ANATOMY OF AN E&O CLAIM—PART II

Real-world examples involving tenured employees 

No matter how experienced you are, you can still make mistakes … .  And newer employees

simply don’t have the “institutional knowledge” that grows from tenure in the position.

By Cheryl Koch, CPCU, ARM, AAI, ACSR, AFIS, and Mary Belka, CPCU, ARM, ARe, RPLU, CIC

In a previous column, we looked at some situations that may have—but luckily did not—resulted in an agency experiencing an errors and omissions (E&O) loss. All E&O insurers record data about the cause of a loss, including who in the agency may have been primarily responsible, and many distinguish between what they consider to be “knowledge-based errors” and “process errors.” 

When we examined those near misses in our previous column, they were an interesting blend of both types of mistakes. New people in an agency, handling very complex accounts with which they are not familiar, are bound to make mistakes from time to time. Fortunately for all of us, we often discover our errors before they become actual E&O claims.

The answer then, to better E&O loss control, is to not hire new people! Sometimes we wax philosophically about our long tenure in the independent agency business, but age does offer some benefits. If you are truly a student of insurance and your profession and have the appropriate level of attention to detail and the time it takes to really analyze a situation, you likely will help your agency avoid an E&O situation.

As you get older, you simply know more (assuming you’ve paid attention), although it is sometimes more difficult to access that information as the filing cabinet in your brain becomes more crowded. So, perhaps not hiring new people is impractical, but we can hire old ones. Oh wait, we’ve already done that. It’s called the “graying” of the independent agency.

According to a study by the Independent Insurance Agents & Brokers of America (IIABA or
“Big I”), nearly two-thirds of an agency’s book of business is produced by individuals who are 46 years old or older, with a significant portion controlled by those 55-plus. While there are no publicly available studies (of which we are aware) on the age of account managers, some insurers have done internal research and found the distribution to be roughly the same as that of the agency principals and producers.

So, if we have all these people with a great deal of knowledge and experience, we shouldn’t have E&O losses … and yet we do.

Here are some real-world examples of situations an agency had despite the fact they had very tenured employees handling the transactions.

Teachable moment one. A long-time client called the agency to make a change to their policy. The account manager had handled the account for many, many years and was thoroughly familiar with the business. She was asked by the client to “delete location number three,” which she processed promptly with a change request to the insurer.

Before the actual endorsement arrived, the insured suffered a severe loss to one of its buildings. You guessed it—location number three, which had been deleted. Neither the account manager nor the client noticed that the insurance company had renumbered the locations at the last renewal.

How could this E&O claim have been prevented?

• The account manager should have verified the actual location, not just acted upon the location number.
• An email should have been sent immediately to the client confirming their desire to delete the location and referring to its specific physical location.
• Rather than a verbal instruction, when reducing or eliminating coverage, an account manager should request something in writing from the insured (email is acceptable).

Remember that this was a very experienced account manager who knew this account like the back of her hand. Yet the system failed.

Teachable moment two. We’re not sure why it happens, but it seems that from time to time a policy that has been properly entered into an agency management system simply does not appear on the renewal/expiration list of anyone in the agency. We have observed this phenomenon with nearly every AMS. It’s kind of like that pair of socks that go in the washer but only one seems to get to the dryer.

An account manager received a call one day from a client inquiring about their renewal policy. She looked in the system and, sure enough, it had not been renewed. She checked her expiration list and those of her colleagues, and that particular policy did not appear anywhere. It was simply one of those “glitches” we hear about so often.

At times, this occurs when somehow an incorrect expiration date is manually entered. Luckily in this case, she was able to have the insurance company backdate the policy to the renewal date, with no lapse in coverage (the insured had to submit a no-known-loss letter for this consideration).

How could this potential E&O claim have been prevented?

• The agency should be running a report in their management system of any policies that have not been renewed and checking those that may have been inadvertently overlooked. Since most agencies have very high retention rates, this is not as daunting a task as it may seem.
• As the final step in processing any policy (new or renewal), the account manager should set a suspense for 120 days prior to the next renewal. This suspense will act as a fail-safe in the event a renewal is overlooked. If it appears on the list, simply close the suspense and move on.

Teachable moment three. An agency had a large and very important personal lines client, whose business had been handled by the same account manager for many years. The client called to report that they had suffered a windstorm loss in which a lot of outdoor property had been severely damaged—a screened porch, patio cover, patio furniture and a complete outdoor kitchen, all of which they had completed during the pandemic at a construction cost of approximately $80,000. Unfortunately, the limit for outdoor structures on their homeowners policy was $50,000 (10% of their dwelling limit of $500,000, the industry standard).

Of course, the agency’s stance was “you didn’t tell us,” but the client’s reply was “you didn’t ask.” Not wanting to lose the client, the agency turned the claim in to their E&O carrier; but since it was less than their deductible, they ended up paying the entire shortfall. The E&O carrier noted that the documentation in the management system clearly showed that the client had not been contacted by the agency in over five years.

How could this E&O claim have been prevented?

• Every client, no matter how large or small, deserves at the very least an annual “touch”—an email, a phone call, or an automated letter letting them know their policies are renewing and won’t be updated unless they contact the agency. Most clients don’t know what kinds of changes are important, so you might want to give them some suggestions.
• You can improve your chances of getting a response to your correspondence by calling to let them know you are sending something that requires their attention and providing a date for receipt of the information. We call it the “one-two punch.” Most correspondence should involve a brief personal call, even if only to leave a voicemail, followed up by an email. The ROI (return on investment) of this small amount of time can be enormous; at the very least, it increases retention by deepening client relationships.