There’s no substitute for reading the stinking policy
We don’t believe insurance
companies intentionally make
mistakes that may cause a loss to their agents,
but mistakes do happen … .
By Cheryl L. Koch, CPCU, ARM, AAI, ACSR, AFIS, and Mary M. Belka, CPCU, ARM, ARe, RPLU, CIC
They say that close only counts in horseshoes and hand grenades, but perhaps it also applies to errors and omissions (E&O) claims. Just like a near-miss at the airport, we can learn a lot by analyzing situations when we successfully avoided an E&O claim by catching an error we (or the insurance carrier) made before it resulted in an uncovered or inadequately covered loss for our client.
Through our work as E&O auditors, as well as time we have spent in agencies and presenting to producers and account managers all over the country, we have seen some all-too-common errors that could have been financially disastrous to an agency client were it not for the sharp eye of a producer, account manager, manager or consultant.
We offer these scenarios as teachable moments in order to avoid, as best we can, a similar situation occurring in your agency. In virtually every one of the following incidents, a simple process of RTSP (Read the Stinking Policy) averted what otherwise could have been a significant financial loss to an agency client and a subsequent E&O claim for the agency.
Scenario #1—Retro isn’t just a fashion term
While Commercial General Liability (CGL) policies are usually written on an occurrence basis, there are times, albeit scarce, when a carrier may only offer coverage on a claims-made basis. Most agencies write a number of policies that are almost exclusively claims-made, such as Directors and Officers (D&O), Employment Practices Liability (EPL) and Professional Liability (malpractice or E&O).
The concepts are the same, regardless of the line of business. Claims-made policies are “triggered” by an event that takes place after the policy’s retroactive (“retro”) date (shown on the declarations page) and a claim being first made against the insured during that policy period.
If a carrier inadvertently advances a retroactive date, it has the effect of eliminating coverage prior to that time. In this case, the retroactive date shown on the agency’s application was correct and what was agreed to by the insurer, but the policy was issued with a different, more recent, date.
The bottom line: If not caught by the agency and corrected, the insured may have had no coverage for a loss that took place between the time of the asked-for retro date and that shown on the policy. The insurance company might have honored the original request if a loss had taken place, but relying on the kindness of strangers, as Blanche DuBois did, is not a good risk management strategy for any agency.
Scenario #2—It matters where the snow falls
A new agency producer wrote a policy for a landscape contractor through an excess and surplus lines insurer. The client later notified the producer that he was about to sign a contract for snow removal with a local municipality, a common situation for landscapers in the northeastern states. The producer contacted the carrier asking for a quote to add the snow removal operation and was provided with a proposal, which he presented to the client.
The change in operations resulted in a significant additional premium, which the client paid. The necessary endorsements were issued by the carrier and “checked” by the account manager and producer prior to sending them to the insured. However, something was nagging at the producer, so he asked a consultant to review the entire policy and note any problems or issues.
Unfortunately, neither the producer nor the account manager noticed that the carrier had added a designated premises endorsement to the policy indicating the insured’s office location. This was not shown on the proposal received from the carrier and appeared to have been inadvertently added.
The bottom line: The only place the insured had coverage while removing snow was in their own parking lot, not the municipality’s property for which they had been awarded the contract. If not for that “nagging feeling” on the part of the producer, the insured could have been left with no coverage for a loss that took place off their premises. Not only does every endorsement have to be reviewed, one must understand the effect that endorsement has on coverage under the policy.
Scenario #3—Sometimes standard isn’t what we think
A client notified the agency that one of their buildings was vacant due to a lease cancellation following COVID, and it was unlikely to be leased anytime in the near future. The account manager advised the client that property coverage would likely have to be removed from their current policy and placed with a surplus lines insurer until it was occupied. He diligently searched the agency’s available markets for coverage. It was clearly noted on the agency’s application that the building was vacant. Finding a carrier willing to write the property, the account manager sent a proposal to the client, who approved the issuance of the policy and paid the much higher premium.
When the new policy arrived, it was “checked” by the account manager before sending it to the insured. Coverage was issued using a standard Insurance Services Office (ISO) Building and Personal Property Coverage Form (CP 00 10). Since this was a “standard” policy, the account manager reviewed the endorsements attached to the new policy when it arrived in the agency and found nothing unusual, like a vacancy exclusion.
Shortly after, the account manager attended a continuing education class where the provisions of the CP 00 10 were reviewed in great detail, including the Vacancy Provision of the coverage form. Simply stated, after 60 consecutive days of vacancy, the new policy did not apply to any loss caused by vandalism, sprinkler leakage, glass breakage, water damage or theft. Any other covered loss would be reduced by 15%. The building had been vacant more than 60 days at the time the policy was issued. In order to eliminate this policy provision, a vacancy permit endorsement needed to be included on the policy when it was issued.
The bottom line: If not for the account manager’s attendance at the class, the insured would have been sold a policy that would provide, at best, limited coverage but more likely, no coverage at all despite payment of a significant premium that reflected the increased exposure.
Scenario #4—On a scale of 1 to 9, 2 beats 6
An agency client’s business auto coverage was arranged with a captive insurer. The coverage applied for included Uninsured Motorist (UM) coverage with a covered auto symbol of 2—owned autos only, meaning coverage would apply to any vehicle the insured owned or newly acquired during the policy period. However, when the policy was issued, the covered auto symbol applying to UM was stated on the declarations page as symbol 6—owned autos subject to a compulsory uninsured motorists law, meaning coverage applied only if the vehicle was garaged in a state where UM coverage was required and could not be rejected.
This was not the case for the insured—the garaging state of the vehicles did not have a compulsory UM law at all. The account manager noted this discrepancy and called it to the attention of the captive insurer, requesting that the policy be corrected to symbol 2 as indicated on the application.
This was met by numerous objections of the carrier, but the tenacity of the account manager eventually wore them down and they reluctantly agreed to make the change.
The bottom line: The account manager stood her ground, knowing that the consequence of this error was that no UM coverage would apply to any of the vehicles on the policy since they were clearly garaged in a state that did not have a compulsory UM law.
Close isn’t good enough when it comes to insurance
We have previously written about the importance of checking policies in the agency and who is best to perform that task. Optimally, this is done by someone who ordered the policy and knows what coverage is supposed to be in place—who is familiar with all applicable coverage forms. We believe these scenarios are clear illustrations of how easy it is for an error to slip through the proverbial cracks, potentially creating an uninsured loss for the agency’s client and, as the night follows the day, a resulting E&O loss for the agency.
We don’t believe insurance companies intentionally make mistakes that may cause a loss to their agents, but mistakes do happen, and the percentage of policies issued with some kind of error is unacceptably high in our industry. It may not be anyone’s idea of a fun task to perform, but in the end, there is no substitute for reading the stinking policy! It’s what we are paid to do and what we are uniquely qualified to do as insurance professionals. n
The authors
Cheryl Koch is the owner of Agency Management Resource Group, a California firm providing training, education and consulting to producers, account managers and owners of independent agencies. She has a BA in Economics from UCLA and an MBA from Sacramento State University. She has also earned several insurance professional designations: CPCU, CIC, ARM, AAI, AAI-M, API, AIS, AAM, AIM, ARP, AINS, ACSR, AFIS, and MLIS.
Mary M. Belka is owner and CEO of Eisenhart Consulting Group, Inc., providing management and operations consulting to the insurance industry. She also is an endorsed agency E&O auditor for Swiss Re/Westport. A graduate of the University of Nebraska, Mary holds the CPCU, ARM, ARe, RPLU, CIC, and CPIW designations.
