Common Pitfalls in Insurance: Understanding and
Preventing Errors & Omissions Claims 

In the complex world of insurance, even the most diligent agents and agencies can find themselves facing errors & omissions claims. These claims often arise not from intentional wrongdoing, but from oversights, miscommunications, or gaps in processes that can have significant financial and reputational consequences. Understanding some of the common reasons for E&O claims – and learning from real-world examples – can help insurance professionals strengthen their practices, better serve their clients, and reduce the risk of costly disputes. This article explores some typical pitfalls that lead to E&O claims, provides illustrative examples, and offers practical strategies to help agents and agencies protect themselves and their clients. 

Failure to Mirror Coverage
What do we mean by mirroring coverage? This means offering coverage equal to a previous policy when replacing coverage. Claims arise when clients are left with a gap in coverage.

Sometimes this is due to property that was previously covered not being included in the new policy. More commonly, it is the result of an agent not recognizing the differences in coverage between carriers and not addressing them with either the carrier or client. When a loss occurs and the client discovers the coverage is missing or reduced, the agency can face substantial liability. 

Examples:
An agency moved coverage for a client that had a packaging operation. The replacement policy contained a designated premises endorsement limiting general liability exposure to the insured’s premises while the prior coverage did not have this limitation. During an outing sponsored by the client, an employee was severely injured by another employee on a jet ski. The carrier denied coverage due to the designated premises endorsement. This matter settled for $1,000,000 against the agent. 

A client made a request for new crime coverage that had equal coverage to their expiring policy. The agent obtained coverage through another market that did not include similar forgery coverage. They did not point out to the client that forgery coverage was not included. This claim resulted in a settlement of $30,000. 

Agents should be familiar with the coverage they are selling so they can identify differences. Is the carrier able to modify their quote to match the prior coverage as closely as possible? Equal coverage may not always be available. If that is the case, point out the differences to the client. Agents can also supply the clients with specimen forms and advise them to review the forms when considering the coverage. Including a disclaimer such as the following can also offer additional protection:

In proposing the moving of coverage for (client name) to a different insurance company, we have reviewed and noted in this proposal some of the coverage differences between your expiring coverage and the possible replacement coverage. It is important to note that during the review of coverage differences, there may be other additional coverage differences that have not been noted in this proposal. We encourage you to read the policy completely and contact us with any questions.

Certificates of Insurance (COI)
Claims related to certificates of insurance are among the most preventable errors in agency practice. These situations most commonly occur when an agent issues a certificate after coverage has already been canceled or has not been renewed. To help mitigate this risk, it is essential for agents to verify coverage is active before providing any certificate of insurance.

Other common mistakes involving certificates of insurance include:

• Indicating that coverage is included when, in fact, it is not.
• Adding non-standard language to the certificate without first obtaining approval from the carrier.
• Listing incorrect addresses, policy limits, or other details.
• Including additional insureds who have not yet received formal approval from the carrier.

Careful attention to these details and adherence to verification procedures can help agents avoid unnecessary claims related to certificates of insurance.

Examples:
An agency requested binding of an umbrella policy. The wholesaler required additional information and the underlying policy to effect coverage. However, this was not returned. The agency did not recognize that coverage had not been bound and subsequently issued a COI indicating the umbrella coverage was in place. Litigation is in progress for this claim with a high-six-figure demand.

An agency issued a certificate of insurance indicating an incorrect retro date for the policy. A claim was submitted and denied due to being prior to the correct retro date.

Agencies should implement procedures to ensure the precise issuance of certificates of insurance. A two-person review process is recommended, with final approval provided by the agent responsible for writing the coverage prior to releasing the certificate to the client.

Failure to Advise a Client of a Pending Cancellation
Many agents choose to proactively contact clients when a policy is at risk of cancellation due to non-payment. This approach is often viewed positively from a customer service standpoint because it helps clients maintain uninterrupted coverage and can reduce the agency’s workload if a policy is canceled and needs to be reinstated. However, consistently notifying clients in these situations can create a pattern of behavior.

By establishing this precedent, agents may unintentionally encourage clients to rely on them for reminders about overdue payments. This reliance can lead clients to expect that the agent will always alert them before coverage is canceled. If the agent does not continue this practice, and the client misses a payment resulting in cancellation, the agent may face liability. Even though the initial responsibility for payment rests with the client, the agent’s previous actions may be seen as having created a duty to notify, increasing their exposure to claims if coverage lapses due to non-payment.

Example:
An agent made a habit of calling their client whenever a notice of pending cancellation was received to encourage them to take care of the payment right away. This client had frequent payment issues. The agent decided to stop chasing this client for payment, however, and did not notify the client that they would be discontinuing this service. The policy canceled and a claim was submitted that would have been covered if the coverage had been active. After the claim denial, the client pursued the agent. This case went to trial and the jury ruled in favor of the plaintiff on the theory that the agent created a duty to call the client regarding pending cancellations. This claim paid more than $500,000.

Agents are advised to rely on the carrier’s notification of pending cancellation as sufficient notice and should refrain from initiating additional contact with clients regarding this matter. If you intend to discontinue your current practice of client notification, it is necessary to inform your clients accordingly. This communication must clearly specify when this service will cease and should be properly documented in each client’s file.

Handling Client Claims Notices
Agencies have varying procedures when it comes to handling requests from clients to submit claims to insurance carriers. Some agencies choose to accept notices of claim from their clients and then forward these notices to the carriers on the clients’ behalf. In contrast, other agencies direct clients to submit claims directly to the carriers and provide them with the necessary information and instructions to do so. Regardless of the chosen approach, each method carries the risk of resulting in an E&O claim if not managed properly.

For agencies that do not accept notices of claim, it is critical to communicate this policy to clients in writing. Clearly informing clients that they are responsible for submitting claims directly to the carrier helps set expectations and creates a record of the agency’s guidance. This written documentation is essential to help defend against potential E&O claims, as it demonstrates that the agency provided the client with the required information and instructions about the claim submission process.

Why is it important to communicate this in writing? Consider the following claim scenario:
An agent received a notice of claim from their client and advised that they do not accept claims. The agent provided the client with the information needed to submit the claim to the carrier. A few months later, the client again contacted the agent about submitting the claim. The agent advised them to report it to the carrier a second time. The client failed to report the claim. Subsequently, a default judgment was made against the client, and the client pursued the agent for failing to report the claim. The agent failed to document the instruction to the client regarding the claim reporting. This resulted in a payout exceeding $100,000.

When an agency chooses to accept notices of claim from clients and forward them to the insurance carrier, there are several important factors that must be addressed to ensure proper handling and to help reduce the risk of errors-and-omissions claims.

1. Agencies must report claims to the carrier immediately upon receipt. Any delay in reporting, especially when dealing with claims-made policies, can result in the denial of coverage for the claim. Timeliness is critical to preserving the client’s coverage.
2. After submitting the claim to the carrier, agencies should confirm that the carrier has received the claim notice. If confirmation is not obtained, it is essential to follow up to ensure the claim has been properly received and processed.
3. It is important to determine if the client has excess or umbrella policies in place, as claims are sometimes only reported to the primary carrier. Additionally, the agency should consider whether the client has other applicable coverages that may respond to the claim. If in doubt, it is preferable to over-report rather than under-report the claim to all relevant carriers.

Clients may often seek reassurance from the agency regarding the outcome of their claim. Agencies must refrain from providing any opinion as to whether coverage will respond; coverage determinations are the responsibility of the carrier. If a client asks whether they should submit a claim – perhaps because they believe it will fall under their deductible or have limited coverage – the best practice is to encourage them to report the claim and provide this advice in writing. Agencies should never advise clients to delay reporting a claim. Prompt reporting is always in the best interest of the client and helps to avoid potential disputes over coverage.

Best Practices
In summary, while errors & omissions claims can never be eliminated entirely, insurance agents and agencies can greatly reduce their exposure by staying vigilant, communicating clearly, and adhering to well-established procedures. By learning from common pitfalls and real-world cases, professionals can implement safeguards that help protect both their clients and their own practices. Ongoing education, thorough documentation, and a proactive approach to risk management each play an essential role in fostering a culture of accountability and trust. Ultimately, prioritizing these best practices helps minimize the risk of costly disputes, strengthens client relationships, and enhances the reputation of the agency in a highly competitive industry. 

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