A Perfect Storm – Insurance Agent Errors and Omissions Claims Continue to Grow

A Few Examples of Activities That Can Generate Insurance Agent Errors and Omissions Claims

• Even a producer’s site visit can generate problems. For example, suppose the agent does a walk-through with the insured. The agent doesn’t bring the property schedule, and the insured has built a new outbuilding. However, even though the insured has a duty to review the policy and any schedules, the frequent E&O allegation in this type of case is, “You were on site; you should have seen the new building!”
• Failure to offer coverage specific to the insured’s exposures is one of the most frequent causes of agent E&O litigation. Documentation of coverage the agent offers, including endorsements that could enhance coverage, increase limits, and increase property values can all help protect the agent and make any E&O claim much easier to defend.
• Similarly, furnishing the insured with a signed declination of coverage when the agent offers a specific coverage, such as flood coverage on a property policy, can help prevent an adverse verdict when the insured alleges the agent “never recommended that coverage.” These declinations should be in writing and include the words, “This declination applies to all future renewals.” Even if the insured fails to return the declaration, proof that the agent sent that document could help defend an E&O claim on failure to offer.

Agency E&O by Agency Size

According to one agent E&O carrier, almost half their claims arise in agencies with staff sizes of 11 to 30 employees, followed closely by those agencies staffed from three to five employees,

Breaking down E&O claims by gross annual premium, the bulk of claims arise in agencies with under $5 million in premium volume followed by agencies with $5-to-$10 million in premium, according to recent data by one E&O insurer. However, these claims can occur in any size agency.

Insurance Agent Errors and Omissions Claims and The Pending E&O Bubble

Recent mergers and acquisitions (M&A) have also impacted E&O claims. When buying an agency, the acquiring entity will review resumes, check for credentialing such as agent licensing, and review employee performance standards. However, the smaller the acquired agency, the more likely the agency may rely on a few key agents who may not be familiar with best practices procedural standards, or in some cases, simply will not adopt the acquiring entity’s procedures and standards.

Smaller agencies may not have a standard procedures manual, or acquired agents may suffer from the “This is the way I’ve always done it” thinking. The industry is beginning to see more significant claims arise out of acquisitions. Certainly, agency E&O insurers are closely watching this trend.
Additionally, prior acts committed by the acquired agency can involve the current carrier depending on the structure of the agency sale.

During the M&A, it can pay to hire a trusted adviser to help provide insight and guidance throughout the acquisition process. For more information on the future and risks of agency acquisitions, read our article in the American Bar Association’s newsletter.

Marketing Collateral a Key Area of Concern in E&O Claims

Whether it’s an agent’s website or marketing material handouts, or even job titles, all can increase the agent’s standard of care, often beyond what that state requires. Common problematic terms include use of words or phrases such as “expert,” “best,” “all-risk,” and “risk management specialty.” Opposing counsel will use those terms in litigation, making defending an E&O claim harder. Always consider how the agent’s written words will look when blown up as an exhibit.

Today’s insurance sales experts increasingly recommend and focus on niche marketing. Rather than be generalists, they recommend agents develop a niche and saturate that market. Especially when niche marketing, insureds rely more heavily on niche producers to solve risk management issues such as safety concerns or help to develop return-to-work programs, for example. If that reliance on the agent’s declared expertise becomes detrimental to an insured, any assurance, whether written or oral, can expand the agent’s standard of care.

Agents must use precise language that confirms their experience. Calling oneself a “risk management expert” without proper education and experience can backfire.

Carriers often seek to file motions for early claims dismissal. Suppose website or marketing materials such as landing pages or handouts expand the insured’s service expectations. In that case, it makes it much harder for the carrier to successfully conclude the claim early.

E&O Prevention Tips to Consider

While occurrence policies generate more claims than claims-made forms, probably because they are more prevalent, any agent placing claims-made coverage must explain the importance of policy terms and conditions. Once an insured cancels claims-made coverage, there is generally no coverage for past activities. Because many business owners are selling their businesses and retiring, the importance of ensuring business owners understand they may still face liability on their completed operations or products they manufactured or sold is critical and not well understood by many commercial clients.

Any size agency is at risk of a claim and all of the following errors can trip up even experienced agents.

• Failure to recommend adequate coverage limits to the insured. Using coverage rejection forms that include wording such as “This rejection of coverage includes future renewals” can help avoid E&O claims from a failure to recommend.
• Negligent misrepresentation allegations may occur if an agent fails to take reasonable steps to inform their insureds of any information that may be detrimental to them. For example, the hard market has caused many insurers to add new policy exclusions or warranties. Failure to warn an insured that if they fail to keep their security system operable they may have no property can generate a large E&O claim after a claim denial. Another key example of negligent misrepresentation occurs when a new agent woos a client by telling the client, “Our coverage will be better than what your current agent/carrier provides.” It is one thing to sit down with a potential client with a checklist that shows gaps in their current coverage versus what another carrier can provide, it’s another to make vague promises or denigrate the competition’s expertise.
• Untimely notice of a claim to the carrier can generate claims. Often insureds call their agents to report an incident they don’t want to report to the carrier. On first-party property claims just above the deductible, an agent may recommend the insured pay the damage themselves. However, agents should review their agency/carrier agreements to determine their claim-reporting duties before advising insureds to handle any issue themselves. And agency risk management experts agree: On liability claims, the agent should always advise the client to report the claim and document that advice. Further, no longer can agents assume that the underlying carrier will appropriately put the excess carrier on notice on high-value claims. One recent court decision left a hole in the liability tower because the primary carrier failed to report the claim to all excess-layer insurers.
• Certificates of insurance (COI) that promise the world are a litigation nightmare. When lenders or risk managers demand certain all-encompassing language in certificates, agents beware. Insurance associations spend a great deal of time educating agents on the hazards of too broadly worded COIs; however, claims still arise. Agents are reluctant to say “no” to an insured if their refusal to place certain language on a COI stalls a deal for the insured. However, COIs with too broad wording are a constant hotbed of litigation.
• Reviewing anything on insured contracts other than insurance requirements can set the stage for an agency E&O allegation. Agents are not lawyers, and although they routinely review leases and other agreements for their insureds, they should never stray outside the insurance requirements to avoid an E&O allegation.

General E&O Issues to Consider

With today’s extremely hard market, carriers are becoming more selective in which accounts they will write and imposed stricter coverage terms in many instances.

More business goes to surplus lines carriers than ever before. Surplus lines carriers often use proprietary forms, and usually offer more limited coverage than many admitted carriers. Agents must read the forms, explore endorsements, especially vaguely worded endorsements, and alert their insureds about these exclusions or coverage limitations. Surplus lines agencies usually access managing general agencies (MGAs) to which carriers delegate underwriting authority. For more information on MGAs, please see our article, Navigating the Managing General Agency Agreement.

Insurers that offer agency E&O coverage seem well prepared for claims arising out of the hard market. Many offer tools to help their insureds improve processes and reduce their exposure to E&O claims. Additionally, industry associations like the Big “I” offer many risk reduction tools for their members, many open to all Big “I” members.

Thoughts in Closing

The insurance market is not going to soften significantly any time soon. Coverage availability, more business placed in the surplus lines market, and the reality of plaintiff litigation funding all help to create larger verdicts. These are just a few challenges facing today’s agents and E&O carriers alike.

Here are a few additional items agents should consider.

• Are the agency’s E&O limits adequate? Agents should never recommend a coverage limit to their insureds. However, it’s a solid idea to recommend that agents review their current agency E&O verdicts to evaluate E&O coverage limits that help them determine their “sleep at night” coverage limit.
• Every agency should have an agency procedures manual, and all producers and customer service representatives should adhere to those guidelines. Rely on current agency best practices recommendations available through state or national industry associations. No matter how much premium they generate, rogue producers who refuse to adhere to standards create significant E&O problems. While agency owners may be reluctant to fire employees, they are also reluctant to pony up often sizable deductibles if one employee creates an E&O incident.
• With the hard market still a reality, agents often work harder to find adequate coverage for their insureds. Agencies must proactively attempt to find alternative coverage and where they cannot, immediately inform the insured verbally and in writing that they cannot find a market. They must also closely review policy language, including endorsements, and notify the insured of any significant changes, coverage conditions, or limitations.

Whether presenting an agency E&O claim or defending one, work with an expert witness who understands the challenges faced by today’s agents. Experts must provide testimony in a highly understandable way, a way in which the jurors will decide, “We believe and like this witness.” This is critical in defending today’s insurance agent errors and omissions claims.

Evolving Landscape of Insurance Agent Errors and Omissions Claims

In summary, the evolving landscape of agency E&O claims requires constant vigilance, solid communication with clients, and expert witness expertise to mitigate and best defend these risks. By adhering to agency best practices and using the right tools, agents can better protect themselves from liability and carriers can better defend E&O claims when they arise. Additionally, plaintiff attorneys can uncover the mistakes made or shortcuts taken by the agent and pursue those claims accordingly.