THE MISADVENTURES OF ERNIE AND OLIVER: RISK MANAGEMENT
The exciting omega to our E&O series
By Christopher W. Cook
It finally happened. One of Ernie’s observant clients, Elizabeth O’Rourke, slapped him with an E&O claim, after Ernie oftentimes informed her that her boat was covered under her homeowners policy when it wasn’t. Emily once oversteered enormously to avoid collision with another boat, but the accident was a total loss, and she had no coverage after Ernie’s incorrect oral explanation. Oliver, embittered, confronted his partner, but Ernie ordered Oliver to leave his office. He proceeded to empty out his desk and exit, never to return. Embarrassed, Oliver settled the claim and closed the door—expeditiously going out of business—and thus ending our exciting journey. What a misadventure! Don’t let this happen to you.
Risk management approach
Agents today can fall into an “order taker” role, but by taking a more focused risk management approach you can become more valuable to your clients. Valued agents tend to have better client relationships and therefore better retention.
This risk management approach works for both personal and commercial clients by allowing you to show them the best ways to handle their risks and at the lowest possible cost. Readers of Rough Notes should be familiar with the risk management approach, but for a quick review, the five steps are:
- Identify risks
- Analyze risks
- Evaluate or rank risks
- Treat risks
- Monitor and review risks
The first step—identifying—is the most important; it requires a careful review of the person’s or organization’s assets and operations. Risks are identified and analyzed to estimate the magnitude of loss that may occur. Checklists and questionnaires are available to help you perform this step of the process.
A pre-interview questionnaire can be sent to the client before the initial meeting. This can be filled out quickly if an application has already been completed. Another beneficial questionnaire, a survey covering exposures, can either be completed during the interview or given to the client to fill out at another time. The survey is divided into categories and requests information like background, property exposures, business exposures and vehicle exposures—automobile, aircraft or watercraft. If you are delving for information on a client’s business, this survey can also show exposures in liability or workers comp or whether the client offers employees health, disability or life insurance.
With the increase in complex loss exposures, it’s imperative for agents to evolve into risk managers for their clients.
Since it’s impossible to anticipate every potential risk exposure for a client, you should take the initiative to go beyond the questions asked in a survey.
As for checklists, numerous forms exist for both personal and commercial coverages. These lists allow you to review existing coverages, compare renewal coverages, outline features of current or proposed programs, and document coverage recommendations and decisions.
When filling out checklists, keep in mind:
- Is any form of coverage currently in effect for the exposure?
- Should the coverage be provided if it currently isn’t?
- Was coverage not purchased but previously contemplated? If this was the case, why, and does the reason still exist?
- If a coverage is provided, should it be modified or dropped?
- What exposures are currently uninsured or underinsured?
Numerous techniques are available to manage risk, such as avoidance, loss control, retention, contractual risk transfer and insurance transfer. Let’s take a closer look at each of these.
Risk avoidance—is simply what it sounds like: not engaging in operations or activities that may lead to unacceptable losses. Some examples are not going ziplining on a vacation or a drug company discontinuing a product due to unwanted side effects.
Risk control—is the reduction of potential loss and/or the effects of losses that do occur. Some examples are adding waterproof barriers to roofs to minimize flood damage, providing protective goggles for employees of manufacturing companies, and installing sprinkler systems in buildings.
Risk retention—is paying for all or part of a loss from the client’s income rather than transferring the risk. Three rules to follow when recommending this method: Consider the odds of a loss occurring; don’t let your client risk more than it can afford to lose; and don’t let the client risk a great deal of loss for small premium savings.
Contractual risk transfer—is the passing of risk to others by a hold harmless or indemnity agreement. This method requires one party to hold another harmless for losses to a member of the public. For example, a lease requires the tenant to be responsible if a customer is injured at the property. It is wise to have contracts reviewed by a lawyer. Determine which risks can be transferred to the other party and which ones the other party will try to pass along to your client.
Insurance transfer—is often considered the “last resort” for risk managers but may be necessary if your client is unable to transfer risk contractually or to pay a loss out of its own pocket.
When using any risk management technique, monitor the results and track changes in your client’s exposures and in market conditions.
Another area where knowledge can help avoid an E&O claim is coverage gaps; you can learn more about these in our Mind the Gap column. Now let’s look at some tips for coordinating exposures and policies:
- Typically, an insured will need more than one policy. To prevent coverage gaps, the named insured (remember this from the previous installment?) should be consistent in all policies.
- Regarding umbrella policies, to reduce gaps in underlying coverage, it’s recommended that the same insurer provide both underlying and excess coverage. This will help avoid bickering between two insurers in case of a major liability loss.
- Insurance proposals that outline exposures and recommended coverages should be retained by insureds for at least three years; some state laws or E&O carriers specify a longer time period. If changes are made to the proposal, the insured should receive updates.
- Old copies of policies—especially those with liability coverages—should be kept indefinitely by an insured. Documents should be scanned and saved electronically, preferably with backups stored in a separate place.
- For clients with complex businesses and myriad loss exposures, you should conduct an annual review of current coverages and identify exposures that may be uninsured or underinsured. As changes are discussed and implemented, you should provide a revised review to the client.
- Loss control and contractual risk transfer recommendations should be provided regularly to clients. This process should be part of the annual coverage and exposure review.
- Advise your clients against purchasing some coverages from the Internet and the rest through an agent. A client may procure liability limits below the minimum required by an umbrella policy. In these scenarios, gaps of $100,000 or more are common.
- If an overlap or gap in coverage is discovered, immediately seek ways to eliminate it. Make sure to alert your client right away if a gap cannot be filled by any available coverage.
With the increase in complex loss exposures, it’s imperative for agents to evolve into risk managers for their clients. The value you add to your service offerings can pay big dividends and increase client satisfaction and retention.
Once all the surveys are filled out and information collected, provide your client or prospect a proposal that recommends all appropriate risk management options, not just insurance. Your detailed proposal should include a risk analysis and identify any currently uncovered exposures. Document all of your client or prospect’s choices and decisions. On that note, one of the best ways to avoid an E&O claim is to document everything. Have your client sign and initial all accepted and rejected coverages. Keep a copy for your records, electronically and/or in a paper file. Be sure to follow up with new clients to thank them for their business.
Things didn’t turn out well for Ernie and Oliver. Don’t let their fate happen to you. On a happy note, Ernie and Oliver made amends, but agreed—no more shared business ventures. And as for our series … executed, over.