Agents E&O Loss Prevention

Commercial auto

Even small mistakes can result in big headaches

By Curtis M. Pearsall, CPCU, AIAF, ARM, CPIA

In virtually every commercial lines agency, there is a good chance that the majority of your accounts have a commercial auto exposure and that you write this coverage for them. The type of risk determines the auto exposure and, for many of those customers, the exposure probably involves vans and/or trucks of various sizes. While "errors or omissions" from this line of business amount to only around 6% of all E&O claims, when these claims occur, they tend to be much larger than with other coverages.

What could go wrong?

You might question what could really go wrong because writing commercial auto is not overly complex. However, as with any line of business, knowledge of the product you are selling—as well as knowledge of your customer's exposures—is key. A great starting point is using an Exposure Analysis Checklist. This will greatly assist in enhancing your knowledge of the exposures of your specific type of risk and will provide the important questions that need to be asked, such as:

• Are any officers, partners or employees furnished an automobile for personal use?

• Are owned vehicles used for towing special equipment (air compressors, concrete mixers, etc.)?

• Are operations periodic or seasonal, resulting in the lay-up of any vehicles for 30 consecutive days or more?

• Are any automobiles equipped with cellular telephones, two-way radios, citizens band radios or similar devices?

• How many automobiles are parked in one location overnight?

• Does the applicant lease/rent vehicles to others with operators?

• What is the maximum/average radius of operation?

• Is there a hired/non-owned exposure?

The symbol on the policy indicates what vehicles are included in the coverage. The applicable symbols (expressed in numbers), range from "1" to "9," with symbol "1" being the broadest. This provides coverage for any auto. Thus, if your customer were to lease a vehicle for a particular job, symbol "1" would provide coverage. On the other hand, symbol "7" is only for vehicles listed on the policy. There would not be coverage for leased or non-owned vehicles with this symbol. Consequently, having a discussion with your customer and getting answers to the above questions will be beneficial when requesting that coverage be structured appropriately. Symbol "9" is only for non-owned vehicles.

Other items to consider

"Named Insured" status/"Drive Other Car" coverage. It should be standard practice to offer the owners of the business (where the business is the named insured) additional "Named Insured" status or "Drive Other Car" coverage. Should a business owner be injured as a pedestrian or as a passenger in another vehicle, this coverage would be needed to collect uninsured motorist (UM) or underinsured motorist (UIM) coverage from the commercial auto policy.

Limits issues. When losses occur with this line of business, the damages can be significant. Limits of $1 million may sound like a lot, but claims involving bodily injuries can certainly be more than that amount. Thus, offering an umbrella policy is highly recommended. If your insured does not want to carry a $1 million limit or an umbrella, get the rejection in writing. This sign-off will be a solid defense should a major claim occur and the insured alleges you had not provided the proper coverage. When providing an umbrella, especially with a different carrier than the primary, check that the necessary underlying limit requirements are being satisfied.

Adding or deleting the wrong vehicles from a policy. With a commercial auto fleet of significant size, maintaining an accurate list can be a challenge. When the customer contacts you to add or delete specific vehicles, get the request in writing. This will help ensure that you are correctly modifying the policy, not only for the vehicles, but for the coverage specific to those vehicles. Since the policyholder might have two vehicles of the same year and make, request that your customer provide the vehicle identification number (VIN) for each vehicle being modified. When mailing the policy or endorsement to your customers, include a cover letter advising them to check the policy to ensure that the policy reflects the requested changes.

Replacement of coverage. If a customer presents an unwanted exposure (such as claims activity, problem drivers, etc.), it may be necessary for you to replace that account. If the account presents some challenges, aggressively pursue a replacement policy as soon as you know the carrier is going to get off that account. If it appears that finding replacement coverage may not be possible, promptly advise your customer. As you will note in the claim discussed below, not keeping the customer informed can result in a significant E&O claim against the agency.

Educate your staff and your customers

An E&O claim, which covers several of the topics discussed in this article, was with a client who had a commercial auto policy with coverage symbol "1" (any auto) procured by the agency. The client specifically wanted the broadest coverage possible to cover employees who used their own cars in the furtherance of the client's business.

At renewal, the carrier refused to continue to write "any auto" coverage because several of the client's employees had poor driving records. The coverage was changed to coverage symbol "7" (specifically described autos) with the agent's approval. The client was told the drivers in question would have to be covered elsewhere, but the agent never told the client that coverage had been changed. When one of the poor drivers was fired and the other had his driving record cleaned up, the agent notified the carrier, assuming the carrier would then change the coverage back to coverage symbol "1." The agent, however, never specifically requested the change.

A loss occurred when one of the client's employees lost control of her vehicle, and four people in two other cars were injured. The value of the four bodily injury claims was around $700,000. The employee's own personal auto policy had a 25/50 limit. The claim against the agent was eventually settled for $447,000.

Writing commercial auto coverage is not as easy as you may think. Effective use of an Exposure Analysis Checklist will help educate your staff and your customers on commercial auto—and will go a long way toward ensuring that you do the proper job each and every time.

The author

Curtis Pearsall, CPCU, AIAF, ARM, CPIA, is president of Pearsall Associates, Inc., a risk management consulting firm that specializes in helping agents protect themselves. He is also a special consultant to the Utica National Agents E&O program. He can be contacted at curtis@pearsallassociates.com or (315) 768-1534.