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Insurance Community University1
Insight on Errors & Omissions:A Lesson Waiting to Be Learned
Insurance Community University
Disclaimer
Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state
jurisdiction. This instructional materials provided by Insight is intended as a general guideline and any interpretations provided by Insight do not
modify or revise insurance policy language. The authors of these materials, Insight Insurance Consultants is a division of Insight Consulting
and Management Inc. In providing these materials, Insight assumes neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of
the instructional materials provided. Copyright 2010 – 2011 All Rights Reserved
www.insurancecommunitycenter.comLaurie: 714.803.5830 [email protected]
Marjorie: 714.206.9583 [email protected]
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Insurance Community University
Your Instructor Today
Marjorie L. Segale, AFIS, CISC, RPLU, CIC, CRIS, ACSR, CISR
Insurance Community Center, LLCDirector of Education
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Insurance Community University
Objectives
• Minimize E & O exposures– Procedures– Responsibility to the client, insurance
carrier and compliance with regulations– Implementation of procedures and
overseeing their effectiveness– Documentation– Education
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Insurance Community University
Tips on How To Avoid Errors and Omissions
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Insurance Community University
What Constitutes an Error or Omission
• An error = mistake– Incorrectly performing a task
• An omission = failure to perform– Omit a coverage– Fail to identify a risk– Fail to offer coverage– Fail to renew
• Error = 90% of E & O claims
Insurance Community University
Avoiding Errors & Omissions
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Procedures
Insurance Community University
Procedure Manual
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Insurance Community University
Procedures (Exception = E & O)
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Insurance Community University
The Process & Procedures
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Insurance Community University
The Process & Procedures
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Insurance Community University
The Process & Procedures
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Insurance Community University 14
Proposals
Insurance Community University
Proposals
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Insurance Community University
Proposals
• Include coverage options – Not just a laundry list– Match with exposures– Include : “other coverages are available
upon request”
• Prospect / insured initial accept or reject• Insured MUST sign proposal
– If unwilling – have insured send “authorization to bind letter
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Insurance Community University
Proposals
• If not accepted, notify in writing no coverage has been placed
• Do NOT overstate information in the proposal
• When delivering the policy, include a cover letter that the policy supersedes the proposal
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The Proposal Said TOO Much
Insurance Community University
Example: The Proposal Looked Great
• Large account – lots of competition– All coverages listed– Definitions included
• The proposal defines “blanket” on the property coverage– Policy does not include definition
• Problem?
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Insurance Community University
Example: The Proposal Looked Great
• The insured suffered a loss and was able to prove that they needed more limit for the building, business personal property and business income at the loss location
• You had only blanketed the buildings although your proposal showed “blanket property insurance”
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Insurance Community University
Example: The Proposal Looked Great
• The insured understood that everything in the property section was combined
• Underinsured by $4,000,000• Outcome:
– E & O claim– Trial– Jury found agent responsible for
misrepresentation
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Insurance Community University
Applications
• Need to be reviewed with the client• Need to be complete• Need to be signed by the insured• Professional liability applications must
be entirely completed and signed by the insured
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Insurance Community University
Binders
• Do NOT issue binders without authority– Agency authority– Broker must receive written consent from
the insurer
• Issue only for allowable time under law• If policy number assigned, use Evidence
and COI, not binder• Cancellation: use same method as for
issued policy
Insurance Community University
Changes
• Obtain authorized persons• Confirm with main contact in writing• If adding or deleting coverage
– Confirm in writing– Notify authorized party of consequences
Insurance Community University
What’s In A Name?
Married couples and their insurance policies
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Insurance Community University
What’s In A Name?
• Mr. Anderson calls to tell you that he and Mrs. Anderson are getting a divorce.
• Mr. Anderson wants you to remove her vehicle from the Personal Auto Policy and take her name off of their Homeowner’s policy as she has been out of the home now for almost a year
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Insurance Community University
What’s In A Name?
• You inform Mr. Anderson that you will send a Lost Policy Release for signature
• In the meantime, you send a request to your underwriter to obtain the changes requested and suspense the request for 30 days to follow up
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Insurance Community University
What’s In A Name?
• The change is received in a few days and sent to the home address
• Two weeks later, you get a call from Mrs. Anderson who is reporting a serious auto accident
• The LPR was never received
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Insurance Community University
Coverage Facts
• The Auto, Homeowner’s and Umbrella policies were originally written in both names
• The vehicle involved in the auto accident is in Mrs. Anderson’s name only
• Claim was denied– Vehicle no longer insured– Mrs. Anderson is no longer an insured
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Insurance Community University
Result
• Mrs. Anderson hired a lawyer– Suit filed against insurer for bad faith,
breach of contract and violation of covenant of good faith and fair dealing
• The insurer responds to the suit and files a cross-complaint against the agency
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Insurance Community University
Outcome
• The insurance company paid, due to law of agency, full policy limits – $500,000 under the auto policy– $1,000,000 under the umbrella policy– Repair of the vehicle and rental
reimbursement
• Two years of legal wrangling, agent’s E & O carrier settled for $1,200,000
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Insurance Community University
Renewals
• Typically , standard market insurers required to renew unless proper notice is sent
• Non-standard, non-admitted markets may require broker to order renewal
• All renewals should have coverage recommendations reviewed and repeated as necessary
Insurance Community University
That’s It For Today
Come Back Tomorrow – Same start time / Same log in
MUST attend both sessions for credit!
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Insurance Community University
Welcome Back to the Errors & Omissions Class
We will be starting in a few minutes
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Insurance Community University
Recap
• Agency procedures– Contain and control E & O risk– Read your proposals, coverage summaries,
procedure manual• What would a lawyer do with them?
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Insurance Community University
You Did EVERYTHING Right!
It was a BIG account
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Insurance Community University
Not Enough Coverage
• Old, frame, non-sprinklered, no upgrades, bad part of town – but, hey, it’s a big account!– You have spreadsheets of the property
account, signed SOVs, several years of emails, phone calls, proposals, coverage rejections in the file
• You manage to get it placed – then the insurance company bails
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Insurance Community University
Not Enough Coverage
• You search your admitted markets – all of them
• You go to a large wholesaler – they put it out to market – you finally get a taker, but…
• No blanket coverage for buildings, personal property or business income
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Insurance Community University
Not Enough Coverage
• You document and retain marketing sheets, declinations and have sent results to the client
• You document changes in coverage, proposal is presented and signed by the client
• Now they have the fire loss
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Insurance Community University
Result
• Underinsurance on Building, BPP and Business Income
• Had it been blanketed the coverage the outcome could have been different
• Business Income paid up to the scheduled location limit (used to blanket)
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Insurance Community University
Outcome
• 8 years of litigation• E & O claim filed against agent• Agency lost• Court ruled in favor of the insured
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Insurance Community University
Certificates
• Do not alter the wording on a Certificate of Insurance Form
• Document who requested the certificate and what was requested
• Do not indicate a party is an “additional insured” on a certificate unless you have an endorsement
• Do not change the cancellation provision
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Insurance Community University
Responsibility
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Insurance Community University
Define The Terms OrWho Are We, Really?
• Agent• Broker• E & S Broker / Wholesaler• MGA• Or a combination
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Insurance Community University
Agent / Agency Requirements
• Comply with terms of the agency agreement
• Comply with the underwriting rules such as eligibility and binding authority
• Comply with complete and “honest” disclosure
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Insurance Community University
Broker / Brokerage Requirements
• Comply with any Wholesaler agreements
• Comply with the underwriting rules such as eligibility and binding authority
• Comply with complete and “honest” disclosure
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Insurance Community University
Read Your Agreements
• Do you protect the wholesaler?• Does the wholesaler protect you?• Is it mutual?
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Insurance Community University
You Didn’t Mean To Do It
But you bound the account
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Insurance Community University
The Excitement of the Sale
• 4pm on a Friday - you bound insurance on a new western wear store chain
• You deliver the binder, pick up the check and their current policy for cancellation and head home to celebrate
• After a great evening, you watch the late news
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Insurance Community University
The Excitement of the Sale
• There it is, the store you had just bound is on fire and burning to the ground
• You had not cancelled the current policy and now had two policies in force
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Insurance Community University
The Excitement of the Sale
• You get to the office in the morning– Review the file, application and binder– You notice that you said the hydrant was
500 feet from the building – wrong– The lack of immediate water contributed to
the total loss– Submit the claim– Notify the other agent of the claim
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Insurance Community University
Result
• The insurance carrier did not treat that as a material misrepresentation
• Both carriers paid on a “contributory” basis
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Insurance Community University
Relationship with Customer
• Responsibility to our insurance customer is based on the “relationship” that the agent/broker has with their customer.
• There are some “basic” standards of care
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Insurance Community University
Standard of Care Basics
• Obtain specifically requested coverage• Follow insured’s directions to add,
delete or change coverage– Confirm in writing
• Advise coverage changes in writing• Notify cancellation or non-renewal• Notify insurance company downgrade
(agent)
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Insurance Community University
Special Relationship
• A “special” relationship is one defined by common law
• Generally when agent/broker performs more than a simple transaction at customer’s request
• “Special Relationship” imposes a higher degree of accountability
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Insurance Community University
Relationship with Customer
• “Establishing” a relationship– Advertising– Web Site Presence– Communication– Holding yourself out to be a risk manager
or other professional
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Insurance Community University
Relationship with Customer
• Call on your client– During the year– 90 days prior to renewal– Meet with account manager to review
needs– Send to marketing as needed – document
results
• Renew “as is”– Dangerous and gets worse over time
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Insurance Community University
The Client Asked You For Full Coverage
And It Burned
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Insurance Community University
He Remembers it Clearly
• The insured had a homeowners with an agency located within three blocks of his home
• He had been insured for 20 years with the same carrier and always paid his premium in the same week of the year, in cash
• He knew this because that was when his pension check came in
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Insurance Community University
He Remembers it Clearly
• It was after one of the fires in San Diego when he walked into the office he asked to speak to his agent
• An assistant offered to help and the insured explained he was concerned with the fires and all he had heard on the news
• He asked the assistant to make sure he had enough coverage
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Insurance Community University
He Remembers it Clearly
• The assistant assured him he did• A week later his house burned to the
ground• The insured was drastically
underinsured• The agency claimed they had no
recollection of him coming in
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Insurance Community University
Result
• The insured was able to demonstrate to the court he had, in fact, been there that day
• He was able to describe in detail the person he spoke to
• Because he specifically asked for “sufficient limits” and the assistant assured him he had them, they were held responsible for the damages
• Loss to agency $240,000
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Insurance Community University
Regulations
• Compliance with regulations set forth by the Department of Insurance in the state of domicile or writing.
• Compliance with state laws relating to mandatory coverages for a state
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Insurance Community University
Regulations
• Compliance with other statutes and laws such as:– Privacy and Fair Claims Reporting– Financial Services Reform Act (Gramm-
Leach-Bliley
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Insurance Community University
Implementation of Procedures
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Insurance Community University
Implementation
• So many procedures fail because they are not actually implemented, monitored, and updated
• Often times the technology does not support the operation
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Insurance Community University
Implementation
• Set up a system for implementation with target dates
• Set up peer reviews to assure compliance
• Appoint a steering committee to review reports and update procedures
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Insurance Community University
Implementation
• Make certain that the goals are obtainable
• Make certain that the implementation creates a positive working environment
• Listen and learn from team members to make certain the implementation and processes are appropriate for your agency
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Insurance Community University
Documentation
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The Old Way The New Way
Insurance Community University
Documentation
• The “file” must speak for itself• Document in the Agency Management
System and anywhere else it would be required
• Document in writing the offer of coverage and quotation of premium
• Obtain signed rejections or signed confirmations of coverage from the Insured
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Insurance Community University
Documentation
• Establish a written e-mail policy and procedure for your office
• If emails are being used with the agency management system then ALL emails should go through the system
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Educate
Insurance Community University
Educate Your Clients
• Explain and discuss– What you are going to do and NOT do– Risk, coverage solutions, coverage gaps– Customer responsibilities
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Insurance Community University
Educate Your Clients
• Proposal / Coverage Summary– Use standardized template - change as
needed– Clearly explain coverage and options– Explain factors affecting premiums– Add place for customer rejection (or
acceptance) of offered coverage– Include authorization to bind
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Insurance Community University
Educate Your Clients
• Communicate with customers about available coverage to manage risk– What is your agency doing?
• Post coverage and risk information on website and update
• Inform customers– New laws and regulations– New exposures– New trends
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Insurance Community University
Professional Standards
• Strive always to be the best• Establish a monthly review of coverage /
client issues• Test staff to identify training needs• Establish agency goals – not just for
sales but for client satisfaction
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Insurance Community University
Professional Standards
• Courts are demanding an increasing level of knowledge
• Agencies must keep up and excel• This is hard to accomplish
– Reduced staff– Increased demands– Supply agency tools to help
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Insurance Community University
Educate Your Staff
• Create method to review agency personnel knowledge of coverage nuances, differences in company forms, coverage extensions– This includes proper sales management –
not just sales goals– Consultative selling creates better and
longer relationships
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Insurance Community University
Education
• Ignorance is NOT an excuse in a court of law– You cannot work in the insurance industry if
you are not educated in insurance– Learn about the industry
• Learn about your “customers” industry• Understand the coverage being offered
by each carrier you represent so you can explain it to your customers.
Insurance Community University
Summary
• Remember the Dual Meaning of E & O and try to avoid them
• “Errors and Omissions”– For insurance personnel
• “Excitement and Opportunity” – For Attorneys
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