Avoiding E&O Claims - it is all about the details sponsored by
Curtis M. Pearsall, CPCU, CPIA, AIAF Pearsall Associates Inc. Special Consultant to Utica Mutual E&O program James T. Scamby, Esquire Heifetz Rose LLP General overview of the E&O Climate / stats / claims trends Dissection of two E&O claims involving: Pollution & Ordinance of Law coverage What were the key issues that determined the direction of the E&O claim What did the agent do well What could the agent have done better Why E&S can be an E&O nightmare 1
Included will be the impact (positive and negative) of: Documentation Electronic Signature The agency proposal / the E&S proposal Industry Designations does it raise the standard? Exposure Analysis Checklists Special Relationship is it special in a bad way? Application misrepresentation The importance of policy checking and prompt policy delivery Claims frequency what are main drivers? Who in the agency is causing the claims? Any trends on the horizon? Claims severity a significant issue and what you need to do about it 2
Frequency nationally 6.2 claims per 100 policies 1 out of every 16 - generally flat the last 5 years or so over In Mass, frequency is 6.2% (2014 ytd), down from 6.4% in 2013 Severity- Average (national) is $60,000 + plus $12K for defense costs 3
50% by producers 50% by the rest of the staff (CSR s, receptionist, claims staff, etc.) Is anyone in your agency immune from causing an E&O claim? 4
E&O loss control What is the commitment / culture of your agency? Is it stronger today than it was last year at this time? What is your personal commitment to E&O prevention? Is it stronger today than it was last year at this time? What is the Standard of Care of a Mass agent 5
Foundation of Legal Liability of the agent / broker / the insured - MA An overview on the responsibilities of the Insurance Producer and the Client in obtaining an Insurance Policy Standard of care An insurance agent is not required to: - provide an insurance policy that would cover all possible contingencies - advise an insured with respect to coverage options - advise the insured as to every exclusion contained in the policy Ordinarily, of course, an insurance agent assumed only those duties normally found in an agency relationship, including the obligation to deal with his principle in good faith and to carry out instructions, and he assumes no duty to advise merely by such a relationship. 6
Standard of care Absent an agreement to the contrary, an agent has no duty beyond what he or she has specifically undertaken to perform on behalf of the client. An agent does have a duty to inform their client if they cannot obtain the requested coverage. Legal Liability of the Client Upon receipt of the insurance policy - A client must read and understand the policy content, provisions, duties and exclusions - A client should contact the agent to make any additions, alterations, and modifications to the policy - Client ignorance / Failure to read is not a defense 7
Insurance Consumer Duties To bolster this presumption of the insured s assent to the terms of a policy, the agent/broker should promptly send the complete policy to the insured and in the cover letter urge the insured to fully review the policy including the declarations and endorsements for accuracy and to the extent that the insured has any questions on the policy contents, the policyholder should immediately contact the producer. Special relationship If a special circumstance is present in the agency relationship, the insurance agent may possibly be under a duty to take some sort of affirmative action, rather than just follow the instructions of the client. What could constitute a Special Relationship? - Intimate knowledge of a client s personal and business endeavors - Where a client has multiple business s and agency writes all of the exposures - Where a social relationship exists frequent interaction - Where additional compensation is involved 8
E&O Claim # 1 Pollution Pollution FACTS OF THE CASE: Agent places commercial auto coverage for a local fuel dealer. The policy contains a pollution exclusion. Agent offered pollution coverage to the customer but the customer declined to purchase it. Agent s file includes a quote for the coverage and file notes reflecting a discussion with the customer where coverage was declined, but nothing else on this issue. 9
Pollution FACTS OF THE CASE: Many months later, after making a delivery, customer is notified that oil has leaked from the property owner s tank and into the foundation. Customer later receives a Notice of Responsibility letter from the Massachusetts Department of Environmental Protection, demanding participation in cleanup efforts. Agency reports the claim and the insurer denies coverage. Customer then sues the agency for failing to obtain pollution coverage. Pollution Could this type of issue / claim occur in your agency? If so, what have you done to minimize the potential for an E&O claim like this occurring? What did the agent do well? What should the agent have done better? What was the outcome of this claim? 10
E&O Claim # 2 Ordinance or Law Ordinance or Law FACTS OF THE CASE: Agency procures a businessowners policy for an apartment complex built in the early 1970s. Upon the agency s recommendation, the customer agrees to purchase additional ordinance or law coverage in the amount of $100,000 (the base policy provided $25,000). 11
Ordinance or Law FACTS OF THE CASE: The complex is completely destroyed by fire. During the adjustment of the claim, the town determines that the entire foundation must be rebuilt because it does not comply with the State Building Code. The cost for the new foundation, together with other code upgrades, approaches $300,000. The insurer agrees to pay only its policy limit. Customer then files an E&O case against the agency for failing to recommend higher limits. Ordinance or Law Could this type of issue / claim occur in your agency? If so, what have you done to minimize the potential for an E&O claim like this occurring? What did the agent do well? What should the agent have done better? What was the outcome of this claim? 12
Excess & Surplus Lines the good, the bad and the ugly The benefits Has consistently been a segment of the market for coverage not generally available Has tremendous flexibility in pricing and coverage form Solid market for professional liability and D&O coverage Known for their high degree of specialization this allows for customized coverages and innovative underwriting 13
The benefits Many of these benefits present some issues that agents need to be aware of The benefits The Excess and Surplus lines marketplace is a great segment of our industry Just because the risk is in the E&S market does not mean that the risk is bad 14
The issues It is different It is critical that agents (producers, CSRs, claims staff, accounting staff) understand the E&S marketplace The difference can hopefully help you write an account The difference also carries with it some E&O concerns The issues The need for a wholesaler (or 2 or 3) Accessing the E&S market requires dealing with entities that have an E&S license typically this is through the use of a wholesaler The wholesalers that you deal with will usually be somewhat determined by the type of business you are trying to place 15
The issues The Guarantee Fund issue In the standard marketplace, states have a Guarantee Fund which protects insureds in the event of a carrier insolvency. The Guarantee Fund has limitations but still serves a key role In the E&S market, there is no Guarantee Fund protection for the insolvency of a carrier (except NJ there is some protection).actually the track record for solvency is very good Potentially opens up some liability for insurance agents if the carrier you placed coverage with is declared insolvent The issues Can handle a wide array of customer needs Not just for commercial lines Can handle personal lines needs such as a personal umbrella for a high profile individual / celebrity / athlete Has been known to be a development breeding ground for new products (such as EPLI, day care centers, etc.) 16
The placement The agreement with your wholesaler Know what is says what authority does your agency have. Probably will be limited but it is important to know What is the premium payment expectation? (per account / account current) Typically your wholesaler will want evidence of your E&O. This is standard. Not a bad idea to ask them for evidence of their E&O coverage (what if they don t have any?) The placement The time line needed to get a proposal (hopefully) Based on the time of the market (hard or soft) or the time of the year (1/1 and 7/1 are busy times), a wholesaler is going to need varying amounts of time While you may be used to getting a proposal from the standard market in a couple of days / week etc., count on at least 30-45 days for the E&S market. Don t wait until you get a declination from the standard market. Wholesaler may have quoting / binding authority on behalf of some of their markets 17
The placement The app needed to get (hopefully) a proposal Many wholesalers / E&S carriers may be able to quote based on an ACORD app or a competitors app but will you be able to bind? Probably best to find out what app is needed and get that one completed will save you from running around at the last minute to get the proper app completed also helps to address any specific carriers underwriting / informational needs Ask the wholesaler what markets they are going to use want to avoid using two wholesalers with the same markets The placement Follow up / communication is critical Be sure that the application is accurate and complete nothings kills an agent s chances of getting an E&S proposal as much as an incomplete app. Also any misrepresentations could cause some serious consequences, including rescission of policy. Have some documentation on when the app was sent it is suggested you contact the wholesaler to make sure that they received the app Find out who is going to be handling the app in the wholesaler s shop Document / Document / Document 18
The placement Follow up / communication is critical Follow up again to make sure that all of the necessary information has been provided Great opportunity to advise the wholesaler their chances of writing the account wholesalers want / need to write business Follow up again before your due date to make sure that everything is on track to get the proposal with enough time to spare The placement On line quoting Many E&S carriers have developed on line quoting capabilities. This definitely speeds up the process When inputting information, accuracy is still the key - Is the quote really a quote or a ballpark # (a/k/a an indication )? - Is additional underwriting information required? - Is the on-line quote bindable? Important to realize that an on-line quote does not eliminate any E&S compliance issues 19
The placement The E&S proposal Proposal vs Indication - know what it is Indication is a ballpark number not bindable Goal is to determine whether the numbers on the indication would be acceptable before any further underwriting is done Might be appropriate to review the indication with the customer The placement The E&S proposal Don t expect consistency in the underwriting of the account by the E&S carriers the approach / appetite may vary from one E&S carrier to another Proposal needs to be reviewed in depth - Secure a specimen policy including endorsements -Is the coverage everything you asked for? - What are the coverage differences between the various E&S carriers? - Are you moving the account from the standard market to the E&S market? 20
The placement The E&S proposal What are the conditions / requirements to bind the account? - Specific app - Premium - Key dates - Who has authority to bind (the wholesaler vs the E&S carrier)? - Loss control requirements / expectations The placement The review of the various E&S proposals For the same exposure, you can expect a difference among the various E&S proposals be sure to review them to determine the differences you will need a specimen policy to do a full review If you are proposing multiple E&S proposal options, the differences among them should be specifically noted on the client proposal Coverage / deductibles / covered services / definitions / limitations, etc. 21
The placement Some of the common issues Complete assault & battery exclusions for hospitality industry clients Complete exclusions for BI to subcontractors on policies issued to owners, developers, contractors, etc. Lack of theft and vandalism for vacant properties Stricter requirements regarding security service and other protective controls when vacancy is involved The placement The agency s proposal Look to include: -The carrier and the fact it is an E&S carrier (include financial rating) -Non-admitted issues associated with an E&S carrier (affidavits / taxes / lack of Guarantee Fund, etc.) -Specific applicable minimum premiums - Specimen Policy 22
The placement The agency s proposal Look to include: -Key need by dates to ensure coverage can be bound timely -Requirements / conditions to bind (account may be able to be bound subject to the receipt / completion of various items) be sure to honor these dates to avoid cancellation -Good idea to collect premium (at least a down payment) this could be based on what agreement you have with the wholesaler regarding payment The placement Backdating typically not allowed with E&S business Within the agency, E&S business may require some unique handling / priorities Need to factor this in when dealing with the customer. Make sure that you allow time to contact the wholesaler to bind. They may need to contact the E&S carrier. Agencies should look to get the order from the customer at least 3 days before the effective date 23
Certificates Does your agency have the authority to issue? You are technically not the agent If the wholesaler is willing to allow your agency to issue the certificates, this authority should be addressed in a written document that spells out the expectations of each party Classification Limitation Endt 24
Classification Limitation Endt Be on the lookout for this form especially on your GL coverages Only covers those exposures that are identified Agency should include this limitation on the proposal (with copy of form) highly recommended to have insured sign form acknowledging their review / understanding / acceptance Renewals Key issues They are not automatic.e&s carrier / wholesaler might need additional information (new app) to renew might not be able to renew or anywhere in between Don t expect the renewal to look like the expiring There is the potential that the renewal can look drastically different than the expiring Conditional renewal notice WILL NOT be issued 25
Renewals 60-90 days from expiration date, check with wholesaler on any information needs Good to ask do you anticipate any changes / reductions in coverage or limits may need to consider pursuing coverage with other wholesalers / E&S carriers Follow up periodically for status When you receive the renewal proposal, it is the retail agent s responsibility to compare (proposed vs expiring) and to identify any changes (especially the reductions) Renewals For any changes in coverage, be sure to secure specimen policies / forms Provide these specimen forms with proposal There is the possibility that the insured may not want the coverage don t request that coverage be bound until insured makes decision 26
Policy checking When the policy is received from the wholesaler / E&S carrier, check to verify that it matches the coverage / terms you requested Don t assume that it is correct THANK YOU! 27