Agents' Errors & Omissions Review is excerpted from The Professional Edge newsletter which is published by SAFECO Insurance Companies in conjunction with the marketing administrators for SAFECO's agents E&O program.
It pays to stay current
At issue:If there is any one thing we all can count on in this industry, it's change. In this day and age, agents regularly encounter new coverages and policy forms, marketing plans, contracts, types of exposures, and theories of negligence. An agency today has to work smart to manage these changes and keep the agency efficiently structured.
SAFECO's commentary:Since most states require continuing education to maintain licensed status, agents have a natural source of information to stay current with issues. In your quest for continuing education credit, don't overlook seminars that focus on agency risk management issues!
There are two good reasons why agency principals and other agency staff need regular updating of risk management techniques. Both pertain to an agency's expenses. One good reason is the credit allowed by most E&O liability insurers. Generally, the triggers of eligibility for such credit are the number of staff having taken the course work and how recent the classes have been. An agency can fail to qualify for or lose this credit if its staff does not continue to keep this important course work up to date.
The other good reason to stay on top of E&O risk management issues is the actual cost to an agency of a claim. The full cost of a claim against an agency goes beyond the cash outlay of deductibles. The future cost of insurance and the size of deductibles can be affected by claims history. Also, the actual out-of-pocket expense and time that will be spent by key producers and agency principals in participating in their own defense can be costly. Your time is best spent building agency volume, not sitting in depositions. An indirect cost can be agency reputation with both carriers and clients. Claims against an agent, whether meritorious or not, can have a real effect on reputation. Morale in an agency suffers, too, when suits are brought against an agency.
A tale of two brothers
At issue: Two brothers worked together frequently. The retail agent brother had a book of business that was canceled in the admitted marketplace. The other brother was a surplus lines broker. The surplus lines broker brother had a marketplace through an offshore nonadmitted carrier, and both brothers decided to transfer the business to the offshore carrier without informing the underlying clients about the dangers of offshore business. The offshore carrier eventually closed up shop, leaving all the clients without liability insurance for existing and ongoing claims.
The retail agent brother informed SAFECO of the problem and the company investigated the incident, determining that the clients had a viable claim against both brothers. SAFECO invited the surplus lines brother's E&O carrier to participate in settlement, but they denied the claim, stating that it was the retail agent's problem. SAFECO disagreed with this analysis, but given the claims pending we moved forward and settled a number of underlying matters on behalf of the clients.
Finally, SAFECO brought suit against the surplus lines brother on the theory that he breached his duties as the sponsoring surplus lines broker. There was evidence that he was acting as a managing general agent taking an active role in the adjustment process. He had also paid claims through the premium taken into his office. Eventually, a settlement was obtained where his carrier, who had originally denied any responsibility, paid a substantial portion of the losses paid.
SAFECO's commentary: This shows the dangers of both internal familial dealings as well as dealing with offshore carriers and surplus lines brokers. Be sure to check the admitted markets and the qualifications of the surplus lines broker. The broker is the party responsible for assuring the financial stability of the carrier, but your clients are not aware of the issues involved and will seek recovery and indemnity from you, their agent.
A handshake and a promise
At issue: Martha is a conscientious person in her personal life and business life. She is a list kind of person, jotting things down during the day to assure that she doesn't forget important details. She ends every day with making a list of what will need to be done the following day, crossing off what was accomplished for that day. She is seen in the insurance agency as meticulous, efficient and always a professional. Why then did Martha find herself involved in a lawsuit against her and her agency?
As is typical of an agent who has been in the business for a number of years, Martha has contacts at various insurance companies with whom she does business. In particular, she has had a close relationship with the underwriting, marketing and claims department of Professional Insurance Company. Martha has attended the annual Christmas party for Professional Insurance for the last 10 years and has been on the president's list of preferred agents for as many years. It is because of this long-standing relationship that Martha felt secure when the claims manager for Professional assured her that her interests would be protected in a claim that had coverage issues for which Professional was denying coverage.
Professional had received notice of a fire loss for its insured, Mr. Smith. When Professional denied coverage, Mr. Smith hired an attorney who sued Professional for bad faith and breach of contract. During the course of that litigation, Professional had called upon Martha and her agency to provide to Professional copies of all documents in the agency file. Martha and her staff had also provided recorded statements to the claims department for Professional.
From time to time, Martha would receive calls from the attorney hired to defend Professional requesting assistance on certain issues regarding coverage written through the agency for Mr. Smith. It was in one of these conversations that the attorney advised that he was in the process of settling the case with Mr. Smith and his attorney. Martha inquired at this time and in conversations in the past if Professional would be protecting the agency should Mr. Smith decide that Martha or her staff had made some error. Martha was assured by Professional and its attorney that the agency would be protected and that Professional would obtain a release for the agency and Martha in settling the case with Mr. Smith.
Approximately six months later, Martha was served with a summons and complaint by Mr. Smith alleging breach of fiduciary duty and negligence in the placement of fire insurance. Stunned by this event, Martha picked up the phone and called her claim manager friend at Professional, Tom Stone. Martha explained that she had received a complaint and was wanting to know what Stone intended to do about it. Stone advised Martha to send him a copy of the complaint and he would review it to determine what might be done.
Meanwhile, Martha put her errors and omissions carrier on notice and sent that company a copy of the complaint as well. With the help of the E&O carrier, Martha wrote a letter to Professional, tendering defense of the complaint to them and rehashing all of her conversations with the claims department and its attorney some six to eight months earlier when she had been promised that her agency would be protected. After two-and-one-half weeks of letter writing and conference calls involving herself, her E&O carrier and the claims staff and marketing department for Professional, Professional declined defense of Martha and her agency and denied that any representations had been made as to defense for the claims now being brought by Mr. Smith.
Martha had fallen victim to an ever-increasing phenomenon in the industry. She had counted on, even come to rely upon, her close working relationship with the people at Professional. In the past she could always work out any problems or situations with the staff at Professional and likewise they had found Martha and her agency cooperative when called upon by the company. But this was simply unheard of. She hadn't felt the need to get any of her conversations with Professional and its attorney in writing, as she had trusted them as she had always done. Now she had to be defended by her own carrier and at considerable time and expense to her and her staff. By the end of the litigation with Mr. Smith, Martha's carrier had spent $75,000 defending the case, $20,000 to settle with Mr. Smith on a nuisance value basis, and Martha had lost Mr. Smith's account, her E&O premium increased and she and her staff had lost valuable time from work during the litigation.
SAFECO'S commentary: What is the message this case sends? It could be that you should trust no one, or that insurance companies are sneaky and deceitful. But a more important message is to remember to document conversations you have with your clients and your carriers by putting the details in writing. Had Martha sent letters to Professional and its attorney in the earlier case, confirming the fact that Professional had promised to defend Martha and her agency, it would have been very difficult, if not impossible, for Professional to turn its back on Martha.
The days of a promise and a handshake are going by the wayside and agents need to be cognizant of this fact. Nothing can take the place of an actual written document to confirm conversations, whether that be handwritten, typed, a fax form or input in a computer.
Still another message to receive from this case is that your errors and omissions carrier should be notified if there is a potential that a claim might be made against you. If Martha had involved her carrier early on, she could have received advice on how best to handle the situation. Her carrier could have assisted in writing letters to Professional and its attorney and perhaps have avoided the subsequent litigation.
Certainly there are no guarantees, but wouldn't you rather have your E&O carrier in the ring with you fighting for you? Think long and hard the next time you consider relying on a long-standing relationship with your companies to insulate you from harm's way. *
©COPYRIGHT: The Rough Notes Magazine, 1999