Agents Errors and Omissions
Our topic this month is about sweating the details.
The hospitality industry is recovering financially but its profit margins are still extremely thin. Hotels, motels, and restaurants are monitoring their costs so closely that some of them are deferring needed maintenance and not purchasing coverage they really need. The residential condominium real estate market has returned, but tighter financial regulations are forcing their associations to pay closer attention to their contracts and their insurance coverages. Both industries look to their insurance professionals for guidance with respect to purchasing the right coverage at the right price.
Knowledgeable insurance professionals are invaluable to their clients. But what happens when an insurance professional becomes the client in order to purchase agents errors and omissions liability coverage? This is a nonstandard line of business and every agent must carefully weigh the balance between coverage and price. Are you looking in the right places for this coverage?
Making a home in the condo and co-op association insurance market
Tightening market requires agents to sharpen their skills & work with knowledgeable partners
Although conditions are starting to turn around, condo and co-op associations continue to deal with issues brought on by the recent economic downturn and housing crisis. "Associations operate on dues they collect from each and every unit owner," explains Jamie Schraff, CIRMS, vice president and Community Association Program manager at Distinguished Programs. "When folks don't have money, dues or assessments are among the first things they stop paying."
According to Ed Mackoul, CIC, president of Mackoul & Associates, "Reduced income affects the associations' ability to pay immediate bills—like tax bills and electric and water bills—but also their ability to maintain and keep up common areas and systems."
When owners stop paying, associations sometimes need to take legal action. "They need to put fees and liens on the home, which may be new territory for associations and their volunteer board members," explains Schraff. In addition, they need to deal with the fallout from necessary operational budget cuts. "Such cuts may impact owners who did pay their assessments, and this can lead to angry board meetings and community meetings, and possible lawsuits," she adds. "It's a lose-lose situation."
Mark McLallen, president of Condominium Insurance Specialists of America, notes that, in a tough housing market, some owners opt to rent out their units. "This helps protect association revenues but leads to other issues," he explains. "Renters may not be as invested in the community as owners would be, and this can lead to distractions that associations must spend time on." Also, he says, if owners abandon their properties, associations sometimes assume the role of rental agent and landlord, which also is time-consuming.
As the housing market improves, associations find themselves dealing with a stricter lending environment. "One of the main issues associations deal with is Fannie Mae and its requirements," explains Mackoul. "Fannie Mae backs lenders and, for example, won't allow a unit owner to close on or refinance a unit unless the association has a certain amount of fidelity bond coverage." With co-ops, he adds, Fannie Mae dictates carrier financial strength ratings.
"There also are issues developing with flood," he adds. "Fannie Mae is requiring a certain amount of flood coverage, where they didn't before."
Schraff points out that Superstorm Sandy, among other events, has led associations into new territory. "Many never had to go through storm recovery or natural disaster recovery," she explains. "They're dealing with everything from working with FEMA to cleanup procedures to rebuilding. These often are volunteers engaged in some very complex issues."
"One of the most surprising changes in the last two years is the increase in construction costs," explains McLallen, "Demand is up, but the supply of contractors remains fixed, so labor costs are rising. So are material costs, especially for petroleum-based materials." In the last 18 months, he says he's seen a 12% to 20% jump in building values.
Housing market shifts have led to other challenges. "Before 2008, many apartment buildings converted to condos," explains Schraff. "Converting is a big process that requires all new documents. They were just wrapping that up when the recession hit, so they started converting condos back to rentals because they couldn't get buyers. Now things are leveling out, and they're starting to return to condos. That's a very laborious process."
Finally, some associations are encountering challenges they never before contemplated, namely, therapy animals. "Many condos have restrictions," explains Schraff. "They're age-restricted, smoke-restricted, and pet-restricted. People are getting around the pet restriction with a doctor's note that might say, 'Mrs. Jones needs seven poodles in her New York City co-op so she doesn't have a nervous breakdown.'
"Now you have these animals, which can be noisy, smelly and dirty," she adds. "Other residents are upset; it's not what they signed on for. But associations need to manage the situation. There is no easy answer." It's not just poodles, though. "Somebody had a therapy pony in their unit," she says.
Insuring the associations
According to Mackoul, the insurance market for condo and co-op associations is getting a more restrictive. "We're seeing a hardening market," he explains. "Once that happens, insurers institute new guidelines or are more diligent about enforcing existing ones. This could result from underwriting losses or it could be that their reinsurance carriers require it."
Mackoul says that as carriers become stricter, associations are encountering loss control or life safety recommendations they didn't face before. "You may have a high-rise building without emergency lights or exit signs that must now install them," he explains. "You might need a second means of egress or the building might need hard-wired smoke detectors where they didn't before."
Some properties have a harder time than others. "It's especially tough for associations with maintenance issues to get insurance," explains McLallen. "When they do, deductibles and pricing are generally higher." He says some associations use insurance policies like maintenance contracts. "They have an $8,000 loss and a $5,000 deductible and figure $3,000 is better than nothing, so they turn in the claim," he says. "Some do this repeatedly. As the market hardens, insurance companies look at frequency issues and these accounts are being hit hard."
Even before renewal, this practice causes problems. "When roof or plumbing failures cause leaks, for example, insurance pays a portion of the repair costs, but having to pay frequent deductibles has an immediate negative impact on association cash flow, further exacerbating the cycle," McLallen notes.
He says carriers are paying extra attention to maintenance issues these days. "They want to be sure it's a client they want," he explains. "A number of our clients have been required to address significant items when preparing for their renewal. Some have had to start projects they had planned to do later, and if they didn't have the money, they needed to obtain financing to begin the project prior to renewal."
Following Sandy, flood insurance is a major issue. "A lot of people didn't realize how much insurance they needed," explains Mackoul. "Many associations lacked proper coverage. Now, FEMA is starting to remap flood-prone areas, and associations that weren't in a high-risk flood zone before now are, so associations that didn't need flood insurance will need it."
Retail agents and brokers can help condo and co-op associations with these issues. "One thing we do is physically inspect any community before we quote it," Mackoul says. "That way, we know their life safety issues and can educate them on what they need."
For example, he says, "Emergency lights in a six-story building will make an association attractive to ten different companies; if they don't [have them], it might be attractive to only three." Agents who conduct on-site inspections have a leg up on those who don't, he notes.
"By going to the property, we get information," Mackoul explains. "Insurance brokers need to know what they're insuring, and they need to be able to share that with underwriters. How many buildings are there? What about life safety? What kind of lights do they have? Are there hard-wired smoke detectors? Are the buildings sprinklered?
"You need to know about the amenities, too," he adds. "Are there swimming pools or a tennis court? Some associations have their own transports for people. We need to know the exposures and, of course, how much property they have and how much insurance they need."
Site visits can help agents make sure they protect clients adequately. "I can't tell you how many times we look at a prospective client and find them underinsured," McLallen explains. "Most often, the agent never became familiar enough with the complex to make sure it's valued correctly."
He says agents should have intimate knowledge of all the details of the association and make sure they use proper cost-estimating software. "No agent wants to be talking to an association the day after a loss and having a conversation about whether the value is adequate to cover the loss," he says.
McLallen encourages agents to think of condo associations as small communities. "Sometimes you get the plain-Jane townhome associations, where everyone retreats into their townhome at night and little else goes on," he explains. "But many communities host social events and parties, so liquor liability comes into play. Some have swim teams or woodshops or other facilities and services, and these all have exposures associated with them. And, of course, with the numerous maintenance-related projects going on, certificates of insurance can be a big concern."
According to Schraff, agents without condo association expertise should find a program or carrier that has it. "Find a carrier or a program that does this, not a carrier or a program that simply will do it," she explains. "Not only will coverage be better, but you'll also have someone on the other end of the phone to help you write it properly."
She says specialists may help agents better understand things like higher-value landscaping or other amenities that set certain properties apart. "A program manager or specialty carrier asking you the right questions can help you serve associations better," she explains. "These specialists also can remind you about things like fidelity practices—requiring counter-signatures, for instance—that can be important to associations.
"If you are just writing a policy based on square footage and applying a per-square-foot rate, you're probably not thinking about the risk as a whole," she adds. "Do your due diligence and find good carriers."
Once you've found them, tap their expertise. "Ask them for help when you are completing the app," Schraff suggests. "If there's a question you don't think you have the answer to, don't fake it, and don't leave it blank. For instance, one of our applications asks what percentage of dues is in arrears. Some people don't even know what that means, so they'll write '0' or '100,' which completely changes the underwriting."
She also warns agents to make sure clients sign off on everything—including completed apps. "A lot of carriers and programs let brokers and agents sign and complete applications, especially now that much is done online," she explains. "A box at the bottom says, 'By clicking this box, I certify this information is correct.' That's your signature. If anything is wrong, it's on you, the agent or broker."
Her advice is simple: "Get the board or community manager or whoever is authorized to sign the app, if possible. If your carrier is exclusively online, ask them for an alternative. Don't be the last one to draw on the application. It could be deadly for you and your E&O."
Schraff offers a number of other tips, too. "Understand flood zones," she notes. "It's very tricky, but it's important to know zones, insurance requirements, and how to work with FEMA." She also says agents should encourage associations to have a reserve study. "It eliminates guesswork on valuations, helps advise how much should be in the reserve fund, and helps the underwriter know how to properly insure the association," she says.
In addition, she stresses the importance of annual audits. "It's very simple for any business," she notes, "but some associations don't consider themselves to be businesses, and they fail to have annual audits done." She says audits are especially important at second-home and vacation communities, where residents are less likely to be actively involved.
She also encourages agents and brokers to attend at least one board meeting. "Association managers may say that's unnecessary, but agents should insist on getting in front of the board," she explains. "Make sure they are hearing you about the things that they need to hear, like directors and officers coverage."
McLallen says agents and brokers would do well to offer their services and those of their specialist partner on upcoming projects. "We have our agents tell clients to use us as an advocate," he explains. "We can help research the insurance policies that vendors or potential vendors use, to make sure limits are accurate, endorsements are correct, that the association is listed as an additional insured, and that an indemnification agreement exists." He says this can bolster the agent-association relationship. "You become part of the association's executive team," McLallen notes. "It may not pay in the short term, but it can pay volumes down the road."
Mackoul believes in the value of ongoing relationships and works hard to keep them strong. "We offer seminars that teach boards and property managers about different insurance-related and non-insurance-related topics," he explains. "We cover everything from terms that should be in contracts with outside contractors to how the association's insurance and the unit-owner's insurance work together in the event of a claim. This goes a long way in helping associations manage their risks, and it helps us retain customers, as well."
Hospitality marketplace enjoys growth, offers opportunities
Experts suggest risk management guidelines for hotels, bars and restaurants
The past few years have been challenging for hotels, motels, restaurants and other hospitality establishments. As the economy regains strength, these businesses are seeing improvement. "The industry appears to be rebounding after some very difficult economic times," says Charles Roberts, vice president for property & casualty at Southern Insurance Underwriters. "We are starting to see audit premiums coming in on risks that show they're experiencing better results than they had anticipated."
Roberts notes that small lodging chains are faring better than locally owned, single-location operations. "It appears that the chains' advertising, marketing and Web presence are making a difference when compared to the smaller, single-site properties," he says.
According to Kurt Meister, vice president of NSU Hospitality, which is part of Distinguished Programs, key measures of hotel industry health are all higher year to date. "Money is starting to flow into the sector," he says. He notes that investors are attracted to cash flow and profitability, particularly in the full-service resort and convention hotel sector.
"Development and new construction are picking up, led by New York City, with Washington, D.C., Miami and Chicago following behind," Meister adds. "Most new hotels being developed and built are in the upscale and upper-midscale segment." He says all sectors are doing fairly well, but investors are a bit more cautious with limited-service hotels because in a downturn, it's difficult for them to lower expenses.
Hotels aren't the only hospitality businesses that are realizing gains. "We have seen an improvement among restaurant businesses," says Michael Maher, vice president of marketing for RCA Insurance Group. "The struggles of the past few years seem to be behind us now. We're no longer seeing the number of businesses closing down that we had." He says there was a period when requests for return premiums due to closings were very significant.
"Our submissions for quoting new business start-ups also are up, which is a clear indicator that a recovery is taking place in the restaurant industry," he adds.
Market issues and risks
Maher notes that for restaurant owners, the cost of doing business has increased across the board. "At the same time they've been forced to hold their pricing down, and this is reducing their profit margins," he explains. "This means they have to aggressively manage their expenses wherever possible."
Maintenance often is among the first items to be cut. "Staying current on repairs and other maintenance items is an important part of keeping establishments safe and losses low," Maher asserts. "Reductions in building maintenance could create hazards, and if they lead to losses, owners might find insurance renewals costly or hard to get."
Some establishments are seeing an uptick in claims for assault and battery. "For restaurants and bars, assault and battery claims are most pronounced in establishments where liquor makes up more than 50% of receipts," explains Vince Demshar, CIC, broker/underwriter at Atlantic Specialty Lines of Florida. "This includes nightclubs and bars."
That said, such claims can occur at any establishment. "I saw one where someone was unintentionally hit in the head with a beer mug by someone who happened to swing his arm back," Demshar recalls. "At the other end of the spectrum, I've seen a claim from a club where one patron ran over another with an Escalade—twice."
Hotels also are seeing more assault and battery claims. "For hotels and motels, carriers look differently at open-corridor versus interior-hall properties," Demshar notes. "Properties with exterior halls have had a tougher time of it."
Demshar observes that hospitality accounts, as well as habitational risks, are seeing more underwriters using crime zone mapping. "There is increased underwriting discipline in a number of areas," he says. "Carriers are looking very carefully at limits, if they offer certain coverages at all. Some geographic areas are having a tougher time than others."
Meister, whose firm has managed more than 27,000 hotel claims, says that slips, trips and falls continue to be a major concern. "They represent 30% of all claims and about half of all claim dollars," he comments. "Clients that are most successful from a loss ratio standpoint really focus on surfaces of all kinds throughout their facility. They don't just take it for granted."
Legionella is another costly claims item for hotels. "It also can have a high negative impact on revenue due to bad PR," Meister remarks. "These claims are complex; it's not always clear when or where the disease was contracted." Food-borne illness has a similar impact in terms of severity and revenue.
An Americans with Disabilities Act regulation that requires installation of permanent pool and hot tub lifts is another source of claims. "Not installing them creates a huge exposure," Meister notes. "Someone can make a quick, easy claim for noncompliance. At the same time, they're attractive nuisances. If not watched, children can easily climb and jump on them, so that increases the exposure."
He points to terrorism as another issue facing hospitality businesses. "It involves more than just an event," he says. "What if a hotel has a mandatory lockdown of 200 people in its lobby? How does it accommodate them for hours? How do you prepare?" Years ago, he says, an overseas hotel had bomb threats repeatedly called in one day, but all were false alarms. "A final call was ignored and a bomb went off," he says. "Employees need to take every threat seriously."
Other sources of severity are claims related to liquor liability and to drowning, although both are low in frequency. "Low frequency may be surprising for liquor," Meister says. "Still, the bad PR following an event can be quite damaging." Establishments should enlist a range of employees to help manage the risks. "Everyone, from the front desk employees who see guests walk by to the valet who parks the car, should look for situations where people are over-served," he notes.
Most establishments post pool safety rules, Meister observes. "Problems come when, for instance, the shepherd's crook is hard to find. When someone needs to be fished out of a pool, people panic, and if they can't find the crook, you can have a death." Another cause of claims at pools is improper depth signage; it needs to be both on the top edge and inside the pool.
As hospitality businesses experience revenue growth, they're also facing premium increases. "One of the biggest challenges agents and brokers have with hospitality clients, like many others, is managing their expectations," Roberts explains. "Pricing in the standard market is increasing due to past experience. Today insureds are being asked to pay higher premiums or bear more of the risk themselves."
For some, premiums are up because they need coverage for what previously were unforeseeable risks. "In the last few years have, such risks have become more of a reality than a surprise," Maher remarks. "Super Storm Sandy along the East Coast is a perfect example. A large number of insureds never considered flood insurance. Now they've incurred losses that were not covered by their property policies."
Some hospitality markets are more competitive than others. "It seems that everyone still wants the mom-and-pop taverns with a small amount of liquor," Demshar comments. "Larger establishments with higher liquor sales or bar exposures, as well as those near a college campus and those with pool tables, for instance, are having a little more trouble this year."
Meister reminds agents to offer abuse and molestation coverage, which some carriers exclude. "In hotels, guests interact with housekeepers, people are roaming around the halls, and anyone can claim that anything happened," he points out. "Many hotels have a child care exposure—perhaps a kids' camp—and many have spas with massage services."
Other important coverages, he says, are innkeepers liability for the safekeeping of guest property; liability protection for pesticide and herbicide applications on properties with golf courses and other sources of water runoff; and garagekeepers liability for hotels with an in-house or contracted valet service.
Adding value
According to Roberts, retail agents and brokers can add value by helping their hospitality clients understand and implement basic loss prevention measures. "Start, of course, with precautions needed to ensure guest and staff safety," he says. "Help establishments educate employees on the significance of good risk management—everything from food safety to alcohol consumption to other potential exposures.
"But go beyond that," Roberts adds. "Really spend time with insureds, helping them understand the benefits and risks of higher deductibles, as well as changing policy terms and conditions."
Meister says: "Agents and brokers who focus on keeping guests and hotel employees safe set themselves apart. Have a mindset of keeping guests safe. What exposures exist? How can someone get hurt? Then ask the same questions about employees."
He points out that guests and housekeepers have different exposures in the same location. "For instance," he says, "when housekeepers make the bed, what do they do with the linens? Are the linens on the floor causing a trip hazard? What about lifting heavy comforters? Simple twisting and turning movements can cause severe workers comp situations."
From a guest perspective, glassware in the bathroom could drop on marble or tile and smash into little pieces; put it in the main room, which is carpeted. "Address little things like that," he says. "It takes time to bring value to the insurance transaction, but if you help establishments with their unique exposures, you really stand out."
Maher encourages agents and brokers to keep clients informed about all aspects of insurance. "Start with carrying the right coverages for their businesses, and then address the benefits of proactively maintaining their facilities in every way," he advises.
"This includes everything from basic building maintenance and having backup generator systems in case of power failure to food storage and preparation and security procedures that protect against customer identity theft due to the high volume of credit card transactions," Maher says.
Meister suggests reviewing safety manuals and the particular establishment's requirements. "Make sure management uses these for continual training," he says. "The goal is to get all employees involved in risk management." He also suggests walking the property, alone or with the client. "Look for things from two perspectives," he says. "How could a guest hurt himself? And how could an employee hurt himself?"
Maher says: "Producers now have the experience of Sandy to illustrate the need for policies that provide coverage in the event of another catastrophe." Such experience can benefit the producer as well as the insured. "Producers have learned that, if they do not offer a client all of the available coverages, they may find themselves confronted with an E&O issue."
Demshar sees this happen in his marketplace. "We continue to come across situations where agents aren't serving their customers well," he remarks. "Recently we looked at a competitor's proposal, and he had totally excluded assault and battery. We went back to our agent and told him to make sure that the prospect realized what was missing. People need to know what they're buying—or being sold."
He also has encountered situations where insureds refused certain coverages. "I talked with another agent recently whose customer said they weren't worried about assault and battery coverage," Demshar says. "From an E&O standpoint, agents need to talk about it. If customers still won't buy, make them sign off on it. They're worried about price, but at the end of the day, price doesn't seem so important when you have a claim."
Roberts encourages agents to sweat the details. "Carriers respond better and quicker to complete, accurate submissions," he points out. "They need a complete analysis of all exposures and how the insured helps to mitigate all losses. For instance, an insured may have regularly scheduled employee safety meetings that the carrier is unaware of."
Adds Demshar: "Agents and brokers would do well to do some pre-underwriting. You can learn a lot about an establishment by doing a Web search to see what comes up, and by looking at its Web site, Facebook page and Twitter feed. For instance, knowing that a nightclub offers 'drink all night' specials or beer pong might make you view it differently. Some up-front work means fewer surprises later."
Roberts stresses the importance of client communication. "Agents and brokers must maintain constant contact with hospitality clients to discuss changes in their operations, issues and plans," he says. "They can offer insureds guidance about possible exposures and how insurance would respond, even while plans are in development."
Maher says agents should take a page from real estate. "It's all about service, service, service," he asserts. "Brokers who deliver the best service build the best reputation and get the most referrals. Hospitality is a small niche, and news of good or bad experiences spreads quickly. Reputation really drives producer success."
Adds Meister: "This is a segment where agents can truly make a difference—plus it offers tremendous opportunities to increase revenue and profits."
Agents E&O: Getting it right
Adhering to the agency's own risk management practices
As the P-C market continues to firm, agents and brokers are spending more time explaining market changes to clients and exploring alternatives. In such a market, they may have less time to spend on their own business exposures, including their need for adequate E&O protection.
According to E&O experts, when agents and brokers do discuss the coverage, many focus first on price. "Many are just looking for the cheapest price," explains Linda Weir, professional liability broker with Atlantic Specialty Lines of Florida. "Some, especially those with more complex books of business, are looking for broader protection; but, on the whole, most are just looking for the least expensive option."
Linda Blechman, assistant vice president and insurance agents professional liability underwriter at Lee & Mason Financial Services, finds this price sensitivity to be most common among smaller agencies, and among those that are focused on certain market segments. "Agents who focus on a niche that was especially hard hit during the economic downturn found their income negatively impacted," she explains. "They're focused on price, even though they know, in the back of their minds, that low prices aren't sustainable. Many are hoping to, perhaps, deal with it next year."
According to Mark Lann, executive vice president at Rockwood Programs, this obsession with price isn't universal. "My clients are middle market to large retail agencies, and they seem to be more concerned with bettering and increasing their coverage," he explains. "Most E&O premiums have dropped significantly over the last few years, and when the economy was suffering, agents took the savings and reduced their expenses. Now it seems like they are investing the savings in better policies and higher limits."
Blechman acknowledges that some accounts, often larger ones, are more coverage savvy. "They're more conscientious about what they're buying and who they're buying from," she notes. "If they work in an unusual niche, they recall challenges they had getting coverage in the last hard market and remember that it's often good to stay with the same carrier."
Weir sees exceptions to the "price" focus, too. "The better agents definitely look at coverage issues, and if there's a difference in price with them, coverage usually wins," she notes.
Even with the significant attention being paid to price, agents and brokers have other E&O issues on their minds. "I have attended a number of agent seminars this year, and all of them are talking about the changes in the ISO forms and endorsements—GL in particular," says Bernie Geis, president of H&W Insurance Services.
"Most of the national agent associations are hosting educational seminars on these changes," he adds. "It is so important that the agents and their staff all attend these seminars or, at the very least, obtain a summary from ISO on these changes."
Coverage issues
There are a number of mistakes agents should avoid when protecting themselves. "Retail agents may view professional liability insurance as similar among carriers offering the product," says Ernie Weeks, AU, resident senior vice president, Errors and Omissions Program, for Utica National Insurance Group. "However, nothing could be further from the truth."
Blechman concurs. "All policies are not the same. Some have very subtle differences and some have very big differences. Each E&O policy probably has something that sounds like it's a not big deal, but it could be." Examples include pollution exclusions, war exclusions and defense outside the limits.
"For instance, if a homeowners client suffers a fire, will a pollution exclusion affect coverage for cleaning up smoke damage?" she asks. "Or would a peaceful protest that gets out of hand fall under a war exclusion? What does defense outside of limits really mean?"
Blechman says agents will tell her: "Well, the carrier doesn't interpret it that way." Her response: "If there's a really big claim or if the company is hurting, what's to keep them from enforcing the exclusion? It's in there, and it says what it says."
She encourages agents who don't like the wording or who believe the carrier doesn't mean it to make the carrier put in writing what it means or change the exclusion. "It's the legal document, even if they say they don't interpret it that way," she adds.
Lann says agents shouldn't buy strictly on price but should look closely at the coverage being offered and the carrier offering it. "There are even some fraudulent companies out there offering what they call coverage, but it isn't insurance," he notes. "Like all insurance, it's just an expense until you have a loss; then you wish you had the best."
He adds, "Treat your E&O like it's valuable and important—because it is. Look at coverages and defense teams, buy limits that will properly cover the agency in the event of a catastrophe, and don't blindly trust a broker or association with your most important business coverage."
Geis warns agents against moving insurance to obtain a lower price. "By doing this, the agent stands the chance of making a mistake on coverages, limits or an incorrect retro date," he explains. "An error or failure to report an incident that could have created an E&O situation could also arise."
Blechman adds, "If it seems too good to be true, it probably is. Stick with someone who gives you a fair price—maybe not the cheapest—because they'll probably be around longer. It's better to have good coverage and more stable pricing than to flip flop all over the place."
According to Weeks, "The cost of an E&O policy should be secondary to the value of the protection afforded. Equally important—and most often overlooked—is the expertise and experience of the individuals entrusted to handle claims that might arise.
"E&O claims can be extremely complicated and, by nature, subject to severity," he says. "Understanding the claims staff's experience, the number of years dedicated specifically to the line of business, expertise of independent counsel, and more, all have a profound impact on the appropriate resolution of an E&O claim."
Weeks adds, "Retail agents work hard to protect their customers from economic ruin. It's critical to approach the purchase of their own professional liability policy the same way. The choice of which E&O policy to purchase comes down to protecting the assets and reputation the retail agent has dedicated his or her life to building and securing. This applies to themselves, their respective organization and their employees."
Minimizing losses
According to experts, there are a number of easy steps agents and brokers can take to reduce their likelihood of an E&O loss. "Make sure employees are trained well and that they follow certain procedures and guidelines on how to handle the business properly," Blechman notes. "And make sure they know the importance of doing so.
"Management understands this, but front-line employees handling the accounts might not," she adds. They need to document all client communications and, when possible, get client signoffs or send a confirmation letter or e-mail."
Weir agrees. "Make sure everyone knows the basics—beginning with how to complete an ACORD application," she says. "Then make sure they are familiar with common and important coverages, including employment practices liability and cyber liability.
"Be sure to have procedures on how to communicate the importance of certain coverages and sell them," she adds. "I come across agents who say, for instance, 'We ask clients if they want EPL and, if they don't, we have them sign something saying so.'
"Agents need to do more than that," Weir explains. "Put a number in front of them, give an indication, and educate them on what the product covers and, perhaps more important, what consequences they might face by rejecting it.
"Too many agents fail to have a real discussion on important coverages," she says. "And too many agencies fail to educate and train employees on how to have these discussions."
"Stick with what you know best and have expertise in," advises Blechman. "If you're used to doing personal lines and very small commercial and you get an opportunity to quote a very large or unusual risk, consider saying 'no.' If you don't understand the risk, it may not be worth that extra income. If it's a line of business you have no knowledge of, hire someone who does or walk away, which can be hard to do."
"Secure signatures on all applications," says Weeks. "While this sounds easy enough, it's surprising how often this does not occur. Without signatures on applications, the issue comes down to 'he said, she said' once a claim is presented."
He encourages agents to conduct what he calls a mirror test. "Many E&O claims are generated by failing to properly compare coverages when securing new business or moving an existing customer from one carrier to another," he explains. "The 'mirror test' assures that an adequate review is performed."
Geis advises agents to, "Double check all policies for coverages and limits requested against what has been provided. Remember, whenever an account is moved out of the standard market into a brokerage or E&S market, coverage may vary."
Lann encourages the use of checklists and written procedures. "Don't create a situation where the CSR has to figure out how to handle a tricky situation on the fly," he explains, "and don't rely on your or someone's memory as to what endorsements are on that GL policy you're renewing. Write it on a policy endorsement checklist at inception. You'll be happy about it at renewal."
Geis agrees that checklists are important. "Agents need to use a checklist of coverages, not only for new accounts but also for existing accounts," he says.
Weeks says checklists can be helpful for both the agent and customers. "It helps identify exposures that need to be reviewed and considered," he explains. "In essence, a needs analysis provides a clear understanding of the exposures to loss and leads to determining what coverages are desired and rejected."
Lann recommends that agents report potential incidents as soon as possible. "If you receive a summons, deposition request or a subpoena, report it to your E&O carrier," he explains. "Most policies have some coverage in helping agents to respond to these, before a claim is made. Having a carrier or lawyer on your side for these can help to avoid an incident become a claim."
Top tip
Good documentation is a universally recommend item. "More and better documentation is important," says Lann. "Phone calls, coverage questions, quotes should all be documented thoroughly. We tell agents and brokers, 'Document, document, document.' " Adds Geis, "Be sure to confirm all conversations to customers by e-mail. In this day and age there really is no reason this cannot be done."
"Documentation won't necessarily help you avoid a claim," says Blechman, "but you'll certainly improve your chances in defending them. You'll keep defense costs down because you can probably make the claim go away sooner."
Weeks concurs. "Documentation remains the best defense against E&O claims," he says. "Social media—blogs, tweets, texting, etc.—is a form of communication being used with increased frequency. As alternate means of communication continue to develop through technology, it's essential to continue documenting and confirming important conversations, regardless of how the communication takes place."
He offers agents and brokers an easy rule of thumb to follow: "If the means of communication does not, by itself, create a permanent record of an important conversation, then the retail agent must confirm the conversation in a way that creates a permanent record that can be retrieved whenever it's needed—either now or down the road."
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