agency procedures is not uniformly exercised—or is not exercised at all.

Claims by Line of BusinessThe majority of E & O claims are submitted in the property and casualty segment of the insurance industry.

1. Workers’ Compensation Insurance – More than half of all reported claims are submitted in commercial lines.

2. Flood and Homeowners Insurance – Approximately 35 percent of all reported claims are submitted in personal lines.

3. Surplus and Specialty Lines – The remaining 5 to 10 percent of reported claims is attributed to life insurance, health insurance, flood insurance, and miscellaneous other types of insurance.

Although an increasing number of Workers’ Compensation claims have been reported during the last few years, the majority of E & O claims reported in commercial lines have been credited to general liability, property, builder’s risk, and business auto. In personal lines, the majority of claims have been ascribed to homeowner insurance, with auto physical damage coverages (collision and comprehensive), dwelling fire, and inland marine claims occurring less often.

Some E & O carriers are reporting their percentage of claims being closed without payment (other than for defense costs) at approximately 60%. Clearly, the policyholders of these carriers were able to present documentation and a sound defense for their positions.

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On the other hand, the trend toward increasing severity in the insurance agent E & O segment of the industry has been noted by risk management professionals and insurers alike. Although insurers in some states report that one in five insurance agencies is sued each year, most industry experts agree the nationwide average is about one in every 16 agencies—or about six to seven percent rather than 20 percent.

The average insurance producer E & O claim judgment totals around $60,000; however, the number of awards in excess of $1,000,000 is mounting at an alarming rate. Some E & O carriers have even reported losses in excess of $5,000,000—which is garnering much attention in commercial lines.

Workers’ Compensation: Commercial ClaimsWorkers’ Compensation insurance has been the subject of an increasing number of errors and omissions claims during the last few years, particularly concerning the audit and other states provisions of the policy. It is estimated by some E & O risk management professionals that the sales and service of Workers’ Compensation is among the top five types of insurance agent E & O claims.

Part of the reason for policyholders prevailing against their producers with respect to Workers’ Compensation insurance is a state Supreme Court ruling that was adopted by the courts in a number of other states. Specifically, the court in one state ruled that because Workers’ Compensation coverage is compulsory, the policyholder is permitted a right of action against producers if adequate coverage was not provided.

Another reason for the high incidence of E & O claims resulting from Workers’ Compensation insurance is the policy’s audit provision. Although the audit provision has existed for many, many years, some producers are either unaware it exists or do not understand how it works. In addition, when policyholders find themselves

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owing a very large audit premium—within 30 days and without the option to finance the very large additional premium—they often file suit and allege the producer never explained the policy premium was estimated and subject to audit. Failure to explain the audit provision of the policy properly is the #1 allegation made by claimants who sue producers and agencies over the Workers’ Compensation insurance policy.

Part Five of the Workers’ Compensation policy describes how the policy premium is calculated, when it is due, how it should be paid, and how cancellation affects premium. Part Five also requires the insured to keep payroll and other records and gives the insurer the right to inspect and audit the insured’s records as they pertain to the Workers’ Compensation policy.

It is especially important for producers to explain to clients that the Workers’ Compensation policy premium is based on an estimated payroll exposure. If the actual payroll exposure during the policy is different from the estimated exposure, the policy premium will change.

Other factors are then considered during the premium calculation process, including but not limited to modification factors and any applicable discounts or credits. Assessments and other charges are also added, depending upon the state, before determining the initial policy premium. The insured must pay all Workers’ Compensation premium payments when due, even if the Workers’ Compensation statutes in the jurisdiction are not valid.

The initial premium for each policy period is an estimated premium based on the insured’s anticipated annual payroll for the policy year. At the policy’s expiration, the insured’s payroll records are audited to determine the actual payroll during the policy period. The final premium is determined after the insurer conducts a policy audit of the payroll report submitted by the insured. If the insured’s actual payroll was higher than the estimated payroll, the insured owes the insurer

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additional premium. If the actual payroll was less than the estimated payroll, the insurer owes the insured a refund. The premium audit determines the final premium.

ExampleDavid at Royer Accounting provides his new insurance producer with an estimated annual payroll of $250,000. Just before the policy renews, the insurer mails Royer Accounting a payroll report form—the form used to audit the policy. The form requires the insured to provide actual payroll figures for the policy year about to expire AND to provide documentation of those figures in the form of certain tax forms (i.e., 941 and unemployment wage reports).

If the actual payroll was $200,000, the final policy premium will be less than the initial premium and a premium refund will be issued when the audit is completed. If the actual payroll was $300,000, the final policy premium will be more than the initial premium and an additional premium invoice will be issued when the audit is completed. The invoice will be due within 30 days of its issue date.

Assume the initial policy premium for $250,000, with all fees and assessments, was $1,000. Further, assume the final premium for $300,000 was $1,200. The insurer would issue a premium invoice for $200 and it would be due within 30 days of its issue.

In most cases, even if David at Royer Accounting did not understand the audit provision of the Workers’ Compensation policy, he probably would not file an E & O claim for $200. But if the actual payroll were $1,000,000 … and the final premium were $4,000 …and the additional premium due within 30 days were $3,000 … David might be inclined to do so.

Despite the fact the audit provision is clearly stated in the policy, it is imperative for producers to explain it not only exists but also how it works. Furthermore, producers should document that explanation, especially if the policyholder uses subcontractors.

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The use of subcontractors is another area of concern with respect to E & O coverage for producers who sell and service Workers’ Compensation insurance. As previously stated, the policy premium is based on estimated payroll. If a subcontractor has its own Workers’ Compensation insurance—and can verify the existence of that coverage per a certificate of insurance, the amount the policyholder pays to the subcontractor will not be considered payroll.

However, if verification of the subcontractor’s Workers’ Compensation insurance is not provided at the time of audit, the policy premium will be revised to reflect the subcontractor as an employee. This will result as the subcontractor’s payments being considered employee wages—or payroll. The premium rate for construction workers can be very high which, in turn, will generate a very large additional premium if significant payroll was not included in the initial premium calculations.

ExampleMurphy Construction reports at policy inception estimated annual payroll of $500,000; this figure excludes all its subcontractors. If, at audit, Murphy is unable to provide a certificate of insurance for a subcontractor to whom it paid $20,000 for contracted roofing work, additional premium will be due.

Assuming the rate per $100 for roofing is $40, Murphy will be billed an additional audit premium at audit of about $8,000 for the $20,000 of payroll that was not included. In addition, the estimated premium for the existing term will be adjusted upward to reflect the revised payroll, which will generate an additional premium for the current term.

Not only is this producer vulnerable to being sued by the policyholder for failing to explain the policy’s audit provision, the carrier may actually be concerned that the producer and policyholder conspired to defraud the insurance company to reduce the policy premium.

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Other States coverage is the second-largest area of concern to E & O carriers with respect to the Workers’ Compensation policy. Because each state regulates benefits provided to workers within its jurisdiction, it is extremely important for a producer to obtain from a policyholder the workplaces of all employees. Item 3.A. of the Information Page lists the states in which coverage applies. The states listed should be those in which the insured business is located AND in which regular operations are conducted AND where workers perform duties.

Other States Coverage is not intended to provide Workers’ Compensation and employers’ liability benefits for ongoing and regular operations in other states. It is intended to provide coverage for the following exposures:

■ Employees traveling through other states■ Employees working temporarily in other states■ States in which the insured employer expects it

may have operations

When another state is listed in Item 3.C. of the Information Page, the policy provides benefits as required under the Workers’ Compensation statute of the state that appears. Monopolistic states may NOT appear on Item 3.C. and coverage is NOT provided in those states (i.e., WY, WA, ND, OH). It should be noted that, on occasion, a monopolistic state such as Wyoming may allow an exception on a very rare basis to an employer insured with a national insurer AND that has the majority of its operations in, and is insured in, a bordering state, such as Montana.

A "monopolistic" state is the only source of Workers’ Compensation insurance in the state; meaning NO private insurers are permitted to sell coverage.

If the insured has work on the effective date of the policy in any state not listed in Item 3.A. of the

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Information Page, coverage will not be afforded unless the insured notifies the insurer within 30 days. It is for this reason that producers should document their requests for policyholders to disclose the workplaces of all employees—at the time of application and at every policy renewal. Producers should also communicate clearly to their business clients that any change in operation during the year, especially with respect to any out-of-state activities, must be reported to the carrier.

Flood Insurance: Personal Lines ClaimsNationwide, the vast majority of flood insurance is written by the National Flood Insurance Program (NFIP) or private insurers affiliated with the NFIP in its Write Your Own (WYO) Program. Because the federal government reinsures flood insurance written in the NFIP, all carriers writing flood insurance must utilize the same manual rules and rating standards. Additionally, FEMA requires all producers who sell flood insurance to complete a one-time continuing education course “related to flood insurance and the NFIP” before selling coverage. The course must be approved by the state for three hours of credit.

Producers should note that although each state has adopted these minimum training requirements (per Section 207 of the Flood Insurance Reform Act of 2004), some states have imposed additional requirements. The state actions taken to implement flood insurance training requirements for agents can be found on FEMA’s website at www.fema.gov/state-actions-implement-flood-insurance-training-requirements-insurance-agents.

Unfortunately, most producers write very little flood insurance—even after they have completed the required training. This fact is borne out by the increasing number of producers who are sued each year because they:

■ Did not explain their client’s property insurance policy excluded coverage for flood (and other types of water damage)

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■ When explaining how the flood insurance policy works, did not explain it properly

■ When selling flood insurance to cover a building with a replacement value higher than the maximum amount of flood insurance available in the NFIP, did not offer excess flood insurance

All standard property insurance policies, including those written in personal and commercial lines, specifically exclude coverage for water or water damage. The exclusion applies to damage caused by flood, waves, tidal waves, tsunami, and overflow of any body of water, regardless of whether the damage was caused by wind driven water or storm surge. Other types of water damage that are excluded include:

■ Water that backs up through sewers, drains, and sump pumps

■ Water beneath the surface of the ground that seeps into or through basements, driveways, sidewalks, etc.

■ Water that accumulates on the surface of the ground

■ Waterborne material

Producers must be sure to explain to all their property policyholders that flood—and, in fact, the majority of all types of water damage—is specifically excluded. Many carriers and agencies have a stamp or sticker they place on the cover page of their property policies stating, “This policy does not provide coverage for flood.”

Even if producers use this method to bring the water/water damage exclusion to the attention of their policyholders, providing additional verbal and written documentation of the exclusion is wise—from two perspectives: providing the best service to the client and protecting oneself from the submission of E & O claims. The best method for producers to avoid allegations they neglected to explain that flood damage was not covered by their clients’ property insurance policies is to obtain

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a flood insurance proposal and document the client’s rejection of flood coverage.

Another significant oversight alleged against producers is their failure to recommend excess flood insurance to clients with buildings valued in excess of the limits sold in the NFIP. Flood insurance may only be written on property located within participating communities. Participating communities are eligible for coverage based on their phase of participation in the NFIP; and these phases determine the maximum amounts of flood insurance that may be sold in the community.

The Emergency Program is a community’s earliest phase of participation. The Regular Program is the final phase of participation and it offers the highest limits of flood insurance that are available. Unlike other forms of property insurance, flood insurance limits are capped quite low.

Coverage limits in the Regular Program are:

Building Coverage Maximum Insurance Available

Single-family residential $250,000

2- to 4-family residential $250,000

Other residential $25,000

Non-residential and business $500,000

Contents Coverage Maximum Insurance Available

Residential $100,000

Non-residential and business $500,000

Regardless of the replacement value of a building or structure, these limits are the highest amounts of flood insurance that can be purchased in the NFIP. Higher limits may be available from private insurers in some states or in the surplus lines market.

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ExampleThe replacement value of Antonio’s home is $400,000. When his producer provides him with a flood insurance quote, she explains that the policy only provides $250,000 of coverage and his home is underinsured. She also provides him with a flood insurance quote from a surplus lines insurer for $150,000 of coverage. If Antonio decides not to purchase the excess flood coverage, the producer should secure his written declination of her offer.

The final concern of producers with respect to flood insurance is to be sure to read the policy and understand how it differs from other types of property insurance. Examples of unique NFIP policy provisions include:

■ The policy only insures one building—it cannot insure multiple buildings

■ A 30-day waiting period applies to all new business policies and endorsements that increase coverage unless an exception applies; exceptions exist for coverage being written in connection with a loan closing, due to the request of a mortgagee or lender, remapping increased the property’s flood zone from a low- or moderate-risk flood zone into a high-risk flood zone (referred to as a special flood hazard area or SFHA), and a few other circumstances

■ The policy deductible applies separately to building and contents coverages

■ If any insured commits concealment or fraud with respect to the policy, in any fashion, coverage is voided

■ The policy does not renew automatically

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■ Loss conditions are very strict and very different from other policies; for example:□ Notice of loss must be provided in writing to

the insurer□ Damaged and undamaged property must be

separated□ If permitted to do so by the authorities,

photograph the standing water levels and provide the insurer with the photographs

□ The insured is responsible for preparing and submitting a proof of loss within 60 days of the loss—this is something the adjuster does under other types of policies; the adjuster is NOT required to do so for a NFIP policy

Homeowners Insurance: Personal Lines ClaimsDog ownership is now responsible for a significant number of liability claims submitted under homeowners and renters insurance policies. Because liability claims for dog bites account for more than one-third of all homeowners claims, producer E & O claims arising from homeowners policies have also risen. Although the actual number (frequency) of dog bite claims has decreased in recent years, the average size of those claims (severity) has actually increased—to about $30,000 per claim.

One emerging trend is that homeowners claims and lawsuits related to dogs are no longer limited to dog bite; injured parties are now filing claims because children, seniors, and bicyclists have been injured in another fashion, such as being knocked to the ground. If a producer happens to insure the owner of such a dog, and failed to explain coverage limitations or exclusions for bites or other injuries caused by dogs, the producer can expect to be sued when the dog’s owner finds his or her homeowner’s policy does not respond to the claim or lawsuit filed after Rover’s indiscretion or rude behavior.

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Although many insurance companies restrict the coverage they provide for dog bites—via underwriting guidelines—by declining to write coverage for breeds such as Pit Bulls and Rottweilers, others issue exclusionary endorsements for dogs of certain breeds. In addition, some carriers also exclude injuries other than bites.

ISO’s Canine Liability Exclusion Endorsement, Form HO 24 77 (05/11), excludes coverage “arising out of direct physical contact with a canine described in the Schedule that is owned by or in the care, custody, or control of an ‘insured’.”

This means that if Rover is excited to see a visitor and causes injury when sitting on the visitor’s foot, when Rover’s owner submits a homeowners claim after receiving a medical bill from the visitor, the claim will be denied.

It is essential for producers to a) be sure they are familiar with their insurers’ underwriting guidelines concerning ineligible dog breeds, and b) read any canine endorsements that limit or restrict coverage.

Trampolines have become very popular, especially among Americans between the ages of 8 and 15. Unfortunately, as the popularity of trampolines has grown, so has the rate of injury caused by trampoline use. According to the U.S. Consumer Product Safety Commission (CPCS), trampoline injuries that resulted in hospital emergency room treatment nearly tripled over the last 25 years.

Children ages 6 to 14 sustain more injuries than any other age group and the most injuries are caused by jumpers colliding with each other, falling on the trampoline’s springs or frame, falling off or jumping off the trampoline, and trying to perform somersaults and other stunts. The CPCS’s website lists dozens of product recalls concerning trampolines and trampoline safety nets. Because of the extreme liability risk posed

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by trampolines, most insurance carriers either refuse to write homeowners insurance for policyholders who own trampolines or they issue homeowner endorsements that exclude coverage for trampoline-related injuries.

When quoting and writing homeowners insurance, it is advisable for producers to include a written statement about the underwriting concerns and policy exclusions pertaining to trampolines. Making a verbal statement about trampolines, or pointing out the trampoline question on an insurance application, is not likely to provide a strong enough defense for a producer in the event a client claims he or she was not informed about coverage restrictions pertaining to a trampoline.

According to the Small Business Association (SBA), more than one-half of all businesses in this country are home-based businesses.4 The unendorsed homeowner policy only provides coverage for business in one place—the Special Limits of Liability under Coverage C – Personal Property; it does not provide liability coverage for any business exposures and, in fact, specifically excludes business liability in several places.

Although no property exclusion exists if the dwelling is used for business purposes, an exclusion does exist for Other Structures if they are used for business purposes. Additional exclusions are included in the Insurance Services Office (ISO) homeowners program, including property coverage for Other Structures used to store certain types of business personal property.

Several endorsements are available to provide limited property and/or liability coverage on the homeowners policy for home-based businesses and business activities taking place on the residence premises insured by the homeowners policy, however, the vast majority of business liability exposures of a home-based business cannot be insured on the homeowners policy. It is for this reason producers should make a concerted effort to determine if any type of business activity is being

4 https://www.sba.gov/content/home-based-businesses

THE E & O LANDSCAPE


conducted in the homes, out-buildings, and premises owned by clients who purchase homeowners insurance.

Most insurance companies will write homeowners coverage if business activities are taking place on the premises, so long as the business has in place commercial lines policies covering the liability exposures and the type of business is not prohibited by the insurer’s underwriting guidelines. It is very important to keep in mind that some types of business exposures will make an applicant ineligible for coverage if they take place on the residence premises. Examples include day care and manufacturing operations.

Producers who sell primarily personal lines or life, accident, and health coverages are especially vulnerable to E & O claims and lawsuits when selling and servicing commercial lines of insurance. Because they are unfamiliar with commercial lines coverages, personal lines and LAH producers do not realize their small business clients have a wealth of opportunity to buy insurance for their businesses in commercial lines.

This is one of the areas where presenting all business clients—even those who own and operate businesses from their homes—with an experience and analysis checklist will prove invaluable. Of course, the checklist should be prepared by the agency’s commercial lines department to be sure all available coverages are offered; however, any offer of commercial lines coverage to fill the tremendous number of coverage gaps will help reduce E & O claim submissions.

Surplus Lines InsuranceE & O loss prevention experts agree that retail insurance producers and agencies must be aware of a number of vital elements involving the excess and surplus insurance markets if they are to avoid E & O claims and lawsuits. Because insurance regulations pertaining to the surplus lines market are different from those that apply to the standard marketplace, many producers experience large

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gaps of knowledge when attempting to place (or actually placing) business with a wholesaler (i.e., excess and/or surplus lines broker, brokerage, producer, or agent).

The reason retail producers submit business through wholesalers is because their standard carriers cannot, or choose not to, write insurance for certain types of risks. Because many producers seldom run across distressed, high-capacity, or unique risks, they tend to place business with wholesalers on an infrequent basis. This lack of expertise is what makes producers unaware of practices that, while common in the surplus lines marketplace, wreak havoc when applied to transactions in the standard insurance marketplace.

The biggest difference between insurance offered in the standard and surplus lines markets is that surplus lines insurers, unlike standard insurers, do not file their policy forms and rates with state insurance regulators. Because the lack of regulatory oversight permits surplus lines carriers more freedom when designing policies that provide insurance for the types of risks they insure, it also allows for more misunderstandings and potential coverage gaps.

Surplus lines carriers regularly use endorsements to limit, restrict, and exclude perils as an underwriting tool when designing coverage for applicants. Examples of exclusions that are often found in surplus lines policies include:

■ Complete assault and battery exclusions for businesses in the hospitality industry

■ Complete bodily injury exclusions for subcontractors

■ Complete theft and/or vandalism exclusions for vacant property

One of the most significant matters for producers to keep in mind is that it is quite common for a wholesaler to provide a proposal that offers insurance coverage and terms that vary greatly from those requested on the

THE E & O LANDSCAPE


insurance application. It is crucial for all retail producers to compare each and every surplus lines proposal with the application to identify conflicts, differences, and coverage gaps.

When providing commercial general liability coverage in surplus lines—especially for builders and contractors, it is common for insurers to issue a Classification Limitation endorsement. This endorsement specifies the policy ONLY provides coverage for business operations that have a corresponding classification code listed on the policy Declarations.

ExampleCarl Carpenter is a genius with his hands. He designs and builds staircases, kitchen cabinets, and interior trim. His CGL policy lists carpentry classification codes for Carpentry-Interior and Carpentry-Shop Only.

One day, Carl is offered a job building an addition on a client’s home. He normally does not accept this type of job but, because business has been slow, he accepts it. When Carl accidentally injures the homeowner while working on the project, he learns his surplus lines CGL policy contains a Classification Limitation endorsement that precludes coverage for the construction of residential property because the classification code for that type of work does not appear on his policy.

Carl learns that if the policy had not contained the endorsement, the carrier would have paid the claim and added the classification code for Carpentry-Construction of Residential Property not Exceeding Three Stories in Height (probably retroactively to the effective date) and collected the additional premium. As a result, Carl sues his producer for not explaining the endorsement and its consequences.

Another important issue when placing coverage in the surplus lines market is that the wholesaler does not have an obligation to:

■ Explain coverage

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■ List what coverages requested on the application are not being offered

■ Provide detail about how the proposal differs from the application

Wholesalers do not engage directly with the applicant or policyholder because their clients are the retail producers. The sole purpose of a surplus lines broker or producer is to act as an intermediary between the retail producer and eligible surplus lines insurers. Retail producers have the obligation, and are expected, to understand surplus lines coverages, how the surplus lines market works, and to provide all explanations and disclosures to their clients.

Retail insurance producers must acquire working knowledge of the products available in the surplus lines market if they are to not only service their clients adequately but also to avoid being sued for negligence. Producer must also understand how transactions are affected by surplus lines insurance laws and provide proper advice and recommendations to their clients. In most cases, surplus lines agents, brokers, and producers are happy to help retail producers gain an understanding of their processes and available products. In most cases, all a retail producer has to do is ask for information, advice, or sample policies and forms to acquire necessary assistance.

Another issue of note producers should keep in mind when writing and renewing insurance in the surplus lines market is that retail producers cannot bind coverage. In fact, many surplus lines brokers and producers are unable to bind coverage, as well. This means producers must be sure to allow their clients adequate time to complete paperwork and all underwriting requirements at the time an application is submitted in order to avoid coverage gaps. Many, many E & O claims have been submitted against producers who were under the mistaken impression that if they submitted a new business application or a bind request

THE E & O LANDSCAPE


to their surplus lines broker, coverage was put into place immediately.

The final major issue pertaining to E & O claims in surplus lines is the difference between a quotation and an indication. A quotation is a firm offer of pricing and terms. If the retail producer indicates the applicant wants to purchase insurance, the wholesaler can bind coverage per the quotation.

On the other hand, an indication is an educated guess about pricing and terms—it is not firm. Wholesalers provide indications on certain types of accounts, usually those they believe they are unlikely to write. An indication takes less time to prepare and underwrite, and is less precise. If the applicant is interested in coverage and pricing based on an indication, the wholesaler will then undertake the time and effort needed to prepare a quotation. Retail producers should also know that surplus lines coverage cannot be bound based on an indication.

1. Which of the following is NOT one of the three basic categories of insurance agent E & O claims?a. Producer negligenceb. Unethical or illegal producer behaviorc. Unfounded accusationsd. Defamation

2. What agency staff members are MOST likely to be responsible for the submission of E & O claims?a. Producersb. CSRsc. Agency ownersd. Agency bookkeepers

3. What tool is considered by many to be the closest thing to a silver bullet in avoiding E & O claims?a. E & O Insuranceb. CGL insurancec. Experience analysis checklistd. Business income worksheet

4. More E & O claims take place in what segment of the insurance industry?a. Personal linesb. Commercial linesc. Life and healthd. Surety

5. All the following are reasons E & O claims are submitted against insurance producers pertaining to flood insurance, EXCEPT:a. Producers refuse to write flood insuranceb. Producers do not explain the flood policy correctlyc. Producers do not explain the water exclusion in

property policiesd. Producers do not offer excess flood insurance

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2Behaviors to Avoid

Recurrent BehaviorsOver time, claims data shows that certain kinds of behavior crops up repeatedly in association with E & O claims. If producers avoid these behaviors, they reduce the likelihood of becoming the targets of E & O claims:

1. Failing to disclose to the insurance company all known information pertaining to a risk OR failing to disclose coverage or other information to the insured

2. Not obtaining the named insured’s signature on an insurance application or submitting new business or renewal applications without the signatures of all named insureds

3. Not obtaining written authorization for a policy change or processing change requests without the signatures of all named insureds

4. Not documenting conversations that involve coverage explanations, requests for coverage, cancellation of coverage, and/or renewals of coverage

5. Non-payment cancellation follow-ups, especially those that were not documented or were conducted inconsistently

6. Groundless accusations account for a certain number of frivolous claims and lawsuits each year, regardless of producer diligence or expertise.


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Failure to DiscloseProducers are required to disclose all known information to the insurance company with respect to an insured risk during the underwriting process, during the transaction of normal insurance business, and with respect to claims. While producers may believe they are helping clients (or the insurance company) by withholding information, they are actually guilty of concealment if their failure to disclose involves a material fact on an application or claim document.

Concealment is the willful holding back or secretion of material facts pertinent to the issuance of an insurance policy or a claim, even if the insured or applicant was not asked about the subject. Concealment can result in cancellation of the policy or denial of a claim and is quite often considered both a violation of fiduciary duty and a breach of contract.

Most producers owe their fiduciary duty to the insurance companies they represent; however, every producer owes some fiduciary duty to the client.

The level of this duty may vary by state and/or based on the producer-client relationship. For example, brokers owe more duties to their clients than do producers. If producers fail to disclose information to their clients, such as available coverages and limits, exclusions, and other policy conditions, they may be considered guilty of failing to disclose and/or concealment.

BEHAVIORS TO AVOID


ExampleThe producer and another producer were involved in the sale of group health coverage to a trucking firm. The producer and his fellow producer were both aware that most of the truckers used by the trucking firm were independent contractors—and not employees. They were also both aware that the health insurance policy only covered employees—not independent contractors.

The trucking firm and its truckers believed that all their truckers (both employees and independent contractors) were covered by the policy. When one of the truckers, an independent contractor, suffered an illness that created $500,000 in medical bills before he died, his heirs learned that the insurance carrier denied coverage because independent contractor truckers were not covered by the policy.

Both the producer and his associate shared liability for the failure to disclose. The producer’s E & O policy paid one-half of the final settlement, as did his fellow producer’s policy. Amount of each E & O claim: $155,000.

Not Obtaining the Named Insured’s Signature On an Insurance ApplicationE & O experts agree that the signed insurance application is a critical element when determining the outcome of an E & O lawsuit. Because the application is a legal component of the insurance contract (technically, it is the offer to contract), the lack of an applicant’s signature is evidence the contract is not legal and binding.

The signed application is as important with electronic application submissions as it is with the submission of paper applications. Although the electronic application submission process of many insurance carriers requires the actual electronic submission to take place before a paper application can be printed, producers should be sure print the document and obtain the applicant’s signature immediately as evidence:

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■ The producer asked the applicant all questions contained on the application

■ The producer typed into the computer the answers and information the applicant provided

In some states, producers are permitted by the department of insurance to retain electronic insurance applications with electronic signatures, so long as specific procedures are followed and record maintenance is kept in accordance with law. However, not all insurers wish to have their records retained electronically. It is crucial for producers to verify with their state insurance departments and insurers how their records must be maintained. Obtaining an actual or “wet” signature—even if scanning that document into a computer and retaining the document and signature electronically, presents producers with the best possible defense that they asked all questions on the application and the answers they recorded were exactly as the applicant provided.

ExampleClaiming false information was provided on the policy application, a carrier sued a producer after paying a claim submitted because the insured restaurant was destroyed by fire. The claim investigation revealed that the restaurant was, in fact, a nightclub that employed exotic dancers—something that had not been revealed on the application. The producer maintained that the information submitted to the carrier on the application was provided by the insured; however, the insured denied that the producer had even asked what activities were performed at the restaurant. Even though the lawsuit was eventually settled, it was very costly.

Not Obtaining Written Authorization for a Policy ChangeMany producers believe they only need authorization for changes that result in policy cancellation or reduced coverage/ limits. As the number of increasing E & O claims show, producers tend to be on the losing side of skirmishes when they cannot produce documentation confirming their

BEHAVIORS TO AVOID


recollection of events and conversations—regardless of the nature of the reason for the policy change.

ExampleThe client informed the producer that she and her husband had divorced, her husband had deeded ownership of their home to her, and he had moved elsewhere. She asked the producer to remove her husband from the homeowners policy and to remove him and his vehicle from their auto policy.

The producer complied with the client’s request and was sued several months later after the husband was involved in an auto accident. Although the couple had divorced, the husband had not deeded ownership of the home to his former wife and had not been aware his name was removed from any of their insurance policies. As a result, he was not insured at the time of the auto accident, for which he was deemed negligent.

Not Documenting ConversationsLack of documentation has been the major contributing factor in E & O claims settlements against producers since the birth of insurance. Regardless of the type of insurance involved, or the precise producer behavior that triggered the submission of an E & O claim, the single most common reason producers find claims or judgments made against them is they are unable to document their position.

It is not enough for producers to retain a piece of paper or type words into an agency management database. E & O experts provide the following tips for maintaining documentation that is most likely to come to a producer’s defense in the event a claim or lawsuit is filed:

■ Documentation must be recorded as soon as possible after the producer’s discussion with the client has taken place

■ Documentation must be factual and devoid of emotion and speculation

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■ Documentation must be clear and comprehensive so any other staff member reading it will gain a complete understanding of what transpired

■ Whenever possible and/or appropriate:□ Photocopies or duplicates of forms, applications,

emails, letters, etc. should be maintained□ A letter or email should be send to the client

confirming details of any discussion that is not supported by a document

ExampleThe producer’s long-time client was a woman who owned a $500,000 life insurance policy, three small life insurance policies, and a $250,000 annuity. Over the years, the client had often submitted policy changes to the insurer without the producer’s assistance, specifically for changes in the policies’ beneficiaries.

The original beneficiary designation on the $500,000 life insurance policy named two people to share the death benefit equally, the client’s second husband and her daughter from her first marriage. During the five years since the large life insurance policy was written, the producer and client had often discussed the daughter’s personal and financial difficulties. During the last conversation that took place between the producer and the client, the client stated that she should change the large life insurance policy’s beneficiary designation so her husband would receive the entire death benefit. The annuity contract’s beneficiary designation named the husband and daughter equally and the client believed that $125,000 was more than enough money for her daughter in the event of her death.

Six months after her last conversation with the producer, the client died. The insurer of the $500,000 life insurance policy issued claim checks to the client’s husband and daughter for $250,000 each because the beneficiary designation had never been changed. The husband was very upset because he stated that his wife had asked the producer to change the beneficiary designation to name him as sole beneficiary.

BEHAVIORS TO AVOID


Eventually, the husband sued the producer for negligence and breach of fiduciary duty because the insurer claimed it was only legally obligated to make claim payment according to the beneficiary designation—and not according to the husband’s recounting of a conversation that had allegedly taken place between his wife and the producer. The producer defended himself by saying that although he knew the client wanted to change the beneficiary designation, he was under the impression the client would be submitting the change herself.

Non-Payment Cancellation Follow-UpsMost insurance agencies opt to have insurance companies bill their clients directly when policies are issued or renewed. The process of direct-billing clients is less costly to the agency because it does not employ bookkeeping and other staff to service agency-billed accounts. The process of insurers direct billing policyholders also frees the agency of the legal duty to follow-up with clients when premiums are late or when they are not paid.

However, producers who choose to follow-up with their clients when premiums are overdue, or policies are pending cancellation for non-payment (or any other reason), incur considerable additional exposure to an E & O claim. Although making follow-up calls (or sending follow-up letters via regular mail, fax, or email) may be viewed in a positive light by clients, conserve some business, and save both the agency and insurer money, the cost of an E & O claim may wipe out any potential savings the process might otherwise produce.

One of the E & O issues producers cause with this follow-up process is the failure to follow-up with every single account that is overdue or pending cancellation. For example, only following up with commercial lines clients, specific high-net-worth personal lines clients, or auto policyholders may land a producer in hot water. Unfair discrimination, especially when such conduct causes harm, is not only difficult to defend, it also causes serious reputational

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damage to producers and the agencies for which they work. Consistency is key if a producer chooses to follow-up when premiums are overdue or policies are pending cancellation because, when E & O claims are presented against producers who failed to make contact as expected, they will be required to prove that client contact was made.

Not only does the follow-up contact need to be documented, the manner in which contact was made must also be documented. Leaving voice mail messages and recording messages in the agency management system may be consistent, but how can producers prove their clients actually received voice mail messages? Maybe one named insured never received the message because his wife deleted it … or the electricity went out and his answering machine does not have a battery backup.

More and more agencies are realizing the potential E & O nightmare they face by following up with clients when their premiums are overdue. If a producer or agency decides to stop this follow-up process, it is essential (from an E & O perspective) to first notify clients the producer and/or agency will be halting the procedure. It is best to notify all clients (even those who have not been contacted previously):

■ In writing (via certified mail or with proof of mailing)■ With a statement that clearly states:

□ No future contact will be made when premiums are overdue or policies are pending cancellation

□ The date the new procedure will go into effect

It is equally essential that exceptions to the new procedure are not permitted or undertaken.

Groundless AccusationsAnother historical trend is for the submission of groundless accusations to be made against insurance producers. Despite the professionalism and diligence of most insurance professionals, a certain number of frivolous or groundless accusations are always made each year. Some of these groundless accusations are the result of a client mistakenly

BEHAVIORS TO AVOID


believing the producer committed a wrongful act. Other groundless accusations are the result of opportunists.

ExampleIvan filed a claim with the Division of Insurance alleging his producer, Bernadette, failed to notify him before or after his business property insurance policy was cancelled. As a result, when fire destroyed the building his business rented, he lost more than $200,000 of inventory.

Bernadette provided the Division of Insurance with documentation supporting her defense that she and Ivan’s insurer notified him, both before and after policy cancellation, that he had not paid his premium. The 13 documents Bernadette submitted included copies of the legal notices of cancellation that were mailed, proof of mailing receipts from the U.S. Postal Service, email chains between Ivan and Bernadette making and rescheduling appointments for him to visit the office to make payment, and entries into the agency management system documenting phone calls between Ivan and Bernadette.

If the producer in this example had not retained copies of her emails and records of her phone calls with Ivan, it is likely that instead of dropping his complaint, Ivan would have sued Bernadette for negligence. And, as is usually the case when producers do not have file documentation, the former client would have prevailed in the lawsuit.

Emerging Behaviors to Watch Out ForThe following behaviors and conduct have been cited as the contributing causes to a significant number of insurance agent E & O claims in recent years. Producers should be aware of these and other issues that arise in the marketplace as the economy changes, technology advances, and the insurance industry evolves.

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Certificates of InsuranceCertificates of insurance are issued in commercial lines. Their purpose has always been to serve as confirmation that a policy was issued and to state the basic coverages and limits provided by the policy. Certificates of insurance have never been insurance contracts, binders, or proof of insurance.

Certificates of insurance are usually requested by one party to a contract or business activity, that is concerned about the potential for becoming legally liable for the acts of another party:

■ Lessors of real property often ask their tenants for certificates of insurance to indicate the tenants are insured in the event a visitor to the rented premises is injured. If an injury occurs, any claim would then be submitted first under the tenant’s insurance policy and then the lessor’s policy—or under other terms as stated in the lease agreement.

■ General contractors often ask their subcontractors for certificates of insurance to indicate the subcontractors are, in fact, insured. If the subcontractors do not have their own insurance, the general contractor’s insurance carrier will a) consider the subcontractors to be employees, and b) will include payments made to the subcontractors’ as payroll for purposes of Workers’ Compensation and general liability insurance. Not only will the general contractor be liable for the actions of its subcontractors, it will also have to pay increased insurance premiums based on their “payroll.”

The improper issuance and use of certificates of insurance has long been noted in the industry, especially by third parties that demanded certificates, for their own benefit, to reflect insurance coverages and terms that were not present in the underlying policies. In addition, some policyholders often requested producers to issue certificates of insurance that did not reflect the actual limits of insurance, or that contained language that was not present in the underlying

BEHAVIORS TO AVOID


policy, because they would be unable to secure a client contract without such a certificate.

In recent years, some insurance carriers report that up to 7% of their insurance agent E & O claims revolve around improperly completed certificates of insurance. It is hoped that model regulation adopted by the National Conference of Insurance Legislators’ (NCOIL) will reduce that number. Once NCOIL adopted its model act, numerous state insurance departments followed this example and enacted legislation that incorporated most or all of the Act’s provisions.

The model act specifies that a certificate of insurance is NOT a policy or binder, does not provide policy rights to the certificate holder, and specifically prohibits a person from:

■ Requesting the issuance of a certificate of insurance that:□ Has not been filed with the state insurance

department, or□ That does not reflect the underlying policy

accurately■ Issuing a false or misleading certificate of insurance,

or one that states it amends or extends insurance provided by the underlying policy

■ Using a certificate of insurance to guarantee the underlying policy complies with the indemnification, or hold harmless, agreement in a contract

Two specific issues arise with regularity when insurance producers issue certificates of insurance:

1. Should the producer list the limits of insurance shown on the policy or only list the limits of insurance requested by the party asking for the certificate?

2. Should the producer show the policy aggregate listed on the policy or the impaired aggregate, if any claims have been paid under the policy?

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The consensus of E & O carrier claims managers and one noted E & O expert is unanimous:

1. Whenever issuing a certificate of insurance, the producer’s duty is to show the limits appearing on the Declarations page, even if a third party is requesting evidence of insurance at a lower limit. It cannot be stressed emphatically enough that certificates of insurance should reflect the coverages, limits, and terms appearing on the policy.

2. Many E & O carriers and experts agree that despite a producer’s knowledge that the liability aggregate limit has been reduced by claims, the fact that certificate of insurance contains the following language indicates the producer does not have a duty to show an impaired aggregate: “limits shown may have been reduced by paid claims.” The E & O carriers agree the verbiage on the certificate would be used to support the producer’s position in the event the producer is sued.

Additional Insured Endorsements1

Once upon a time, commercial lines contained standard Additional Insured endorsements; this meant the language among the various forms was similar. This is no longer the case. Currently, E & O carriers report that approximately 5% of their claim submissions in commercial lines are due to the improper manner in which additional insured endorsements are addressed on certificates of insurance.

An additional insured is an individual or entity granted status as an insured on the liability insurance policy of another per an endorsement. Additional insured status can be conferred by naming an individual or entity on a separate endorsement or per a blanket additional insured endorsement.

Some additional insured endorsements grant insured status to the person or organization named in the endorsement, but only under specific conditions. The following excerpts are from ISO forms.

1 http://www.roughnotes.com/rnmagazine/2013/april/2013_04p060.htm

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■ CG 20 11, Additional Insured—Managers or Lessors of Premises□ “...but only with respect to liability arising out of

the ownership, maintenance, or use of that part of the premises leased to you and shown in the Schedule...”

■ CG 20 15, Additional Insured—Vendors□ “...but only with respect to ‘bodily injury’ or

‘property damage’ arising out of ‘your products’ shown in the Schedule which are distributed or sold in the regular course of the vendor’s business...”

Blanket Additional Insured EndorsementNearly all blanket additional insured endorsements contain a requirement that any party afforded additional insured status MUST have agreed in writing with the insured to be added as additional insured on the subject policy. This requirement appears in the ISO CGL policy’s Section II – Who is an Insured and reads:

“Section II – Who Is An Insured is amended to include as an insured any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy.”

This means the policy and the blanket additional insured endorsement require the execution of a written contract between the insured and the party named in the endorsement. In other words, if a blanket additional insured endorsement has been added to a policy, it does not afford coverage to any party that does not have a written agreement with the insured that calls for the third party to be added as additional insured on the policy.

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If the third party and insured do not have a written agreement, it is essential for the issuance of a separate additional insured endorsement naming the third party. These individual endorsements may not be available without carrier approval, so producers are advised to obtain that approval before binding coverage.

Another problematic issue pertaining to additional insured endorsements is a situation where the person or organization (or the actual policyholder) requesting to be named as additional insured does not know if an underlying written contract is in place. Some producers address this issue by including the following language in the notes section when issuing a certificate of insurance, “Coverage as an additional insured is provided if required by written contract.”

If a written contract does exist, producers need to determine what type of contract it is to be sure they provide the appropriate additional insured endorsement. The breadth of coverage of these additional insured endorsements can be classified into one of three groups—coverage for:

■ The additional insured’s sole negligence■ The additional insured’s negligence, but only if the

named insured shares that negligence■ The additional insured’s vicarious liability for the

named insured’s negligence

Primary and NoncontributoryMany parties requesting to be added as additional insured also demand coverage on a primary and noncontributory basis. Although this phrase is not defined in insurance policies or their underlying contracts, it has generated much concern and confusion.2

Generally speaking, when insurance is primary it pays before all other insurance pays. In this sense, an

2 https://www.irmi.com/articles/expert-commentary/primary-and-noncontributory

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additional insured wishes the named insured’s insurance policy to pay first—before its own insurance pays. When insurance policies refer to contribution, they refer to the payment of damages for which the named insured is legally liable. According to noted insurance expert, Craig F. Stanovich:

“Noncontributory generally means that an insurer has agreed not to seek its independent right to contribution when two or more insurers apply to the same accident for the same insured. In this context noncontributory appears to be shorthand for the insurer giving up its right of contribution. Waiver of subrogation and similar approaches to prevent contribution may fail as the right of contribution is independent of any insured's rights. As subrogation is derived solely from an insured's rights the insurer would likely retain its right of contribution.”

ExampleSeraphina and Julianna are jointly responsible for causing injury to Kheng.

Kheng recovers all his damages from Seraphina’s insurance company, which then seeks reimbursement (contribution) for half of those damages from Julianna’s insurance company.

Finally, producers should be sure to read all additional insured endorsements before requesting them to verify the precise language they contain. They should then compare the verbiage contained in the endorsements with that of any underlying contract and terms requested by potential additional insureds. Because non-ISO endorsements vary from carrier to carrier, and some can vary significantly from the ISO forms, producers leave themselves especially vulnerable to E & O claims if they do not handle the issuance of additional insured endorsements properly.

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Social MediaIt seems as though every person, and every business, has a Facebook page, a LinkedIn or Twitter account, and communicates online in a variety of ways. While using social media is an excellent way to market, provide customer service and public relations, network, and acquire new clients, it is also an excellent way to find oneself on the wrong end of an E & O claim.

Social media has the ability to both enhance the reputation of an insurance producer or agency—or destroy it. Unfortunately, not everyone understands how to implement a plan that utilizes social media properly.

ExampleVictor is upset because one of his clients cancelled all his business insurance and transferred it to a competing agency—an agency where his ex-wife, Margie, works. When Margie boasted on her Facebook page that she just acquired a very large new commercial lines account, Victor was unable to contain his frustration and added the following comment to her post: “The Red Fox Inn is going to be sorry it decided to leave our agency and go to yours. Once your level of incompetency is revealed, I’ll win that account back.”

It is evident Victor is unaware he broke federal law by revealing nonpublic information without the source’s permission (i.e., the client’s identity) and that his comment about Margie’s “incompetency” might be viewed as defamation. Not only might Victor and his agency be sued for a number of personal injury perils (i.e., libel, slander, and/or defamation), they might also be slapped with an E & O suit by the Red Fox Inn.

The following tips will help producers avoid the most common E & O risks inherent to the use of social media:

■ Develop a written social media plan for the agency in the form of a guide that requires employees and independent contractors to acknowledge, in writing, their agreement to comply with it

BEHAVIORS TO AVOID


■ Share the written plan with all employees and independent contractors in the form of a published guide that specifies precisely what employees are and are not able to do when using social media on behalf of the agency. The guide should contain at least the following elements:□ A directive that employees CANNOT:

• Reveal agency trade secrets• Criticize or malign the competition• Include any type of client information on the

Internet, in any fashion—especially if it is nonpublic or confidential information

□ A directive that all content posted to the Internet (i.e., via Facebook, Twitter, LinkedIn, Yelp, blogs, etc.) MUST be professional, honest, and truthful

□ An explanation that most forms of agency communication via the Internet will be viewed as a form of advertising and, as such, is subject to federal, state, and insurance regulations

■ Employees AND agency clients should be educated about the plan and, specifically, that:□ New insurance cannot be secured via social

media□ Existing insurance cannot be cancelled via social

media□ Existing insurance cannot be changed via social

media□ Sensitive and/or private information cannot be

shared via social media

One of the most important things to remember about the use of social media is that once something is published or posted to the Internet, it remains there forever. A spelling or grammatical error, an incomplete or inaccurate fact stated in a blog, an opinion that offends ... they can all be viewed hundreds and thousands of times. Although a spelling or grammatical error is unlikely to cause an E & O claim, it will

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provide a graphic illustration of the level of the degree of professionalism exhibited by a producer or agency. On the other hand, the publication of an inaccurate fact or opinion that causes harm to another may just lead to an E & O claim or lawsuit.

Data BreachesOver the years, producers have become more savvy about cyber exposures and understand how important it is for them to protect their clients’ confidential and sensitive personal information. However, many small insurance agencies and the producers who are employed by them seem to believe they are not as vulnerable as their larger counterparts are, to being responsible for a data breach or being sued if they are responsible for one.

The first thing producers can do to reduce their exposure to E & O claims resulting from data breaches is to familiarize themselves with federal and state laws pertaining to data breach, including:

■ What types of information are required to be protected, i.e., Personally Identifiable Information (PII) and Protected Health Information (PHI) per HIPAA

■ Privacy and safeguards rules, among others, per the Gramm-Leach-Bliley Act (GLBA) and the Health Insurance Portability and Accountability Act (HIPAA)

■ State insurance laws pertaining to privacy and safeguards

■ Laws regulating the disposal of client records■ Data breach notification laws (all but a few states

have them)

The next thing producers should do is utilize security measures:

■ Lock and secure the physical premises, including file cabinets, desk drawers, and any location that houses documents containing protected information

BEHAVIORS TO AVOID


■ Shred or otherwise destroy all documents that contain protected information

■ Establish and enforce the security of the electronic system that contains and stores electronic data, including the actual server and physical equipment

■ Be sure to include all smartphones, cell phones, tablets, laptops, external hard drives, and thumb drives owned or used by the agency in the course of business

Despite installing and utilizing anti-virus and firewall protection on its computer system, an insurance agency failed to update these software programs after installation. After the system became infected with malicious code that attacked the servers of an agency affiliate, the affiliate sued the insurance agency. Result: the E & O carrier paid nearly $100,000 in defense and settlement to compensate the agency affiliate for lost income and costs to repair its server as the result of a denial of service attack it suffered.

A number of insurance agent E & O carriers now offer cyber coverages as an option in their E & O policies because of the size of the risk posed to producers AND because most other policies do NOT provide coverage for cyber perils. Most of the perils insured on cyber liability policies are specifically excluded in both the CGL and E & O policies.

1. Regardless of the type of insurance involved, or the precise producer behavior that triggered the submission of an E & O claim, what the single most common reason producers find E & O claims filed against them?a. Groundless accusationsb. Non-payment cancellation follow-upsc. Lack of documentationd. Unsigned insurance applications

2. A certificate of insurance is a document that does which of the following?a. Replaces an insurance policyb. Acts as a binderc. Extends an insurance policyd. Confirms an insurance policy was issued

3. What phrase describes an individual or an organization granted status as an insured on the liability insurance policy of another per an endorsement?a. Additional insuredb. Named insuredc. Mortgageed. Loss payee

4. What must be in place in order for a blanket additional insured endorsement to afford coverage to an additional insured?a. Workers’ Compensation insuranceb. General liability insurancec. An underlying written agreementd. A certificate of insurance

5. A written social media plan should instruct employees to avoid all the following behaviors, EXCEPT:a. Share the agency’s trade secretsb. Refuse to sell insurance on Facebookc. Criticize the agency down the streetd. Post information on the Internet that is inaccurate

CHAPTER TWO QUESTIONS


3Insurance: Agent E & O Policy Provisions

When an insurance producer engages in a professional relationship with a client (or anyone who later becomes a claimant), that producer is expected to provide a degree of care required of professional insurance producers. When producers are deemed to have breached the expected standard of professional care, they are considered negligent. To be deemed legally responsible for professional negligence, the following components must be present in the rendering of, or failure to render, professional services:

■ A professional relationship was established and existed between the professional and the client—A duty was owed to the client

■ An expected standard of care existed and the professional breached that standard of care—The professional services provided to the client were at a level of care below what was owed and expected

■ The client suffered harm that can be proven■ The professional’s breach of duty to provide a

standard of care was the proximate cause of the client’s harm AND the harm was a foreseeable consequence of such a breach

Of course, whenever a professional liability (E & O) claim is brought, the party bringing the claim or lawsuit must prove its allegation(s) for the insured to be deemed legally responsible and/or for the professional liability policy to make payment. If the claim or lawsuit goes to trial, all the


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legal requirements of legal liability must be met in the jurisdiction.

Because individuals and organizations are permitted to file claims and lawsuits at will, the greatest benefit of insurance agent’s E & O policy is its defense provision. This element of all types of professional liability insurance cannot be overstated. Producers who practice without professional liability insurance leave themselves exposed to potentially unlimited expense in the event they are viewed as being professionally negligent.

Claims-made FormsBefore delving into the specifics of the E & O policy, a discussion of the claims-made liability form of coverage is in order. No two policies are exactly alike—and this sentiment cannot be overstated because it is a crucial element of understanding coverage.

Two basic types of claims-made forms exist, and each has different variations based on the policy contract and type of professional being insured. In addition, each professional liability policy contains its own precise definitions and reporting requirements, of which the following are essential to understand and communicate clearly to the insured:

■ Wrongful act■ Claim■ Professional services■ Retroactive date■ Extended reporting period (ERP)■ Claim and Incident reporting

The two types of claims-made forms are pure claims-made and claims-made and reported. The pure claims-made form is the original version of the claims-made form of liability coverage. As opposed to the occurrence form of liability insurance—under which coverage is activated when a loss occurs during the policy period, the pure claims-made form activates coverage when a claim is first made against the insured during the policy period. Over time, however,

INSURANCE: AGENT E & O POLICY PROVISIONS


disputes about the precise definitions of “claim” and “first made” arose:

■ Was a “claim” a phone call reporting an occurrence that took place?

■ Was a “claim” the filing of a lawsuit?■ Was a claim “first made” during the phone call to

the insured ... or upon the insured’s receipt of the legal papers?

Because the perceptions of claimants and insurers clashed, it was often left to the courts to answer such questions. Sometimes, the courts’ decisions made things clear and at other times, the decisions only muddied the waters of the insurance companies’ intentions to provide coverage. As is often the case when insurance companies become unhappy with the courts’ interpretations of insurance policy language, insurance carriers re-drafted policy language to communicate more explicitly their intentions with respect to liability insurance written on the claims-made form.

The claims-made and reported form of coverage was introduced and is currently the most popular form of claims-made liability coverage. Such a form contains two requirements for coverage to be activated rather than the single coverage trigger of the pure claims-made form:

■ The “claim” must be made during the policy period, AND IT MUST ALSO

■ Be reported during the policy period

Important NoteSome policies declaring they are "claims-made" policies are really "claims-made and reported" policies. Producers MUST read the policy language to determine what type of claims-made form is being used.

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The following is an excerpt from the insuring agreement of a claims-made and reported E & O policy:

"We will pay on behalf of the Insured all Damages and Claim Expenses in excess of the Deductible and subject to the applicable Limit of Liability that the Insured becomes legally obligated to pay as a result of any covered Claim that is first made against the Insured and reported in writing to Underwriters during the Policy Period or during any properly exercised and applicable Extended Reporting Period, for any Wrongful Act by the Insured or by anyone for whom the Insured is legally responsible, provided, however, that such Wrongful Act was committed or allegedly committed on or after the Retroactive Date set forth in Item 8. of the Declarations and further provided that the Insured had no knowledge of the actual or alleged Wrongful Act prior to the inception date of this Policy."

E & O policies contain different definitions based on the professionals they insure and the types of wrongful acts committed by those insureds. Until the definitions and provisions of E & O policies are studied in detail, producers should not assume an understanding of coverage or how coverage will be triggered.

Important DefinitionsIn liability policies other than professional liability, an “occurrence” triggers coverage. The accepted industry definition of:

Occurrence1. An accident, including continuous or repeated

exposure to substantially the same general harmful conditions.

ExampleIf a carpenter builds a staircase and the banister breaks off after installation, the act of the banister breaking off is an occurrence. Likewise, if a contractor was exposed repeatedly to asbestos while working on a job site, that exposure to asbestos is an occurrence.



Wrongful ActProfessional liability policies do not provide insurance for occurrences—they provide coverage for wrongful acts. In general, a wrongful act is an actual or alleged negligent error or omission committed by an insured. Of course, each policy defines “wrongful act” differently; for example:

■ Any actual or alleged breach of duty, negligent act, error, omission, or personal injury committed solely in the performance of the professional services of the insured

■ Any negligent act, error, or omission of the insured in rendering or failing to render professional services as stated in Item 6 of the declarations for others on behalf of the insured organization and caused by the insured except as excluded or limited by the terms, conditions, and exclusions of this policy

■ Any actual or alleged act, error, omission, misstatement, misleading statement, breach of duty, neglect by, or any matter asserted against:□ An insured person in his or capacity as such□ An insured person in his or her outside

position□ The insured organization, OR□ Any matter asserted against an insured

person solely by reason of his or her status as such

ClaimOnce the definition of wrongful act is understood, the next definition of concern in any E & O policy is “claim.” The definition of claim is extremely important because the failure to report claims as required may void coverage. The following are examples of the definition of claim excerpted from several E & O insurance policies:

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■ Any written demand the insured receives for compensatory damages or services for wrongful act, including arbitration proceedings against the insured

■ Any civil proceeding seeking compensatory damages against the insured for a wrongful act, commenced by the service of a complaint or similar proceeding

■ The insured’s receipt of a summons, a subpoena, or any other notice of legal process

■ The insured’s receipt of any “suit” – as defined in the policy

■ The insured has received notice of a written demand or a written demand for money or services, and/or

■ The insured’s receipt of a request to provide a recorded statement

Producers MUST understand the definition of "claim" contained in their errors and omissions insurance policies to be sure they know precisely what types of wrongful acts and events must be reported to the insurer. In one policy, an allegation of a wrongful act may be considered a "claim"; in another policy, only a written demand for damages as the result of a wrongful act will be considered a "claim."

If the insured receives notice of a claim, it is essential that it be reported to the E & O carrier as soon as possible. Sometimes producers and other agency personnel receive reports about incidents or wrongful acts and do not consider them claims. Unfortunately, their interpretations of claim will not determine coverage—the policy definition of claim will prevail.

Each policy contract has specific requirements for the reporting of claims and/or potential claims. Some policies actually preclude coverage for claims reported in violation of the reporting or notice provision.



Professional ServicesE & O policies provide insurance for one specific profession. For example, if Marta is a licensed insurance producer AND a licensed attorney, she will need to purchase two separate E & O policies because each policy will exclude coverage for professional services rendered in any capacity other than that designated on the policy’s declarations page. However, many insurance agent E & O policies will extend coverage to a producer who is also a notary public.

To illustrate the manner in which insurers consider professional services, the following language was excerpted from an insurance agent’s E & O policy’s definition of “professional services:”

■ Services rendered as a managing general insurance agent, general insurance agent, insurance agent, insurance broker, or insurance consultant

■ Premium financing services provided by the named insured to the named insured's clients for insurance products placed through the named insured's agency

■ Loss control, risk management, or anti-fraud services rendered in connect to insurance placed through the named insured

■ Services as a registered representative rendered in connection with the sale and servicing of variable life and variable annuity products

■ Acting as a countersigning agent for out-of-state insurance agencies on policies issued with the state of domicile of the insured

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Another policy defines “professional services” as only:

"when rendered in connection with a covered product by the insured to a client in the conduct of the named insured's profession as an insurance agent, broker, solicitor, general agent, managing general agent, surplus lines broker, or notary public:

■ Soliciting, negotiating, recommending, selling, or servicing a covered product but not including the sale, surrender, conversion, or any alteration of a covered product in order to acquire or invest in anything other than a covered product

■ Providing advice or consultation solely related to a covered product, including financial planning or consulting

■ Incidental claims adjusting in connection with first party property claims draft authority

■ Appraising real or personal property in connection with soliciting, placing, selling, or servicing a covered product

■ Providing loss control or risk management services in connection with soliciting, placing, selling, or servicing a covered product

■ Assisting a client to secure premium financing from a licensed premium finance company for a covered product placed by or on behalf of the insured

■ Training, managing and supervising others, but only in connection with covered products

■ Employee benefit plan administration■ Expert witness testimony related to

professional services or a covered product■ Insurance class instruction"



The definitions contained in the two policies are quite different. In fact, the second definition contains language that is much more restrictive. A policy’s definition of professional services may also list specific activities that are NOT “professional services,” such as the “ownership, creation, formation, operation, administration, adjustment, or adjustment of claims of or for any Multiple Employer Welfare Arrangement (MEWA), any health maintenance organization (HMO) or preferred provider organization (PPO), risk retention group, Professional Employer Organization (PEO), or captive insurance program.”

The exclusions section of each E & O policy also contains specific professional services, such as COBRA administration and acting as a named fiduciary under ERISA. These facts underscore the importance of reading and understanding the entire insurance contract.

Retroactive DateThe retroactive date on a claims-made form is an underwriting tool used by insurance companies to limit or expand the timeframe for which they will insure losses.

It cannot be stated emphatically enough that the policy period of a professional liability policy is the term stated on the declarations page and it is not extended by any of the policy’s terms, provisions, or endorsements. The renewal of a professional liability policy constitutes a new policy term and does NOT allow the reporting of a claim to be made during the term of the subsequent renewal policy.

A retroactive date is a liability policy provision that stipulates coverage only applies to events that occur on or after the retroactive date. Sometimes this date is the same as the inception date of the policy; sometimes it is a date before the policy’s inception date. To complicate matters further, a retroactive date may be advanced—meaning it is changed to a point in time after the policy’s original retroactive date.

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The only purpose of the retroactive date is to signal the date on or after which covered wrongful acts must take place.

ExampleIf Martin graduates from college and promptly opens his own insurance agency, he will apply for errors and omissions insurance. When the policy is issued on 7/1/2016, its retroactive date will also be 7/1/2016 because Martin neither worked as an insurance producer before that date nor had coverage in place before that date. When Martin’s policy renews on 7/1/2017, the retroactive date of that policy should ALSO be 7/1/2016—meaning the policy would honor claims reported during the policy period that occurred after 7/1/2016—or during the previous policy term’s effective date.

If Martin does not secure E & O insurance immediately upon establishing his business and waited three years before applying for insurance, anticipating he would be in a better financial position to pay premiums, his situation becomes problematic. When the E & O policy renewal is issued on 7/1/2019, it is very likely the insurer will issue the policy with a retroactive date of 7/1/2019—the policy's inception date—because it will not want to provide coverage for the three years during which Martin was uninsured. However, the insurer may decide to provide Martin with a retroactive date of 7/1/2016 if it believes the exposure for loss during that time was minimal.

Extended Reporting PeriodAn extended reporting period (ERP) is a provision contained in a claims-made liability policy that lengthens the timeframe during which claims may be made and reported. ERPs are also known as “tails” or “tail coverage.”

Unlike occurrence forms, which provide coverage for losses that occur during the policy period—regardless of when they are submitted (even 10 years later), claims-made forms leave the insured vulnerable to claims that are made and reported after their policies expire or cancel. Examples of situations



that leave professionals vulnerable result in the cancellation or non-renewal of a claims-made liability policy for the following reasons:

1. The insured terminates the policy (either voluntarily or because the business closed or was sold)

2. The insurance company cancels or non-renews the policy

3. The claims-made policy is replaced with a liability policy issued on an occurrence form

In each of the preceding situations, the insured will not have liability coverage for any claim that occurs after the policy’s retroactive date if it is reported after the policy’s expiration date (or after the end of any extended reporting period contained in the basic policy).

ExampleCathy is a producer who decides to retire on December 31. If she cancels her E & O policy on January 1 and a client makes a claim on June 30 for a wrongful act that took place on December 1, the policy will not respond unless Cathy purchased an extended reporting period.

Extended reporting periods do not change any of the policy’s terms or conditions, nor do they extend the policy period. They simply apply to the submission and reporting of claims that meet three criteria:

1. The wrongful act occurred after the retroactive date2. The wrongful act occurred before the end of the

policy period, AND3. The claim is first made and reported during the

extended reporting period

Some ERP provisions are contained in the policies themselves, such as the basic extended reporting period (BERP). Others ERPs may be purchased as separate endorsements, with additional premiums charged, and are known as a Supplemental Extended Reporting Periods (SERP).

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When an E & O policy offers a basic extended reporting period, the BERP usually extends the claim-reporting period for a short time—such as 30 or 60 days. (60 days is most common.) This ERP does not require the payment of an additional premium.

When an E & O policy offers a supplemental extended reporting period, the SERP extends the claim reporting period for durations of one, three, and/or five years. A SERP is offered subject to certain conditions:

■ The SERP is available if the policy is cancelled or non-renewed—except if the policy is cancelled for non-payment of the policy premium

■ The insured must request the purchase of a SERP, in writing, within the number of days specified in the ERP provision contained in the policy (usually 30 or 60 days); if the insured does not make such written request within the specified timeframe, the insurance company is not obligated to offer or sell a SERP at a later date

■ The insured must pay the entire additional premium, which is fully earned, before the SERP goes into effect

■ The SERP does not increase or change any of the policy’s limits of liability□ Whatever limits are available on the day the

policy expires will be the limits available under the SERP

□ Example: if the $500,000 aggregate limit of liability were impaired by payment of a $50,000 loss, only $450,000 of insurance would be available for claims submitted under the SERP

Reporting ProvisionsClaimsEvery claims-made coverage form, whether it is used to provide general or professional liability insurance, conditions coverage on compliance with its



requirements for reporting incidents and/or claims in accordance with policy terms. Insureds who fail to report incidents and claims as required will find themselves uninsured in the event of a loss.

Each E & O policy will also contain its own instructions for reporting claims. Despite the fact that policies contain explicit language with respect to the reporting of claims, these requirements are not always clearly understood—especially by producers who do not read their policies.

The following are examples of common claim reporting requirements:

■ Claims must be reported in writing; depending upon the contract, they must be reported as soon as practicable or in some other fashion, such as no later than 60 days after the end of the policy period or, if applicable, during the extended reporting period

■ The insured must forward to the insurer immediately every demand, notice, summons, or other process received

■ The insured must provide details of the claim, including:□ The alleged wrongful act□ The name of the insured(s) who committed

the alleged wrongful act□ The date the wrongful act was committed□ A summary of facts upon which the claim is

based□ The potential or alleged damages that might

result from the claim□ The names of all claimants or potential

claimants□ How the insured came to learn of the claim

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Failing to read and understand the claim reporting requirements of your E & O policy will prove calamitous in the event of a loss because failing to report claims as required results in the denial of coverage.

Many E& O policies contain language that specifically prohibits coverage in the event the insured chooses to voluntarily settle or make payment for a loss. The following language was excerpted from an insurance agent’s E & O policy:

The INSURED shall not without our written consent, do any of the following:

1. Admit liability2. Participate in any settlement discussions

nor enter into any settlement3. Incur any cost or expenses4. Produce documents, provide a

recorded statement, or give any deposition regarding any actual alleged WRONGFUL ACT.

RememberThe claims-made and reported form of coverage contains two requirements for coverage to be activated:

1. The claim MUST be made during the policy period, AND

2. The claim MUST be reported during the policy period.

IncidentsIncidents are not claims—they are events that generate circumstances from which claims may arise. Essentially, an incident is something that might become a claim.



ExampleAfter a client sustains a loss, he tells his producer he secured a second opinion that reveals the producer did not provide proper life insurance coverage or limits. Although it has not been determined the policyholder will be submitting a claim against the producer—or, in fact, that the policyholder even sustained a loss—the mere communication of the possibility of a claim will probably be viewed as an incident by the E & O carrier.

Incidents must be reported before the policy term expires and most contracts require the insured to provide specific details about the error or omission that gave rise to a circumstance from which injury or damage might arise. The insured is also required to report how the insured first became aware of the incident and the circumstances surrounding it.

Because incidents are not claims, the policy's extended reporting period does not apply to incident reporting. Extended reporting periods only apply to the reporting of claims to which the insurance applies.

Policy RenewalsSometimes, a producer will replace an E & O insurance policy with another carrier’s contract. If a policy issued on an occurrence form is replaced by a policy issued on a claims-made form, a coverage gap will exist if a future claim is made and it is determined the loss occurred after the occurrence policy’s expiration date.

This eventuality occurs far more often with general liability policies than it does with E & O policies. However, if this situation does materialize on a CGL policy, the coverage gap can be filled by the insured’s purchase of a discontinued operations endorsement on the original occurrence policy.

Discontinued operations coverage is similar to an extended reporting period.

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If the replacement occurs with respect to a claims-made E & O policy, the insured would need to purchase full prior acts coverage on the replacement claims-made policy or an extended reporting period on the original policy. Prior acts coverage provides insurance for wrongful acts that took place at any time before the policy’s inception date; in essence, the policy does NOT have a retroactive date.

A much larger coverage gap arises, however, when a claims-made policy is replaced with an occurrence policy. Because the claims-made form requires claims to be made and reported during the policy period, and an occurrence form requires claims to occur during the policy period, neither requirement is met if a loss occurs and is reported after the claims-made form’s expiration date.

ExclusionsEach E & O policy contains its own specific exclusions. The following are some of the more common exclusions found in agent E & O policies:

■ Bodily injury and property damage claims■ Contractual liability■ ERISA and COBRA claims■ Conversion, misappropriation, or improper

commingling of client funds or funds held on behalf of clients

■ Intentional acts (i.e. dishonesty, fraud, criminal conduct, malice, assault & battery, etc.)

■ Personal profit■ Prior claims (acts occurring before the retroactive

date)■ Infringement of copyright, trademark, trade name,

trade dress, patent, service mark; misappropriation of ideas or trade secrets; piracy; plagiarism, etc.

■ Insured’s duties as a third-party administrator■ Employment-related practices■ Discrimination, harassment, etc.



■ The following services performed by the insured, whether or not licensed:□ Accounting□ Architecture□ Actuarial□ Tax preparation or advice□ Legal□ Real estate

■ Actual, alleged, or unauthorized use or release of confidential information or private information of any client

■ Arising out of the bankruptcy, conservatorship, receivership, insolvency, or financial inability to pay any organization—including an insurance company.

NoteAn exception to the exclusion may be found if, at the time the wrongful act occurred, the insurance company was an admitted insurer rated above a particular A.M. Best rating (i.e. B+ for P & C companies and A- for Life & Health companies).

■ Based upon or involving, in any way, viatical settlements, promissory notes, or securities

■ Any claim covered by any other policy■ Any claim about which the insured knew but did not

report to the company at application or renewal

Defense and SettlementMost E & O policies obligate the insurer to provide a defense. However, the manner in which defense is provided varies from contract to contract, especially with respect to the type of professional insured. As is the case with most liability policies, the insurance company has the duty to defend claims that might be groundless, false, or fraudulent and only pays up to the limit of liability stated on the declarations page. The insurer has the right to investigate all claims and it may only cease defending a claim after it has paid the policy limits in settlement of a claim.

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One provision most insurance agent E & O policies contain is a prohibition against the insured admitting liability or attempting to settle a claim without the prior written consent of the insurer. If the insured admits liability or attempts settlement, the policy does not have to make payment. In addition, if the insured makes any payments or incurs any expenses, he or she does so at personal expense and does not obligate the insurer to make reimbursement.

General ConditionsIn addition to the policy provisions pertaining to the reporting of claims and incidents, and the extended reporting period, the following conditions are contained in many insurance agent E & O policies:

■ The insured must assist and cooperate with the insurer in the investigation and settlement of any claim or lawsuit; this condition is usually a requirement of coverage and policy language usually contains the phrase, “as a condition precedent to any coverage under this policy”

■ The insurer is subrogated to all the insured’s rights of recovery

■ In the event of any mergers, acquisitions, or material changes that occur after the policy inception date, the insured must comply with requirements outlined in this condition

■ The application contains material representations and is part of the policy; if any of the representations are later found to be false, coverage may not apply

■ The other insurance condition states the E & O policy is excess over all other types of available insurance—regardless of the type or whether it is primary, contributory, excess, or contingent

■ The policy is subject to audit■ No action may be taken against the insurer unless all

terms of the policy have been complied with■ The insured’s bankruptcy does not invalidate the

policy or relieve the insurer of its obligations



■ Appraisal, arbitration, and/or mediation provisions apply as outlined in the contract

■ Cancellation and non-renewal is permitted according to the terms outlined in the provision; state law will supersedes this condition

■ The insured may not assign the policy without the insurer’s written consent

Submission of a ClaimGiving proper notice of a claim or potential claim is always important and should be conducted in strict accordance with policy terms—especially if the insured is considering changing E & O carriers. It is also important for the insured to begin collecting documentation and information that will help the E & O carrier with its defense.

It is especially important for producers to avoid admitting liability. Although this is a requirement of the E & O policy, it may be difficult to do when a producer realizes he or she may have made an error and is trying to appease the client and maintain the relationship.

Other terms of the agent’s E & O policy with respect to the submission and settlement of claims include:

■ Producers should not negotiate payment with a client before submitting a claim, even when hoping to mitigate damages and keep claims history “clean;” negotiating such a payment is usually a violation of the policy contract and will likely jeopardize coverage

■ Producers should not alter or destroy client or agency files, documents, or records pertaining to the incident/claim; such actions are usually viewed as deceitful and will prove harmful to the producer’s defense

■ Producers should not alter procedures manuals without first consulting the E & O carrier; altering procedures may be viewed as an admission of liability

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■ Producers should not provide written or recorded statements to anyone other than a representative of the E & O carrier

■ Producers should not discuss the claim with anyone other than a personal attorney or a representative of the E & O carrier

■ Producers should not allow agency records or documentation to be reviewed, copied, or taken without first seeking advice from the E & O carrier

In short, producers should cooperate with their E & O carriers. Failure to cooperate is far more likely to result in jeopardizing coverage than any other activity.

Costs and ConsequencesThe submission of an errors and omissions claim affects not only the insurance producer who is alleged to be negligent; it also affects the entire agency and its clientele. Consequences range from negligible to significant, depending upon the precise nature and details of the claim.

Once an E & O claim has been submitted, the insurance carrier and its legal team usually require copies of agency files pertaining to the client in question. Items that usually need to be reproduced include policy declarations pages, policy forms and endorsements, correspondence, phone logs, internal procedures manuals, employee handbooks, payment information, details from the agency management system, etc. When one or more staff members are required to reproduce documents for the legal team, the loss of productivity and time can become sizeable.

The expense of research and document retrieval can be expensive and the value of time spent during depositions and other meetings with attorneys and the defense team compounds costs. The financial blow of an E & O claim can cripple an agency financially—especially if no coverage is in place, the policy does not provide coverage for the loss, or the policy provides insufficient limits.



Most producers and agency owners think about the policy deductible when an errors and omissions claim is submitted. Management scrambles to identify the deductible amount—if it is not already known. The producer allegedly responsible for the claim wonders if he or she will be required to pay any portion of the deductible out of his or her own pocket.

Agencies employing a large number of people tend to select a large deductible on their E & O policies to help offset a correspondingly large policy premium. Smaller agencies often tend to choose a large deductible for the same reason. Although the policy premiums of smaller agencies may be much less than those of larger firms, they may still be costly.

As the E & O claim is being processed, agency morale often becomes an issue. Fingers are pointed—not just at the “responsible” party, but also at any other staff member who may have committed a similar act or omission. Chatter takes place, gossip spreads, and sensitive issues are discussed and shared.

Oftentimes, employees feel like Big Brother is breathing down their necks. Internal procedures are reviewed. Audits may be conducted. Meetings are held behind locked doors and only certain staff members are privy to the topics of conversation addressed in those meetings. Management may be angry: because it will have to pay the policy deductible, because of the damage to reputation, because of lost productivity, because an employee may not have followed agency procedure, etc.

Many costs and consequences are not realized until long after the E & O claim has been submitted. Those associated directly with the loss of reputation can be the most harmful. When a producer-client relationship erodes to the point that the client sues the producer and/or agency, a number of other losses occur: loss of the client’s account, loss of the accounts of the client’s friends and relatives, and the harm generated when former clients discuss the “lawsuit.” Yes, commission dollars are lost; but how can a dollar value be assigned to loss of reputation?

CHAPTER THREE


Assume a producer and his agency have attempted to calculate the hard and soft costs of an E & O claim. They have identified the policy deductible, expended the time and effort necessary to reproduce the entire client file, attended depositions and meetings with the legal team, overcome the challenges of lowered agency morale, adjusted to the loss of accounts and corresponding loss of income, and weathered the storm of gossip and attacks on agency reputation. Further, assume the E & O claim is not covered. The coverage denial sends the costs and consequences into the stratosphere.

E & O policies, just like every other type of insurance policy, contain exclusions. What if the alleged, or actual, error or omission falls squarely into territory that is excluded on the E & O policy? What if the error or omission falls into a grey area and the producer or agency has to retain counsel to convince the carrier to pay? Now, on top of all the other costs, the producer or agency will have to pay its own attorney and defense costs, in addition to the cost of any settlement or judgment if the producer or agency is deemed legally responsible.

Regardless of whether an E & O claim is covered, the producer or agency also runs the risk of being unable to renew coverage at expiration. Depending upon the type and size of a loss, an E & O carrier may decide to non-renew if frequency or severity becomes an issue. A carrier might non-renew after a single loss—depending upon the nature of the loss. While no producer wants to see his or her E & O premium increase significantly at renewal, a premium increase is a small price to pay when compared to the cost of losing coverage completely.

After claims have been submitted, E & O carriers will offer advice about how to adjust future operations and behaviors to avoid recurrences. Producers and agencies that do not learn from their mistakes are far more likely to suffer from multiple E & O claims than those who do learn from their mistakes. They are also far more likely to be on the receiving end of a non-renewal notice, as well.



Insurance agencies and producers with histories of E & O claims may also find their markets drying up. What insurance company wants to be represented by an insurance producer or agency that has been sued several times? Or one who has had several clients allege that wrongful acts have been committed by the producer or agency—even if those offenses weren’t proven?

1. If it has been determined legally that a producer breached the expected standard of professional care he or she owed, what was the producer guilty of:a. Negligenceb. A felonyc. A misdemeanord. An ethical violation

2. What event triggers the activation of a pure claims-made policy?a. A loss takes place during the policy periodb. A claim is made during the policy periodc. A loss takes place before the retroactive dated. A claim takes place after the extended reporting period

3. If Elliott is licensed as a producer, attorney, and notary public, how many E & O policies does he need?a. Oneb. Twoc. Threed. Four

4. What is an underwriting tool used by insurance companies to limit or expand the timeframe for which they will insure losses?a. Extended reporting periodb. Policy inception datec. Wrongful actd. Retroactive date

5. What may an E & O carrier do if the insured fails to report a claim in accordance with the policy’s reporting provision?a. Fine the insuredb. Impose a higher deductiblec. Deny the claimd. Provide restricted coverage

CHAPTER THREE QUESTIONS


REVIEW QUESTIONS ANSWER KEY

Chapter 1

1. D E & O claims fall into three basic categories: negligence, unethical, or illegal behavior and unfounded accusations.

2. A Individuals who serve as outside sales producers are responsible for the submission of E & O claims far more often than any other member of the agency workforce.

3. C Curtis Pearsall’s blog, Agents E&O Tips, reinforces his well-known viewpoint that experience analysis checklists are “a tool that is considered by many the closest thing to a silver bullet in avoiding E & O claims.”

4. A Claims in personal lines tend to occur with more frequency; however, commercial lines claims tend to be more severe.

5. A The reasons that E & O claims are submitted against producers pertaining to flood insurance is because: (a) the producer did not explain their client’s property insurance policy excluded coverage for flood (and other types of water damage); (b) when explaining how the flood insurance policy works, did not explain it properly; or (c) when selling flood insurance to cover a building with a replacement value higher than the maximum amount of flood insurance available in the NFIP, did not offer excess flood insurance.



Chapter 2

1. C Lack of documentation has been the major contributing factor in E & O claims settlements against producers since the birth of insurance.

2. D The purpose of a certificate of insurance has always been to serve as confirmation that a policy was issued and to state the basic coverages and limits provided by the policy.

3. A Additional insured status can be conferred by naming an individual or entity on a separate endorsement or per a blanket additional insured endorsement..

4. C Nearly all blanket additional insured endorsements contain a requirement that any party afforded additional insured status MUST have agreed in writing with the insured to be added as additional insured on the subject policy.

5. B There should be a directive that employees CANNOT: (a) reveal agency trade secrets; (b) criticize or malign the competition; or (c) include any type of client information on the Internet, in any fashion—especially if it is nonpublic or confidential information.



Chapter 3

1. A When producers are deemed to have breached the expected standard of professional care, they are considered negligent.

2. B The pure claims-made form activates coverage when a claim is first made against the insured during the policy period.

3. B E & O policies provide insurance for one specific profession. A person who is a licensed insurance producer AND a licensed attorney, will need to purchase two separate E & O policies. However, many insurance agent E & O policies will extend coverage to a producer who is also a notary public.

4. D The retroactive date on a claims-made form is an underwriting tool used by insurance companies to limit or expand the timeframe for which they will insure losses.

5. C Failing to report a loss according to the terms of the E & O policy often precludes coverage. This means the carrier will deny coverage, even if it would otherwise be provided, solely because the producer did not submit a loss notice in the fashion outlined in the policy … or within the specified timeframe.



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