Customer Service Focus
How to avoid E&O claims
Follow this three-step process: document, document, document
By Linda M. Faulkner, CIC
Once upon a time, if you were a knowledgeable, ethical insurance professional, you didn’t have to worry overmuch about being sued by your clients. Or by the insurance companies you represented. In light of ongoing changes in the insurance industry and the volatility of the economy, insurance producers and CSRs these days are finding themselves increasingly vulnerable to errors and omissions claims.
Not only are the policy provisions and exclusions of our insurance agents’ E&O policies changing (and not to our collective advantage), but the standard of care to which we’re being held is changing drastically. I remember a time when policyholders were expected to read, or at least skim through, their policies. That time is long gone.
Since 2007, several national E&O carriers have shared details of their losses with me so I could provide up-to-date facts and statistics in the insurance continuing education seminars I conduct and the courses I write. Some of these stories are nothing short of outrageous. One client won a case against an agency because he alleged that the workers compensation audit provision wasn’t explained sufficiently at the time coverage was written. The agency hadn’t asked the client to sign a document stating that he understood the audit provision.
Another claim was settled against an agent because, although the policyholder signed a waiver indicating she understood that the uninsured motorist limits in her personal auto policy were less than her BI limits, the agency couldn’t show that the agent had offered higher UM limits, along with pricing.
Other claims are equally outrageous. In one case, a client called the agency and asked to remove two buildings from a commercial property policy because he couldn’t afford the premium. The CSR deleted the locations without securing a signed request from the client. When the buildings were later destroyed in a fire and the client claimed he had never asked the CSR to delete coverage, the agency was shocked to receive an E&O claim.
In another case, a CSR received a request to issue a certificate of insurance showing general liability limits of $3 million/$6 million. The client’s policy provided limits of $2 million/$4 million. What did the CSR do? She issued the certificate as requested, without offering or discussing an increase in limits with the client.
Some factors that give rise to E&O claims are never going to change: Agents and CSRs are human and make mistakes, and some people simply do things they’re not supposed to do (usually without thinking or trying to cut corners). The single most significant factor that causes agents and CSRs to lose E&O claims is something that can be controlled: lack of documentation.
In the majority of E&O claims, regardless of other details—such as the line of business (commercial vs. personal) or the reason for the error or omission (e.g., failure to secure proper coverage, explain exclusions, or make requested changes), judgments against agents are awarded because the agents are unable to present documentation supporting their positions.
Typical scenarios involving lack of documentation include failure of the agent or CSR to:
• Secure the signature of the insured/applicant on a new business application, renewal application, or policy change request (yes, even requests to increase coverage!)
• Maintain copies of proposals and quotes that show additional coverages and higher limits were offered—with pricing
• Make and retain notes, including details of all telephone conversations and meetings with clients
What are the reasons agents and CSRs give for not securing documentation as listed above? Some say they don’t have enough time during the course of the day to document the details of all the conversations and meetings they have with their clients. Others say that because they have good relationships with their clients, it isn’t necessary to secure written authorizations. Still others offer a variety of additional reasons. Regardless of the reason, however, when a client suffers a significant financial loss whose cause can be traced back to an agent or CSR, an E&O claim will likely be made and will be successful.
On the other hand, an E&O claim will not succeed when an agent is able to document the precise nature of his or her involvement in a situation for which a client threatens to sue or submit a claim. An example involves a 20-year-old self-employed carpenter who purchased a motorcycle. The client lived in and purchased his motorcycle in a state where personal injury protection (PIP) coverage was mandatory for owners of insured vehicles. The state-mandated language, however, contained a provision that excluded injuries sustained in motorcycle accidents.
The agent explained to the client that unless he purchased medical payments coverage, he would have no coverage for injuries sustained by himself or any passengers on the motorcycle. The client, who did not have health insurance, told the agent he did not want to purchase medical payments coverage because the premium was too high. The agent required the client to sign both the new business application and a form she’d designed specifically for clients who purchased motorcycle insurance. The form explained the PIP exclusion for injuries sustained in motorcycle accidents and also listed the available medical payments limits, with their respective annual costs.
Three weeks after purchasing his motorcycle insurance, the client was involved in a serious motorcycle accident. His bike was totaled and he sustained a ruptured spleen, a severed intestine, and several broken ribs. He was hospitalized for nearly two weeks. His mother called the agency to inquire about where she should submit her son’s medical bills for payment.
When the agent informed the client’s mother that the motorcycle policy did not contain coverage for injuries, the mother became angry. “What kind of insurance agent would sell a kid who doesn’t have medical insurance a motorcycle policy that doesn’t provide coverage for injuries?” she demanded. The agent politely informed the woman that medical coverage had been priced and offered to her son and that he’d declined it—in writing.
What would have happened if the agent hadn’t documented her offer of coverage and secured the client’s signature on that offer? You guessed it. She’d have been sued for failing to recommend or secure proper coverage. Her failure to document would likely have resulted in a judgment against her and her employer.
Although some agents perform deliberately unprofessional and/or illegal acts, the vast majority of the errors and omissions that give rise to E&O claims are unintentional acts. Understanding the standard of care required of insurance agents, acting within the scope of an agent’s training and experience, and always documenting insurance conversations, meetings, and transactions are the three most important things an agent or CSR can do to avoid being faced with an E&O claim.
Linda Faulkner has been working in the insurance industry since 1974 and is a licensed insurance producer and consultant. In addition to owning and operating an insurance agency and an insurance education firm, she develops insurance continuing education seminars, workshops, and online courses for Faulkner Education Services and several national insurance organizations. For information on the CISR program, call (800) 633-2165 or go to www.thenationalalliance.com