Insurance Community University 1 Insight on Errors & Omissions: A Lesson Waiting to Be Learned.

Insurance Community University1

Insight on Errors & Omissions:A Lesson Waiting to Be Learned

Insurance Community University

Disclaimer

Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state

jurisdiction. This instructional materials provided by Insight is intended as a general guideline and any interpretations provided by Insight do not

modify or revise insurance policy language. The authors of these materials, Insight Insurance Consultants is a division of Insight Consulting

and Management Inc. In providing these materials, Insight assumes neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of

the instructional materials provided. Copyright 2010 – 2011 All Rights Reserved

www.insurancecommunitycenter.comLaurie: 714.803.5830 [email protected]

Marjorie: 714.206.9583 [email protected]

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Your Instructor Today

Marjorie L. Segale, AFIS, CISC, RPLU, CIC, CRIS, ACSR, CISR

Insurance Community Center, LLCDirector of Education

[email protected]

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Objectives

• Minimize E & O exposures– Procedures– Responsibility to the client, insurance

carrier and compliance with regulations– Implementation of procedures and

overseeing their effectiveness– Documentation– Education

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Tips on How To Avoid Errors and Omissions

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What Constitutes an Error or Omission

• An error = mistake– Incorrectly performing a task

• An omission = failure to perform– Omit a coverage– Fail to identify a risk– Fail to offer coverage– Fail to renew

• Error = 90% of E & O claims


Avoiding Errors & Omissions

Insurance Community University 8

Procedures


Procedure Manual

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Procedures (Exception = E & O)

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The Process & Procedures

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Proposals


Proposals

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Proposals

• Include coverage options – Not just a laundry list– Match with exposures– Include : “other coverages are available

upon request”

• Prospect / insured initial accept or reject• Insured MUST sign proposal

– If unwilling – have insured send “authorization to bind letter

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Proposals

• If not accepted, notify in writing no coverage has been placed

• Do NOT overstate information in the proposal

• When delivering the policy, include a cover letter that the policy supersedes the proposal


The Proposal Said TOO Much


Example: The Proposal Looked Great

• Large account – lots of competition– All coverages listed– Definitions included

• The proposal defines “blanket” on the property coverage– Policy does not include definition

• Problem?

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• The insured suffered a loss and was able to prove that they needed more limit for the building, business personal property and business income at the loss location

• You had only blanketed the buildings although your proposal showed “blanket property insurance”

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• The insured understood that everything in the property section was combined

• Underinsured by $4,000,000• Outcome:

– E & O claim– Trial– Jury found agent responsible for

misrepresentation

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Applications

• Need to be reviewed with the client• Need to be complete• Need to be signed by the insured• Professional liability applications must

be entirely completed and signed by the insured

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Binders

• Do NOT issue binders without authority– Agency authority– Broker must receive written consent from

the insurer

• Issue only for allowable time under law• If policy number assigned, use Evidence

and COI, not binder• Cancellation: use same method as for

issued policy


Changes

• Obtain authorized persons• Confirm with main contact in writing• If adding or deleting coverage

– Confirm in writing– Notify authorized party of consequences


What’s In A Name?

Married couples and their insurance policies

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What’s In A Name?

• Mr. Anderson calls to tell you that he and Mrs. Anderson are getting a divorce.

• Mr. Anderson wants you to remove her vehicle from the Personal Auto Policy and take her name off of their Homeowner’s policy as she has been out of the home now for almost a year

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What’s In A Name?

• You inform Mr. Anderson that you will send a Lost Policy Release for signature

• In the meantime, you send a request to your underwriter to obtain the changes requested and suspense the request for 30 days to follow up

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What’s In A Name?

• The change is received in a few days and sent to the home address

• Two weeks later, you get a call from Mrs. Anderson who is reporting a serious auto accident

• The LPR was never received

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Coverage Facts

• The Auto, Homeowner’s and Umbrella policies were originally written in both names

• The vehicle involved in the auto accident is in Mrs. Anderson’s name only

• Claim was denied– Vehicle no longer insured– Mrs. Anderson is no longer an insured

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Result

• Mrs. Anderson hired a lawyer– Suit filed against insurer for bad faith,

breach of contract and violation of covenant of good faith and fair dealing

• The insurer responds to the suit and files a cross-complaint against the agency

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Outcome

• The insurance company paid, due to law of agency, full policy limits – $500,000 under the auto policy– $1,000,000 under the umbrella policy– Repair of the vehicle and rental

reimbursement

• Two years of legal wrangling, agent’s E & O carrier settled for $1,200,000

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Renewals

• Typically , standard market insurers required to renew unless proper notice is sent

• Non-standard, non-admitted markets may require broker to order renewal

• All renewals should have coverage recommendations reviewed and repeated as necessary


That’s It For Today

Come Back Tomorrow – Same start time / Same log in

MUST attend both sessions for credit!

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Welcome Back to the Errors & Omissions Class

We will be starting in a few minutes

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Recap

• Agency procedures– Contain and control E & O risk– Read your proposals, coverage summaries,

procedure manual• What would a lawyer do with them?

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You Did EVERYTHING Right!

It was a BIG account

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Not Enough Coverage

• Old, frame, non-sprinklered, no upgrades, bad part of town – but, hey, it’s a big account!– You have spreadsheets of the property

account, signed SOVs, several years of emails, phone calls, proposals, coverage rejections in the file

• You manage to get it placed – then the insurance company bails

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Not Enough Coverage

• You search your admitted markets – all of them

• You go to a large wholesaler – they put it out to market – you finally get a taker, but…

• No blanket coverage for buildings, personal property or business income

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Not Enough Coverage

• You document and retain marketing sheets, declinations and have sent results to the client

• You document changes in coverage, proposal is presented and signed by the client

• Now they have the fire loss

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Result

• Underinsurance on Building, BPP and Business Income

• Had it been blanketed the coverage the outcome could have been different

• Business Income paid up to the scheduled location limit (used to blanket)

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Outcome

• 8 years of litigation• E & O claim filed against agent• Agency lost• Court ruled in favor of the insured

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Certificates

• Do not alter the wording on a Certificate of Insurance Form

• Document who requested the certificate and what was requested

• Do not indicate a party is an “additional insured” on a certificate unless you have an endorsement

• Do not change the cancellation provision

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Responsibility

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Define The Terms OrWho Are We, Really?

• Agent• Broker• E & S Broker / Wholesaler• MGA• Or a combination

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Agent / Agency Requirements

• Comply with terms of the agency agreement

• Comply with the underwriting rules such as eligibility and binding authority

• Comply with complete and “honest” disclosure

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Broker / Brokerage Requirements

• Comply with any Wholesaler agreements

• Comply with the underwriting rules such as eligibility and binding authority

• Comply with complete and “honest” disclosure

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Read Your Agreements

• Do you protect the wholesaler?• Does the wholesaler protect you?• Is it mutual?

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You Didn’t Mean To Do It

But you bound the account

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The Excitement of the Sale

• 4pm on a Friday - you bound insurance on a new western wear store chain

• You deliver the binder, pick up the check and their current policy for cancellation and head home to celebrate

• After a great evening, you watch the late news

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• There it is, the store you had just bound is on fire and burning to the ground

• You had not cancelled the current policy and now had two policies in force

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• You get to the office in the morning– Review the file, application and binder– You notice that you said the hydrant was

500 feet from the building – wrong– The lack of immediate water contributed to

the total loss– Submit the claim– Notify the other agent of the claim

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Result

• The insurance carrier did not treat that as a material misrepresentation

• Both carriers paid on a “contributory” basis

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Relationship with Customer

• Responsibility to our insurance customer is based on the “relationship” that the agent/broker has with their customer.

• There are some “basic” standards of care

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Standard of Care Basics

• Obtain specifically requested coverage• Follow insured’s directions to add,

delete or change coverage– Confirm in writing

• Advise coverage changes in writing• Notify cancellation or non-renewal• Notify insurance company downgrade

(agent)

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Special Relationship

• A “special” relationship is one defined by common law

• Generally when agent/broker performs more than a simple transaction at customer’s request

• “Special Relationship” imposes a higher degree of accountability

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• “Establishing” a relationship– Advertising– Web Site Presence– Communication– Holding yourself out to be a risk manager

or other professional

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• Call on your client– During the year– 90 days prior to renewal– Meet with account manager to review

needs– Send to marketing as needed – document

results

• Renew “as is”– Dangerous and gets worse over time

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The Client Asked You For Full Coverage

And It Burned

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He Remembers it Clearly

• The insured had a homeowners with an agency located within three blocks of his home

• He had been insured for 20 years with the same carrier and always paid his premium in the same week of the year, in cash

• He knew this because that was when his pension check came in

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• It was after one of the fires in San Diego when he walked into the office he asked to speak to his agent

• An assistant offered to help and the insured explained he was concerned with the fires and all he had heard on the news

• He asked the assistant to make sure he had enough coverage

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• The assistant assured him he did• A week later his house burned to the

ground• The insured was drastically

underinsured• The agency claimed they had no

recollection of him coming in

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Result

• The insured was able to demonstrate to the court he had, in fact, been there that day

• He was able to describe in detail the person he spoke to

• Because he specifically asked for “sufficient limits” and the assistant assured him he had them, they were held responsible for the damages

• Loss to agency $240,000

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Regulations

• Compliance with regulations set forth by the Department of Insurance in the state of domicile or writing.

• Compliance with state laws relating to mandatory coverages for a state

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Regulations

• Compliance with other statutes and laws such as:– Privacy and Fair Claims Reporting– Financial Services Reform Act (Gramm-

Leach-Bliley

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Implementation of Procedures

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Implementation

• So many procedures fail because they are not actually implemented, monitored, and updated

• Often times the technology does not support the operation

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Implementation

• Set up a system for implementation with target dates

• Set up peer reviews to assure compliance

• Appoint a steering committee to review reports and update procedures

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Implementation

• Make certain that the goals are obtainable

• Make certain that the implementation creates a positive working environment

• Listen and learn from team members to make certain the implementation and processes are appropriate for your agency

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Documentation

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The Old Way The New Way


Documentation

• The “file” must speak for itself• Document in the Agency Management

System and anywhere else it would be required

• Document in writing the offer of coverage and quotation of premium

• Obtain signed rejections or signed confirmations of coverage from the Insured

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Documentation

• Establish a written e-mail policy and procedure for your office

• If emails are being used with the agency management system then ALL emails should go through the system

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Educate


Educate Your Clients

• Explain and discuss– What you are going to do and NOT do– Risk, coverage solutions, coverage gaps– Customer responsibilities

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• Proposal / Coverage Summary– Use standardized template - change as

needed– Clearly explain coverage and options– Explain factors affecting premiums– Add place for customer rejection (or

acceptance) of offered coverage– Include authorization to bind

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• Communicate with customers about available coverage to manage risk– What is your agency doing?

• Post coverage and risk information on website and update

• Inform customers– New laws and regulations– New exposures– New trends

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Professional Standards

• Strive always to be the best• Establish a monthly review of coverage /

client issues• Test staff to identify training needs• Establish agency goals – not just for

sales but for client satisfaction

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Professional Standards

• Courts are demanding an increasing level of knowledge

• Agencies must keep up and excel• This is hard to accomplish

– Reduced staff– Increased demands– Supply agency tools to help

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Educate Your Staff

• Create method to review agency personnel knowledge of coverage nuances, differences in company forms, coverage extensions– This includes proper sales management –

not just sales goals– Consultative selling creates better and

longer relationships

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Education

• Ignorance is NOT an excuse in a court of law– You cannot work in the insurance industry if

you are not educated in insurance– Learn about the industry

• Learn about your “customers” industry• Understand the coverage being offered

by each carrier you represent so you can explain it to your customers.


Summary

• Remember the Dual Meaning of E & O and try to avoid them

• “Errors and Omissions”– For insurance personnel

• “Excitement and Opportunity” – For Attorneys

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Insurance Community University 1 Insight on Errors & Omissions: A Lesson Waiting to Be Learned.

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Transcript of Insurance Community University 1 Insight on Errors & Omissions: A Lesson Waiting to Be Learned.