by Curtis Pearsall, CPCU, AIAF, CPIA
President – Pearsall Associates, Inc., and Special Consultant to the Utica National E&O Program
Most Most Agents’ Errors & Omissions (E&O) carriers report that Commercial Lines generates the majority of E&O claims. However, a significant number of E&O claims arise from the sale and service of Personal Lines. For agents selling Personal Lines, understanding the risks and knowing how to minimize the potential of an E&O claim are vital.
While most agencies have an errors and omissions (E&O) policy, it is questionable whether they have the time to review it and truly know how to use it. Sometimes the situation is obvious, such as if you are presented with a summons and complaint. Other times it may be questionable whether it is appropriate to contact your E&O carrier. Because any two situations are rarely exactly alike, there are some good rules to go by – do’s and don’ts – that can help in these instances.
THE DO'S
Read your E&O policy. This is great way to understand what your E&O policy covers and what it doesn’t. Every E&O policy has exclusions, so review them to determine to what degree those exclusions are of concern for your agency. Ensure you are covered for what you do and what you sell. There have been many situations where the agent found out, after being presented with an E&O claim, that the agency didn’t have the coverage the agent thought they did.
Know your limits and how they work. Typically, agents only have one time a year to modify their limits – at renewal time. In determining the “right” limit for your agency, realize that the size of the agency is not a determinant of the potential size of an E&O claim. Big claims happen even with small agencies. While E&O claims arising from Personal Lines tend to be smaller, big E&O claims happen with all types of agencies. Find out more: Considerations When Choosing a Limit for Your Agency E&O Coverage
Understand how the deductible works. Are you only required to pay the deductible if your agency is determined to be liable – or are you responsible for defense costs on claims even where your agency is absolved of any wrongdoing? Unsure? Contact the Underwriter or a representative of the agents’ association, if you secured coverage through it. Don’t wait for an E&O claim to occur to find out.
Use the resources/expertise of your E&O carrier. Your E&O is more than just a policy. Some E&O carriers provide their agent-customers with resources to help those agents manage their E&O exposure. In most cases, this involves the usual articles and tips. However, the staff of some E&O carriers (typically the Claims and Underwriting folks) are readily available to answer questions on procedures or a multitude of other E&O matters. If a potential E&O matter surfaces, do not hesitate to contact the Claims staff for their perspective. They can help guide you regarding your future actions.
Report any claim, error, or concern promptly. The earlier the agent advises the E&O carrier of an issue, the quicker the carrier can begin to begin its discovery to determine what happened.
THE DON'TS
Don’t admit liability or commit to a payment. There have been situations where after an agent committed an error, he or she automatically presumed the E&O policy would pay. This is not always the case. An E&O policy is based on the concept of legal liability. If the agent made a mistake, legal liability would still need to be proven before the policy will pay. There are many defenses E&O carriers can apply to eliminate or reduce the degree of the agent’s legal liability. For example, in most states, the client has a duty to read his or her policy. By doing so, the client would be able to determine, hopefully before the claim, that coverage was not what they thought it was. If it was determined that the client did not read the policy, any eventual settlement could potentially be modified.
It might be natural for an agent to want to admit they made a mistake and to advise a client that the agency’s E&O policy will pay. However, just as an agent advises a customer not to admit liability if the customer is involved in an auto accident, agents should follow their own advice. If a client suffers a loss only to find out they will not be fully paid or not paid at all, the agency should contact its E&O carrier immediately for guidance/direction. An admission of liability could impair the ability of your errors and omissions carrier to settle the claim at the best possible terms. In some situations, it could actually jeopardize your E&O coverage.
OTHER DON'TS
YOUR E&O IS SERIOUS BUSINESS
In many respects, the decisions you make regarding your errors and omissions coverage – carrier, limit, deductible, etc. – are among the most important decisions you will make during the year, and can only be made before the claim. Yet the other set of decisions – those made after you have been presented with a claim – are equally important.
Work with your E&O carrier to make sure you understand your coverage and how it works. This can give you the peace of mind to help you sleep better at night.