No Windstorm Sign‐off
To protect themselves, agents must not only inform their clients of gaps, but also retain proof of that conversation. When a client moved her family to a new home a block from the ocean, she was too excited to hear very much. The agent carefully reviewed the policies with her, noting the exclusion for windstorm and asking if she wanted him to continue trying to find this coverage, though it might be expensive. She wasn’t interested in pursuing it – just in returning home and walking on the beach. Several months later, a hurricane hit the area and blew off her roof. Now she was upset that the agent hadn’t found coverage and accused him of failing to properly inform her of her risk. She had not signed a windstorm waiver, so it became a he said‐she said situation that blew a lot of defense costs for both parties.
No Flood Coverage
Clients rely on their agents to get them the coverage they need, so when a boutique children’s clothing store relocated to a building a block away from a pond, the owners expected their agent to arrange all the necessary coverage. The agent didn’t realize the property was in a flood zone and failed to suggest flood insurance. With the spring rains came a flooded basement and the loss of thousands of dollars worth of stock kept there ‐‐ all without coverage.
Certificate of insurance
It is common practice for agents to issue a certificate of insurance, but a typo in that certificate can be costly. An insurance agency had this problem when it arranged an auto policy for a new client. The policy’s effective date was to be January 5, but the insurance certificate the agent gave the client accidently showed an effective date of January 1. Relying on this, the client canceled his old policy as of December 31, and then was involved in a bad accident on January 2 that was determined to be his fault. The carrier refused to pay the claim, so the client sued the agent.
Underinsuring a client
An agent may be held liable for a client’s inadequate coverage, especially if he fails to properly inform the client. When an historic hotel’s replacement‐cost policy was up for renewal, the carrier sent out a representative to inspect the property and assess the cost of replacing it, if damaged. After reviewing the inspector’s report, the carrier offered to continue replacement‐cost coverage, but to raise the limits to almost twice those of the expiring policy, and sent the quote to the agent along with a copy of its assessment. The agent failed to present this information to the client and instead notified the carrier to insure for the original limits and change it to an actual cash value policy. Several months later, fire
engulfed the hotel and the coverage fell far short of replacement cost. A California court found the agent liable for his client’s multi‐million‐dollar loss.
Questions to Ask
Do you have a checklist of offered coverages and do you require the clients to sign-off on that form if they decline the coverages?
Using such a process, which also includes filing the sign-off in a management system or some other accessible place, is a strong indicator of agency risk management procedures. It also dramatically improves the likelihood of a successful defense if a client tries to sue for negligence.
Specifically what lines of business does your agency place?
Like their own clients, almost all insurance agencies are looking for the most inexpensive coverage they can find. An inexpensive E&O policy that fails to cover all the agent’s activities, however, could turn out to be very expensive indeed. Limited lines policies that exclude specific lines have been gaining traction, and they are not always so easy to spot. If an insurance agent is placing an E&O policy for another insurance agent, the placing agent needs to be aware of this trend and may need expert advice to avoid such policies. If the client insists on the limited lines policy after its shortfalls are thoroughly explained, the placing agent needs to reach for the sign-off sheet.
Do you employ independent contractors?
An insurance agency’s employees traditionally are covered by the agency’s E&O policy, but any independent contractors may not be. Independent contractors usually can be added to an E&O policy with a simple endorsement, often for no additional premium.
How much can you really afford to lose to an errors & omissions (E&O) claim?
Insurance agents often advise clients about the value of a carrying a higher deductible, so it is natural for insurance agents themselves to look at a higher deductible for their own E&O policies. The cold truth, though, is that taking on that higher deductible can be just as problematic as having inadequate limits. There have been many instances where an insurance agency had to scramble to come up with their high out-of-pocket deductible, or were unable to pay it when due, which made future coverage more difficult and more expensive for them. In most cases, the cost between a $2,500 E&O deductible and a $5,000 deductible is only a few hundred dollars. If you can’t afford the additional premium, you certainly can’t afford to pay the higher deductible.
Do you ask your clients to complete a full application each year?
No one wants to annoy a client by repeatedly going back for more information, but it is important for an agency to have all the client information it needs. Clients can change in size, scope and other ways, so when an agency relies only on a renewal application, it could be missing changes that affect the client’s coverage needs and could result in an insurance gap. Similarly, when an agent is given a chance to shop a new piece of business, they will also need a full new business application with current, pertinent information to do the job properly and avoid E&O action.
Ask an Expert
Given the significant number of insurance carriers experiencing financial instability, what should I be doing to protect my business in the event a carrier is downgraded?
During the course of the past 12 months, many carriers have suffered from a combination of poor underwriting performance, declines in statutory surplus, and investment losses. In an effort to safeguard E&O exposures from a downgraded carrier, retail agents and brokers must make sure their professional liability policy has a favorable insolvency clause. Most policies will have exclusionary language which prohibits coverage for claims brought against a retail broker because a carrier the broker placed a client’s coverage with is unable to pay a covered claim due to the carrier’s financial instability. Most favorable wording will extend E&O coverage to an insurer that had received an A.M. Best's rating equal to or higher than a B+ at the time coverage was placed by the broker.
Sometimes I shop around policies to make sure I’m getting the best value for my clients. Are there any watch outs?
Yes—the retro date. Agents and brokers should ensure the client’s original date stays intact over time. There is a premium charge that comes with offering retro coverage due to the greater probability of a carrier picking up losses from prior wrongful acts. A competing insurer may offer an attractive premium when compared to the incumbent’s renewal pricing-if the difference is significant look to the retro date first to make sure the prior acts exposure is addressed.
What types of exclusions and coverage enhancements should I be mindful of for my own professional liability policy?
Basic policies often exclude life and health insurance placements. If your agency is involved in this arena make sure coverage properly extends and can address the exposes involved with annuities-fixed and variable as needed. There are also enhancements and additional coverage’s which serve as a nice compliment to the basic professional liability policy. Specifically, a professional liability policy can be enhanced with cyber and privacy coverage which provides the resources necessary to be proactive in the event of a data breach and mitigate reputation damage. Employment practices is a must have for any operation that has employees or experiences interaction with individuals outside of the organization (third parties). Key enhancements to an agents/brokers professional liability policy can come in the form of aggregate deductibles which caps the number of deductible payments a policyholder will incur during the course of the year, first dollar defense which limits the carriers collection of a deductible to indemnity payments only, and defense costs extended outside the limits of liability.