The total cost to an agency of an Errors and Omissions (E&O) claim is much more than any amount eventually paid by an insurance policy. The actual cost to the agency in lost staff time, litigation expense, stress, impaired carrier relationships, damaged reputation, and lost business resulting from the claim can exceed the direct loss cost. E&O losses can happen to anyone, they don’t discriminate based on agency or community size or geographic location.
This article is intended to provide an overview of various E&O loss exposures that exist in commercial lines of insurance and to review methods and procedures that an agency could consider to help reduce the possibility of a claim. The reader should consult with his or her own legal counsel to determine the specific steps his or her agency should take in satisfying legal responsibilities. Agencies are advised to contact their individual companies for details about interpretations of their eligibility requirements, particular insurance contracts and rules.
The first step in developing any successful risk management program is to have a complete understanding of a client’s operation and potential exposures to loss. This must be done before possible insurance and non-insurance “solutions” can be discussed. It is the same with an agency’s own E&O loss prevention program. Sources and the relative frequency of claims must be understood before genuine evaluation of specific exposures and procedures can take place.
E&O exposures must be evaluated systematically, so the agency commits resources to the most “important” areas. One way to measure “importance” is from the perspective of E&O claim frequency and severity.
According to one national insurer of Agent’s Errors and Omissions coverage, the two largest categories of reserves by type of error were Inadequate Coverage (31.8%) and Misrepresentation (21.1%).
As a percent of total claims frequency, the four largest commercial lines were: Commercial Liability (17.5%), Workers Compensation (7.8), Commercial Auto (5.7), Commercial Fire (5.3%).
The process of evaluating the hundreds of procedures and tasks that agency personnel perform along with the thousands of commercial insurance policies and optional endorsements available would be unmanageable without knowing where to start. Numbers like these help the agency set priorities.
Another way to measure “importance” is by evaluating personnel time and the financial investment required to fulfill responsibilities and satisfy the needs of all parties involved, the client, carriers represented and the agency. Every business has limited resources; as a result it must allocate them carefully, to maximize return on its investment.
When discussing procedures, file documentation and communication, it is important to balance the need and desire for completeness and accuracy with the reality that the agency is a business. As such, procedures must be evaluated from a cost/benefit perspective. If not, the agency may provide excellent client service, fulfill its responsibilities to carriers, generate substantial documentation and communication, right up to the day it goes broke.
The role of the agent has evolved over time from being solely an insurance sales person to today being asked to assist in a client’s total risk and insurance program. He or she is frequently asked to provide consulting services and advice on the management of a client’s varied risk exposures. Knowledge and skills are required to identify exposures to loss and provide recommendations for both insurance and non-insurance solutions. These additional responsibilities can change the agent/client/carrier relationship and the overall E&O exposure. A client’s un- or under-compensated loss may in turn become the agency’s E&O loss. The standard of responsibility can depend on previous actions and the “course of conduct and practice” that the various parties have grown to expect and rely upon.
During the insurance transaction the agency has responsibilities to both the carrier it represents and to the prospect/client. This dual role can create shifting responsibilities depending exactly where the parties are in the risk management process or what particular procedure is being performed, i.e., risk identification, application completion, issuing binders, processing certificates of insurance, policy cancellation, claims handling, etc. An agent can have both common law and contractual responsibilities to both parties.
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