List of Articles

Prompt Policy Checking and Delivery are Musts.

Agent to Agent: Your Insurance Proposals - Will They Help You or Hurt You in E&O Litigation?

Mergers and Acquisitions: Some E&O Words of Wisdom

Which of your customers could use an umbrella?

What’s your 2015 E&O goal?

Which position would you rather take?

When Getting the Clients Signature Might Not be Enough

Faking honesty is not a good E&O tool

Do's and Don'ts of Reducing Chances of an E&O Claim

Time for an E&O realty check.

How well are you holding your customer’s accountable?

What’s changed in the world of Agents’ E&O?

Prompt Policy Checking and Delivery are Musts

by Curtis M. Pearsall, CPCU, AIAF, CPIA

President – Pearsall Associates, Inc., and

Special Consultant to the Utica National E&O Program

 

Ask most agencies where policy checking and delivery rank among daily duties and it is likely not high on the list. It’s not that agents think these are unimportant.

 

  • Some agents believe policies are correct and, if they are not, it’s the carrier’s problem.
  • Other agencies report the “quality ratio” is 95% or higher. This sounds impressive, but it means one out of 20 policies contains a mistake.
  • Many agencies believe the quality of the policy issuance has improved, but these same agencies will state that errors happen and some are significant e.g. missing locations or vehicles, incorrect named insureds, etc.

 

Whether the policies are provided in paper or electronic form, it is vital to promptly check for accuracy to ensure the coverage provided meets what the agency requested.

Identifying Policy Errors
Just giving policies a quick “once over” will not be detailed or comprehensive enough to identify errors in the policy. A best practice is to use a checklist that is completed and saved in the system. Break down the checklist by overall issues (named insured, address, effective and expiration dates, policy number, etc.) and by type of coverage. For:

 

  • Property coverage:  verify correct coverage/forms, locations insured,  limits for each location, correct list of mortgagees/loss payees, additional coverages or changes requested from the prior policy, etc.
  • Liability insurance: review additional insureds, limits,  requested coverage changes, etc.
  • Auto policies: check symbols, list of scheduled vehicles, limits, and any unique exclusions or coverage limitations that need to be brought to the customers attention, etc.
  • Umbrella:  double-check that underlying insurance limits meet the minimum  underlying limits required by the umbrella. Insufficient underlying limits is a major cause of E&O claims.

 

The reviewer should complete, date and “sign” the checklist, which should then become part of the file. Other policy checking documentation methods include:

 

  • A “policy checked” stamp indicating who checked it, when and what was noted.
  • Requiring notes in the system with an activity code showing the policy was checked.

 

Check policies within 30 days of receipt. When some agencies get backed up in policy checking, they have mailed the policies with a message like, “Here is your policy. Please understand that we have not checked it.” This approach is not suggested.

Delivery Details
After the policies have been checked, it is equally important that they are promptly delivered to the customer, either electronically, in person, mailed, etc. In most states, the customer has a duty to read his or her policy. However, it will be difficult to hold them to that duty if the policies are still sitting on the producer’s desk. When the policies are mailed, include a cover letter encouraging the customer to read the policy and to advise the agency of any areas needing correction, if there are questions, etc. The file should note when and how the policies were delivered.

The promptness of policy issuance varies. If the agency receives the majority of the policies, but is awaiting a “straggler,” it is best to deliver the policies on hand. Tell the customer what policies are still pending and that these will be delivered shortly after the agency receives them.

 

While many other tasks vie for priority, make the time for prompt policy review and delivery now to help prevent an errors-and-omissions problem later.

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Agent to Agent: Your Insurance Proposals — Will They Help You or Hurt You in E&O Litigation

by Curtis M. Pearsall, CPCU, AIAF, CPIA

Most agencies and their respective producers look at insurance proposals as one of the key tools that will determine whether they land the account. However, in addition to the sales benefit, a quality insurance proposal can also provide solid E&O benefits. The key word is “quality” because there is certainly the possibility that your proposals can cause you some E&O nightmares if a problem were ever to develop. How do the proposals in your agency measure up? Typically, insurance proposals are broken down by line of business and list the coverages offered/proposed and the corresponding premium. They probably use abbreviations or phrases such as ACV or RC, co-insurance, or time element or business interruption coverage. As a producer, you know what these abbreviations and phrases mean. How about imagining that you are the prospect? Does the proposal help you understand the insurance program? If not, while you may sell the account, you have not really achieved the E&O benefits of the proposal. In actuality, you may have hurt your E&O defense. If an E&O claim developed, both the defense attorney and the plaintiff’s attorney will review the agency file as well as all of the specific documents involved in the procurement of the coverage. There is a very good chance that the proposal you provided will be reviewed in depth. The goal is to ensure that when this occurs, the proposal helps your case, not hurts it.

Educate Customers and Prospects

If your proposals are structured strictly to provide an overview, you may be missing an important element — one that may actually play a role in landing the account while also providing some quality errors and omissions protection. Look for your proposals to educate your prospects and help them understand their insurance program. They know their business but do they really know the finer points of the insurance business? Educating customers and prospects has been shown to be a key issue in minimizing E&O claims activity. Since customers and prospects heavily rely on proposals to make informed purchasing decisions, the best proposals clearly lay out the coverages offered, with documentation ultimately being made to detail what was — and was not — purchased. Oftentimes, these discussions are verbal. Without something in writing, any problems could involve “he said, she said” scenarios. Who wins these is anyone’s guess. To ensure there is no misunderstanding, it is highly suggested to secure the insured’s signature / acknowledgement detailing his or her ultimate buying decision. To ensure thoroughness and consistency, a standard template detailing what the proposal should include and how it should be communicated should be used. This will ensure that the proposals contain the necessary detail and explanation.

Key Ingredients of a Proposal

Detailed explanations and definitions of key terms. Just because the agency understands the terms does not mean the client does. As you present the proposal, look for opportunities to ensure that the prospect understands the material. Avoid abbreviations if there is any chance the customer will not understand what they mean.

Easy-to-understand information. Provide the material in a language that is not above the ability of the prospect to understand it.

Reference any mortgagee or loss payee you know of. It is amazing how this level of detail is taken for granted. Failure to provide this has surfaced in a host of E&O claims.

Be as detailed as necessary. For example, if you are providing a proposal including Time Element / Business Interruption coverage, spell out exactly what coverage is provided or maybe include a “specimen policy” for reference. Many of the Exposure Analysis Checklists provide this level of detail for the various coverage forms. When dealing with Workers Compensation, based on the corporate structure of the entity, reference should be made to whether the policy affords coverage for sole proprietors/partners. On General Liability, it should be clearly stated if the policy is “subject to audit.” For a Professional Liability/ D&O policy, provide clarification on issues such as “retro date” and whether the defense is within or outside of the limit of liability.

Where applicable, include a statement that clearly denotes that higher limits are available. This would certainly be applicable in references to an umbrella or excess limits policy.

Include the financial rating for each of the carriers, with an explanation of what the rating means. It is recommended to use the exact definition as provided by that rating organization.

Include a disclaimer. There is no way the proposal can include every single aspect of the insurance program. A disclaimer, such as the following, will provide a degree of E&O protection:

Information contained in this proposal is intended to provide you with a brief overview of the coverages provided for reference purposes only. It is not intended to provide you with all policy exclusions, limitations and conditions. The precise coverage afforded is subject to the terms, conditions, and exclusions of the policies issued.

In addition, if your agency has relied upon information provided directly by the prospect, consider including a statement such as, “This proposal is based on information provided and we cannot attest to the accuracy of this information.”

If any of the carriers referenced are non-admitted, provide an explanation of what this means.

A Clearer Understanding

Obviously the goal of your proposal is to sell the account. Enhancing your proposal with some quality E&O prevention tools may actually result in a more educated prospect and could very well be the difference that helps you land the account. If a problem develops down the road, the detail provided in your proposal could be key in the defense of your agency.

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Mergers and Acquisitions: Some E&O Words of Wisdom
by Curtis M. Pearsall, CPCU, AIAF, CPIA

President – Pearsall Associates Inc. and

Special Consultant to the Utica National E&O Program

 

 

The issue of mergers and acquisitions is a popular topic in the insurance news world. While there are many issues related to mergers and acquisitions to consider, there is a key – if not critical – one that doesn’t seem to get the attention it deserves: how your errors-and-omissions policy will address potential liability issues that can make a good deal a “nightmare” without the proper attention. While this is not an overly complex matter, it is also not all that simple. Bottom line, whether you are the buyer or the seller, proper planning and appropriate attention to detail are extremely important.

 

Consult your E&O carrier or policy

Mergers and acquisitions seems to be an area where there is a tremendous lack of consistency among all E&O carriers on the options available and the process that must be followed. While the policies typically provide the necessary coverage, the options regarding the number of years varies significantly from carrier to carrier. This definitely speaks to the need to plan ahead.

 

A good time to become educated on some of the significant coverage issues is as soon as you start thinking about buying or selling. Any good E&O carrier “worth its weight” can provide guidance and direction based on your specific scenario. For example, will the E&O carrier treat the transaction as an acquisition or is it actually a merger? What additional information is needed? Will the carrier agree to provide the coverage based on the details of the transaction? Contact the underwriter, broker or agents’ association that played a fundamental role in the purchase of your E&O coverage and explain the situation. Don’t hesitate to ask all of the necessary questions.

 

Both the buyer and the seller should allow sufficient time for the development and providing of additional paperwork, copies of the proposed transaction documents, applications, etc., the E&O carriers may require.    

 

When you’re the buyer

It is best for the buyer to consider “asset-only” purchases, and not purchases of any liabilities of the agency going out of business. This is one of the many areas where an attorney is needed to ensure the buyer is fully protected.

 

The traditional approach is to have your E&O policy endorsed to provide coverage for the “new” agency. The coverage, referred to by many E&O carriers as a purchased entity endorsement, will provide protection against errors made by the “new” agency starting with the effective date of the acquisition.

An additional issue that must be vetted is for the buyer to know the finer details of his or her own E&O policy, including whether that policy contains a “retro date.” While liability for any claim may rest with the seller (the agency purchased), purchasing agencies (the buyers) are often still sued under the theory that the new agency purchased the liabilities of the purchased agency. The presence of a retro date may preclude defense to the purchasing agency for an otherwise defensible claim. There may be a premium charge for the purchased entity coverage as this varies from one E&O carrier to another. In some cases, there will not be a charge as some E&O carriers look to address this “additional exposure” at the next renewal. 

Lastly, the purchasing agency should look into either obtaining tail coverage for the purchased agency or potentially require the purchase of tail coverage as part of the deal. This is designed to ensure there is E&O protection should a problem develop. Look to secure (or require) the 10-year tail option if it is available.

When you’re the seller

If you are selling your agency, contact your E&O carrier and advise it of your plans. Don’t hesitate to ask questions regarding cost, options, timeframes, etc. This is an important decision and should be carefully planned.

 

One of the many important issues is to understand the “known loss provision” in the E&O policy. If you are selling your agency and are aware of any actual unreported claims or situations that could lead to a claim, it is vital that these are reported to your E&O carrier to lock in coverage. Failure to report these real or potential claims has significant potential to result in a lack of coverage.

 

The seller should secure an optional extended-reporting-period endorsement (a/k/a “tail”). Even after a sale, the now-defunct agency is still at risk of being sued. In addition, while the law often protects the right of claimants to seek the personal assets of the agency’s former owner, an attempt could be made, thus making the tail coverage and the defense it will afford that much more important.

 

The purpose of this optional tail is to provide an additional period of time after the expiration of the policy for which valid claims will continue to be accepted, provided the wrongful act occurred before the end of the policy period.

 

While virtually all claims-made policies contain this provision, there is, once again, a tremendous lack of consistency as to the available options. Some policies only allow an additional 1-year “tail.” Other policies may only allow options up to 3 years. Still others provide up to 10 years – or even an unlimited period. The charge for this additional coverage comes with a hefty premium charge, so plan for this expense. Two-hundred percent (200%) of the last full annual premium for a 10-year tail is common. You only have one time to make the decision and this is not a cost that can be financed, so make sure you have the resources available.


Document retention is still an issue

Whether you are the buyer or seller, it is also important to understand the importance of document retention of the purchased agency’s files. Should an E&O claim develop (and they definitely have), having access to the file and the various documents is critical. Those files should be retained as if the agency was ongoing.

 

Looking to buy or sell? Consider the E&O issues early on and include your E&O carrier and an attorney in the discussion. This is crucial to ensuring that the process goes as planned.

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Which of your customers could use an umbrella?  

by Curtis M. Pearsall, CPCU, AIAF, CPIA

President – Pearsall Associates, Inc. and

Special Consultant to the Utica National E&O Program

 

 

When looking at various E&O claims involving umbrella coverage, there are circumstances where the “gaps” between the actual underlying limits and those required are major concerns. However, in the majority of those cases, the real issue is the lack of the umbrella. Essentially, there is a claim where the underlying limits were not sufficient to cover the claim. Unfortunately, when this occurs, the possibility that the agency could be involved in litigation due to the absence of the umbrella increases. Why, then, don’t more personal and commercial customers have this important coverage?

 

Who has the potential?

There are instances where a customer is provided with an umbrella proposal and chooses not to buy it. This is fine, providing there is solid documentation of the offer and the declination. Could there be situations where an umbrella proposal was not even provided because the agency CSR/producer did not think the client needed an umbrella? Absolutely. On any given day, the news reports on major accidents in which the potential to exhaust the underlying coverage limits exists.

 

Which of your clients need an umbrella? Asking the question in a somewhat different manner, which of your customers has the potential to cause an accident where the underlying auto or homeowners limits will not be sufficient? They most likely all do! Why, then, has an umbrella proposal not been provided to all of your customers?

 

Who receives a proposal?

Some agency staff members may judge whether to offer an umbrella based heavily on the size of that specific customer’s assets. When an agency CSR deals with a personal lines customer who has two homes, three cars and a boat, the thought of offering an umbrella seems much more logical. After all, the customer has the assets, and umbrella is a coverage that will assist greatly in protecting those assets. The same is true for a commercial lines customer with a multiple-vehicle fleet and a significant general liability exposure.

 

Going back to the personal lines customer, contrast that customer with a young adult that owns a car and rents an apartment. If one were to judge the “need for an umbrella” by the size of the assets, there is a good chance there will not be an umbrella discussion with the young adult client. After all, what could the young adult do that could cause a serious auto accident or result in a significant liability exposure? Plenty! 

 

Bottom line, the potential size of auto accidents or liability exposures is not determined by the size of the client’s assets. What if the client just graduated and has a college debt of $200,000? What are this individual’s net assets? It’s probably a negative number, yet this person still has the ability to cause a significant loss where the underlying insurance is not sufficient – just as great as the person who owns two homes, three cars and a boat.

 

In the commercial lines scenario, contrast the customer with multiple vehicles and a storefront operation with a one-person operation, such as a contractor or salesperson. Does one of these exposures offer a greater likelihood there will be a sufficient claim? While the customer with multiple vehicles probably presents a greater exposure, it does not mean the customer with one vehicle has no exposure. In addition, accounts such as contractors have other exposures that present tremendous potential for a sizeable general liability loss.

 

Write more umbrellas

To reiterate, which of your customers need an umbrella? The most likely all do! Agency staff should be careful not to prejudge customers when determining customers’ insurance needs. There is the requirement that certain minimum underlying limits be carried to secure an umbrella, so when dealing with current and prospective customers, discuss the benefit and cost of an umbrella. Propose a variety of limits for the coverages being considered. This lets the customer know that you are not “recommending” a specific limit and that higher limits are available. This also “forces” the customer to make a decision on which limit he or she wants and those which are being rejected.

 

Most agency management systems provide the ability to identify those accounts that don’t have an umbrella. Make it a goal in 2015 to ensure that all of your customers are advised of umbrella coverage, what it does and how much it costs. For some customers, you must factor in the cost to increase his or her underlying limit. If a customer rejects the umbrella offering, get his or her sign-off. At the end of the end, you’re likely to find yourself writing more umbrella policies.

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What’s your 2015 E&O goal?
President – Pearsall Associates Inc. and
Special Consultant to the Utica National E&O Program

With the 4th and final quarter of 2014 under way, most agencies are looking to finish strong and start goal setting for 2015. This goal setting should include some errors-and-omissions goals for agencies to be successful. It appears that those agencies that continually enhance their E&O culture and commitment are being rewarded by writing more business and protecting themselves when E&O litigation arises.

Now is an ideal time to begin the development of your E&O goals for 2015. This will enable your agency to implement new initiatives as early in the year as possible. A good starting point involves a “reality check” on how things are going. A review of issues, such as the following, is suggested:

  • Need for staff training
  • Review/update of the current agency procedures
  • A focus of customer education using various methods

When setting your goal, it is best to focus on a handful of initiatives, at most. Trying to launch too many has the potential to result in doing an “okay” job on a significant number, as opposed to a solid job on a more manageable number. Here are some items to consider:

  • Enhance your staff education. After all, agencies don’t make mistakes, people do. A strong focus on ensuring that you have a technically proficient staff that possesses strong customer service and automation skills is recommended. Work individually with each staff member to identify those areas that need improvement. Each employee’s annual performance review should include the specific goals that were agreed upon.

  • Include a cover letter when sending out new and renewal policies. This ties in with the duty in most states for the customer to read his or her policy.

  • Raise awareness of options and limits. Make sure your customers are aware of limit options and that higher limits are available.

  • Get signatures. Be a fanatic about requiring the staff (producers, account managers, CSRs, etc.) to secure customers’ signatures on the various insurance applications.

  • Secure the customer’s sign-off on all rejected coverages. This is one aspect of an enhanced focus on documentation that will reap benefits if E&O litigation develops. There is a general feeling in the courts that “if it is not in the file, it didn’t happen,” so any initiative that strengthens the agency’s documentation culture and commitment is a good thing.

  • Perform – or at least offer to perform – annual reviews with your customers. This could involve a live discussion or a form that is automatically sent to each personal and commercial lines customer 60-90 days prior to the expiration of his or her coverage. The goal is to secure an update of any changes in exposures so that some insurance discussions can take place. Include coverages for a customer to consider, such as flood, earthquake, home businesses, various types of personal articles floaters, umbrellas, etc. While some may believe that “it’s their job” for a CSR to identify gaps and round out the various accounts, consider an incentive or form of compensation for the staff. Many agencies have enjoyed solid success in this initiative by “rewarding” the staff.

  • Educate your customers. Take some time and ask your staff what insurance issues are potentially misunderstood and need to be communicated. It is important to examine the issues by line of business and then develop a marketing/education campaign using the media that would be most effective. There have been a number of surveys that spoke to customers’ desire to understand the coverage they have and how it works. One of the biggest segments of the population that wants this education and advice is the 18-24 age group.

  • Establish a strong quality control/audit process – or update your current one. The goal of an audit process is to verify that the staff meets the expectations established by the agency. Without this type of a process, how can any agency feel confident that the various tasks and requirements are being met? Maybe there is a need for further training. Be proactive – don’t wait for a claim to develop to discover some issues.

Good results don’t just happen. They involve a strong culture and commitment of management and every person in the agency. As you finish up 2014, dedicate some time and thought to how you can enhance the E&O culture in your agency. Establishing some well-thought-out attainable E&O initiatives is a step in the right direction and should pay solid benefits moving forward. You may just find your agency selling some more business, too.

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Which position would you rather take??
by Curtis M. Pearsall, CPCU, AIAF, CPIA
President – Pearsall Associates, Inc., and
Special Consultant to the Utica National E&O Program

When an errors-and-omissions claim against an insurance agency develops, an objective of the E&O carrier and the attorney it assigns to handle the matter is to review the file in question and determine the degree of liability, if any. Numerous defenses can be applied based on the facts of the specific case. Defenses include, but are not limited to


If the agency’s customer had been made aware of a specific coverage but rejected it, generally, one would hope this would position the agency in a positive light. But what if the agency’s customer was not made aware of, say, umbrella coverage, including what it does and how it works? To what degree would this hurt the agency’s defense?

Some positive E&O initiatives
Let’s take the following scenario and look at the various positions. Imagine you are the jury and will be asked to render a verdict. The agency writes a homeowners policy for a customer in 2000. The agency includes a cover letter with the policy requesting that the customer read the policy and contact the agency if there are any questions. The cover letter includes a statement noting that the agency is a full-service agency and encourages the customer to contact the agency if there is any change in the customer’s exposure.

These are some positive E&O initiatives from the agency … so far. However, for the next 10 years, the agency simply sends the policy with no cover letter. In essence, the agency has a customer for whom it writes one line of business, homeowners. The agency never reached out to the customer inquiring about where the customer’s auto insurance is placed, whether the customer has an umbrella policy, any new exposures, etc.

In that 10-year period, the customer purchases a dog for his or her kids. The dog later bites the neighbor’s child, resulting in a lawsuit requesting damages in excess of the liability portion of the homeowners policy. The agency is sued due to the lack of sufficient coverage.

While E&O cases will typically be very “fact sensitive” and not totally “cut and dry,” consider the following defense positions.

In the agency’s favor

In most, but not all, states, the agent is often referred to as “an order taker.” In other words, it is up to the customer to specifically request coverage. Generally, an insured must make a specific request for a particular type of insurance coverage to impose a duty on the agent to procure that particular coverage. In addition, an insurance agent is not required to:


In defense of the agency, it secured the coverage the client requested. The customer never contacted the agency for additional coverages or to let the agency know about the “change in the exposure.” Bottom line, the agency fulfilled its duty. A “special relationship” will be difficult to prove because the agency only wrote one line of business. Therefore, is there a good chance the agency will prevail on this legal matter? The odds are in the agency’s favor.

Not in the agency’s favor
The customer probably will contend that he or she is not insurance savvy and relied on the agency’s knowledge and expertise. The customer was not aware of umbrella coverage, but because of the purchase of the dog, had an umbrella been suggested, the customer would definitely have purchased it. (This is always what the customer will say after the loss.)

In addition, that the agency simply renewed the account “as is,” with a slight increase in coverage A for 10 years, and never contacted the customer to discuss other coverage options or changes in exposure, does not position the agency well.

While the agency may prevail, these are exactly the types of situations E&O carriers are seeing with significant frequency. A recent industry study indicated the average number of policies an agency has for each personal lines customer is in the 1.6 area. When considering all potential “selling opportunities,” it certainly seems like some missed opportunities exist. So, even if the agency does prevail, this scenario is resulting in significant defense dollars to defend the agency, which are obviously factored into the price of the E&O product.

What to do differently
What could or should the agency have done differently? One initiative that could have easily helped avoid the type of E&O claim above involves the agency actively undertaking a cross-selling campaign. Some approaches to consider:

Now, take the E&O claim scenario above and add the following to the letter the agency sent: ask the customer for an update on his or her exposures and/or bring umbrella coverage (what it does and how it works) to the customer’s attention. Now, imagine if this communication was ignored by the customer. There is the strong possibility the E&O claim would have never even developed.

Another benefit of these additional “touches” involves the chance that you may just sell some insurance along the way. So, if you want to grow your agency, enhance your E&O commitment. Doing this will truly give your business the “best of both worlds.”

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When getting the client’s signature may not be enough
by Curtis M. Pearsall, CPCU, AIAF, CPIA
President – Pearsall Associates Inc. and
Special Consultant to the Utica National E&O Program

Producers and customer service representatives are advised from early their careers of the importance of securing a customer’s signature on an application. The basic premise is that if accurately completed and signed by the applicant, an application possesses tremendous power in the event of some type of errors-and-omissions litigation. The signed application played a significant role in the outcome of that litigation in a substantial number of E&O cases.

For agencies serious about reducing their E&O exposure, proper handling of applications is a great place to start. Unfortunately, there have been numerous E&O cases where the signed application lacked the power it should have had. For an application to really help the agency if E&O litigation arises, the customer must fully know the contents of the entire application. If the agency sends the customer the application to sign, the entire application must be sent. Sending only the signature page could cause a problem as it might enable the customer to disavow knowledge of the contents of the entire application.

The goal is to ensure that applications work for your agency, not against it. Here are some key items to follow:

Complete, current and correct
This is known as the “3 c’s requirement.” Are applications from your agency completed fully or are some questions left blank? If questions are left blank, why? The answers to these blank items could significantly impact the account’s desirability or pricing. How confident is your agency on the accuracy of the answers to the questions? In the haste to get applications submitted, producers/account executives may answer the questions believing they are answering honestly and correctly. This has the potential to cause some problems as carriers rely heavily on the application and presume the information to be truthful.

What is your agency’s approach when the carrier underwriter calls with additional questions? As a producer or CSR, do you presume to know the answer or do you contact the prospect to check? It’s best to contact the prospect/customer to ensure the information presented to the carrier is correct.

After a loss
What happens if, after a loss, the carrier discovers the information was incorrect? This is when your nightmare could start. The carrier may take the position that it would not have written the account had it known the correct information. Unfortunately, this scenario occurs much too often. At this point, the carrier will typically have two options: rescind the policy or honor the claim, but then take action against the agency. There have been many E&O claims where the carrier successfully sued the agent due to misrepresentation of the nature of the risk. This issue by itself heavily reinforces the benefits of having the insured sign the application to affirm the accuracy of the information.

The best approach
Complete the application face-to-face with the prospect/customer, asking him or her the questions exactly as they appear and accurately noting the response on the application. After completing the application, the producer/CSR will usually request that the client sign the application. An additional requirement is recommended. Namely, don’t just ask the client to sign the application. Require the prospect/customer to review the entire application to ensure you have accurately stated the exposure, and then have the client sign it. This is one of the most important procedures for an agency to insist on.

In virtually every state, the customer is held responsible for the contents of the application once he or she has signed it. If the client misled you in the completion of the application, his or her signature on the document could play a significant role if a problem develops. As stated previously, this means more than just sending the client the signature page to sign.

If getting the signature is not feasible for some reason, explore the possibility of providing the customer with the application electronically, asking him or her to review and approve the information for correctness. Be certain your file is well documented with the insured’s approval.

Don’t sign the insured’s name
While the agency may believe the customer has authorized you to do so, don’t sign for the insured! After a loss, the customer may disavow giving you this authorization. Handwriting experts have found their way into E&O claims, so extreme caution should be exercised in this area.

Use all-new information
As a producer or CSR, have you ever completed “this year’s application” using the information from “last year’s application?” Avoid doing this. It is extremely dangerous and fraught with potential problems. Risks change, so it is always best that the application is completed through current discussion with the customer.

Ensure accuracy
Review and reinforce with your staff the issue of providing your carriers with complete, accurate applications signed by the customer. This is also a great time for management to clearly state the expectation that applications will not be submitted to the carrier unless they are complete and accurate. This requirement normally falls, especially with commercial accounts, on the producers. Customer Service Representatives should be authorized to return an application to the producer if the application is incomplete or if the CSR is concerned about accuracy.

Work in your favor
Applications you submit to your carriers are extremely important and must be handled accordingly. Your agency’s goal should be that the information in the applications is complete, current and correct (the “3 c’s”) and the application is reviewed and signed by the customer. While getting the insured’s signature may be an additional step that takes time, the power of this signed application cannot be emphasized enough. Anything less could spell trouble if a loss develops and the carrier believes it was misled. Turn the power of the application to work in your favor by mandating and enforcing these requirements.

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Faking honesty is not a good E&O tool
by Curtis M. Pearsall, CPCU, AIAF, CPIA
President – Pearsall Associates Inc. and
Special Consultant to the Utica National E&O Program

The great comedian Groucho Marx once said, “The secret of life is honesty and fair dealing. If you can fake that, you've got it made.” As interesting as it may sound, it is probably fair to say that Groucho was not an insurance producer. If he had been, he may have been involved in an E&O claim or two.

In the daily operation of an insurance agency, producers and customer service representatives will be “tested” on their levels of integrity and honesty. How those tests are handled can lead to significant consequences. Imagine facing the following scenario:
As a producer/account executive/customer service representative, you are looking to write a specific account that, in the company's eyes, may not be a “perfect match.” Perhaps the account had a loss or two (or three). Maybe it’s a property account, with a significant amount of the building vacant. Quite possibly, the account was non-renewed by the previous carrier. The list of possibilities is virtually endless.
As you complete the application, you arrive at the questions addressing these exposures. What are you thinking? Possibly, if you “bend the truth,” who will ever know? What could possibly happen if someone did find out?
This issue has been the central focus of more than a handful of E&O claims. In practically all of these cases, the odds are stacked heavily against the agency. In most of these E&O cases, somehow the carrier did find out the truth and, when this happened, the agent caught the full brunt of the carrier's consternation.
Agency staff interacts with carriers and wholesalers on a variety of application issues. The scenario could involve when the application was initially submitted or when the carrier underwriter contacted the agency with additional questions.
Lying on an application to get an account written is wrong, dead wrong. If lying on applications is how you will conduct yourself, it’s advisable to find another occupation. There are thousands of honest, truthful producers who present the carrier with an accurate assessment of the risk and stand by the carrier's decision. Doing anything to the contrary gives the noble insurance industry a bad name.
The best practice is to complete an application with the customer’s input. Ask all of the questions and don't presume to know the answer to any of them. Where possible, visit the risk you are trying to insure. This enables you to speak with some degree of credibility on any subsequent conversations. Upon the completion of the application, require the customer to review it, and then require his or her signature, thereby attesting to the accuracy of the information.
Don't presume that you know the answers when handling follow-up questions from carriers. Take down the questions, and then contact the customer to secure the answers. If the customer answers your questions over the phone or in person, document those discussions in the agency file. Send a letter or e-mail back to the customer that memorializes the discussion and the responses, and include a copy in your file.
Customers often ask questions try to understand insurance and how it works. How the producer chooses to answer those questions is extremely important. Providing the customer with incorrect information is wrong. Suppose a producer thinks, “The only way the customer will know I was wrong is if they have a claim. What are the chances of that?” The producer is wrong. An anonymous quote summed it up best: “I’d rather be honest than impressive.”

Should honesty be the basis of your carrier relationship? Yes! The consequences can otherwise be significant. While losing one’s license is a definite possibility, the carrier/wholesaler could decide to terminate its relationship with you. Don’t expect any carrier to be too understanding and accommodating if it finds out there has been a breach of honesty.

Agency management should make it a goal to ensure that all sales staff knows honesty is the only way and anything outside of that will not be tolerated. Lying to your carriers has many significant consequences, including the damage done to the relationship between the agency and the carrier. In addition, if the carrier suffers a loss and believes it was misled into writing the account, it could rescind the policy, essentially leaving your agency as the “insurance carrier.” That’s definitely a position you do not want to find yourself in!

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“Do’s” and “Don'ts” of Reducing Chances of an E&O Claim

by Curtis M. Pearsall, CPCU, AIAF, CPIA
President – Pearsall Associates, Inc., and
Special Consultant to the Utica National E&O Program

The duties of a producer or account executive/customer service representative in an agency present tremendous challenges and responsibilities. It’s hard work and is not getting any easier. The knowledge expected would fill volumes and the workload probably seems like it never ends. These staff members deserve a tremendous amount of credit because without them, the agency would not be the same. While the degree to which these men and women perform this job professionally and ethically can greatly determine the agency’s success, it can heavily determine the agency’s errors-and-omissions risk, too.

Gaining knowledge
Both producers and account executives must have a strong technical knowledge of the industry. Customers and prospects rely on them for this knowledge to ensure their assets are properly protected. To meet this challenge, a commitment to knowing the various classes and lines of businesses, and the uniqueness of each, is required. Because there is so much to learn in the insurance business, there will be times when a producer and account executive does not possess the necessary knowledge. How these instances are handled and knowing where to find the information are vital. Bluffing one’s way through the answer is not recommended. This might work once in a while, yet since there is a very good chance the customer or prospect is documenting the conversation, it’s only a matter of time before it catches up with the agency staffer.

A great tool for producers and account executives is an exposure analysis checklist. These checklists provide tremendous detail on more than 650 classes. For a producer, this is an ideal resource for knowing the prospect or client. Before visiting a jewelry store prospect, for example, the producer should take the time to educate himself or herself on a jewelry store’s exposures. For account executives, these checklists are also a solid way to improve their knowledge of various lines or classes of business.

Sales skills and more
Yet having the knowledge and knowing where to get it are only parts of the solution. The formula for success also includes the need for sales skills. Having knowledge with no sales skills – or sales skills without knowledge – can be extremely dangerous for the agency from an E&O perspective. Without a doubt, the sales process doesn’t end when the sale is made. How producers and account executives conduct themselves during the sales process – pre-sale, sale and post-sale – will likely determine whether they are successful and to what degree they are an E&O risk.

When interacting with the client, in most states, an insurance producer, including account executives, has a common-law duty to obtain the coverage the client specifically requests within a reasonable time or inform the client of the inability to do so. Thus, it is key to listen for what the customer or prospect is asking. Not providing what the customer requested has been a root cause of many E&O claims.

The words or phrases used to promote your agency and abilities are also important for avoiding an E&O claim. Telling customers and prospects you are an “expert” or that “at our agency, we make sure that you are properly covered” sound impressive. However, while the belief may be that the ability to be successful is enhanced, it can also lead to the producer and the agency being held to a greater degree of liability should a problem develop. Choose the words and phrases used verbally or in print carefully.

One word to avoid is “recommend.” It’s not as harmless as it might sound. For example, say the agency recommends that the client secures a $1 million umbrella. If the client ultimately has a loss well in excess of the $1 million, the agency could face an E&O claim for “recommending” a limit that was insufficient for the loss suffered. The best approach is to offer coverage options and limit options for each of those coverages, and then let the customer make the decision. Don’t make it for them!

Document and review
In all of the various interactions, whether with the prospect or the markets you are using, is the need for prompt and professional documentation. Reinforce that this need for documentation applies to producers and account executives. While the “old school” approach of documenting the discussion in the file or agency management system may be sufficient at times, there will be situations where the documentation should also involve a note to the customer or prospect detailing the essence of the conversation. The goal here is to avoid any misunderstandings before a claim occurs. If a problem develops, this documentation – or lack of – will greatly determine the direction of the E&O claim. Documentation is not an option; it is mandatory. It must also be prompt and professional. Does the customer always buy all of the coverages noted in the proposal? No. Both producers and account executives should get the customer’s sign-off on the coverages/limits they will not be securing.

After receiving the order, it is crucial to review the policies upon receipt of them to ensure they reflect what was ordered. The producer and account executive should be involved in this process to ensure the coverage is what the customer requested. In all but a few states, the client has a duty to read his or her policy. Therefore, it is strongly suggested to include a cover letter with the policies advising the customer to review the policies and contact the agency if there are any questions or any of the policies need correction. If the producer is delivering the policy, include the cover letter with the policies and bring the letter to the customer’s attention.

In all likelihood, the marketplace has prompted accounts to be remarketed on renewal to other carriers in your office, so bring to the customer’s attention any deficiencies or coverages being “given up” by moving the account to another carrier. Document these discussions. This also applies if you are moving the account from the standard marketplace to the E&S marketplace.

Oftentimes, carriers will change their guidelines. Agency staff must be aware of these guidelines and to adhere to them. Overstepping the carrier’s binding guidelines is a common reason carriers are increasingly suing their agents.

Going a long way
Being a producer or account executive requires tremendous knowledge, professionalism and attention to detail. This will go a long way to ensuring success – and ensuring you are not an E&O nightmare waiting to happen.

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Time for an E&O realty check

by Curtis M. Pearsall, CPCU, AIAF, CPIA
President – Pearsall Associates, Inc., and
Special Consultant to the Utica National E&O Program

An important component of errors-and-omissions loss prevention involves continuous improvement. This is an ideal time of year for agencies and their staff to assess the level of their E&O culture and commitment. In some respects, making this assessment is easier said than done. Perhaps a more appropriate way to look at it is whether your agency is a better E&O risk today compared to the same time a year ago. Honesty is critical for this exercise to have any real benefit for the agency and each staff member.

Many issues factor in to making this determination, including staff education, customer education, enhanced documentation expectations, producer training, file auditing, etc. The overwhelming majority of agencies in a recent industry survey indicated they made a substantial improvement over the previous year. What about your agency?
Here are some important areas to help you and your staff assess the E&O culture and current level of commitment.  
Does management “walk the walk” and “talk the talk?”
An insurance agency’s E&O culture starts with its management and leadership. It is imperative that the staff sees and feels that management is committed to a strong errors-and-omissions culture as this commitment will heavily drive staff behavior. Without this commitment on the part of management, it is doubtful the agency can achieve the desired level of E&O commitment. E&O is a serious issue requiring an “all in” commitment by every staffer – and that starts at the top.

Is each staff member committed to a strong E&O culture?
Agencies don't make mistakes, people do. In many respects, an agency’s E&O culture is only as strong as its weakest link. Does your agency have a weak link? Now is as good a time as any to strengthen your E&O culture by identifying and “fixing” that link. Although producers and CSRs are traditionally the main drivers of E&O claims, virtually everyone in an agency, including the receptionist and claims team, has the potential to cause – and actually are causing – E&O claims.

Does each employee have the necessary technical proficiency?
This is a key component for all staff members. After all, your customers count on the staff’s expertise on a wide range of insurance matters. Agency leadership should identify opportunities for technical training for each employee. As you develop 2014 goals for them, include these “education goals” as a part of each person’s annual performance review.

Are your customers more educated today?
Many agencies would contend that the best customer is an educated customer. Within the last year, has your agency undertaken or enhanced a campaign to educate customers on various coverages and how these coverages respond? There are many approaches to take, including producing a newsletter to send to customers. How about a weekly “Did You Know?” e-mail blast? This can be effective because shorter messaging has a greater chance of being read. There isn’t a shortage of topics, either. Consider starting with seasonal issues (Valentine’s Day, kids going to college, boating, etc.) and the coverage exposures each presents.  
Another useful approach is performing an annual agency review for each customer. This will help customers understand their coverages and may also identify any exposures that are not properly insured. While it may be difficult to have a dedicated conversation with each customer, at least make the offer. Many agencies send every personal lines customer a checklist to review, with the request that the customer contact the agency for further discussion on some possible uninsured exposures.
What’s the quality and timeliness of your file documentation?
There are two good rules of thumb for documentation:

How does your agency file documentation measure up?

Are you auditing the files?
To truly assess the E&O culture and commitment of the agency staff – and how well the various agency procedures are being adhered to – review their files and the detail each contains. Develop an audit form addressing the main issues, perform periodic reviews of a pre-determined number of files for each staff member, and then measure the results. This will show the commitment that the agency has toward a strong E&O culture.  

How well are you holding your customers responsible for their insurance decisions?
Possible approaches include 1) providing options for the customer to consider and requiring the customer to sign off on the coverages and limits selected and rejected, and 2) sending a cover letter with the policy to the customer requesting that the customer review the policy and advise your agency of any questions or problems.

Was 2013 a good year in terms of your E&O culture and commitment? Does your staff believe the E&O culture is stronger now? Do a reality check. It might be a great conversation to have at an upcoming staff meeting.

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How well are you holding your customer’s accountable?
by Curtis M. Pearsall, CPCU, AIAF, CPIA
President – Pearsall Associates, Inc., and
Special Consultant to the Utica National E&O Program

If one were to ask insurance agents for a list of frustrations dealing with their customer, there is no doubt that high on that list would be the following – “why is it always our fault when a customer has a loss that is not covered? They knew that they didn’t have that coverage”. Unfortunately, this scenario has played itself out over and over again. Then when an E&O claim happens, it typically will be the agent’s word against the customer’s word. While the agent may win some, there is a good chance that they will lose once in a while. So what can an agent do to hold their customers more accountable? Some agents may contend “just document the conversation in the system” but there is really more to it than that. Let’s took a look at some of the typical scenarios.

The agency file is discoverable
It is important to start off by stating that when an E&O claim occurs, the E&O carrier will look to secure the actual file in question to see what it looks like and what is included. Whether the file is paper or electronic, there is no doubt that solid documentation makes the E&O carrier’s job much easier. Conversely a file with sketchy documentation could prove to be a challenge in building a strong defense for the agency.

Completion of an app
This could involve explanations of coverages, responses to questions, etc. Since the best type of documentation involves something with the insured’s signature on it, holding customers accountable is enhanced when an agency can get the customer’s signature on a document. This is one of the main reasons why getting customers to sign applications is so important. In virtually all legal jurisdictions, a customer is going to be held responsible for the accuracy of the information in an application if they signed it. So when an agency is completing an application based on the responses from the customer, a solid best practice is to require that the customer review the application and if everything looks in order, to sign it.

Other customer interactions
As customers look to make modifications to their insurance program, once again, look to get their signature acknowledging the request. This is more doable when the customer is in your office or you are meeting with them at their business or residence.
However there may be times where this is not possible and thus the level of documentation needs to be tailored for the situation. How would your agency handle a request from a customer to delete certain coverage? Some agencies have taken the position that they will not make any changes without some form of written communication from the customer. This is great if you can get it but what if the customer doesn’t want to “cooperate”?

Without some form of documentation that confirms or memorializes the discussion, mistakes can occur. Possibly, what the agency heard is not what the customer requested or possibly what the customer advised is not what they really meant. Thus the need for some form of correspondence. If the customer doesn’t want to send you a note, then you send them one! Something to the effect of the following:

“per your request or per our conversation, we are deleting the collision on your Ford truck. If this is contrary to your understanding, please contact the agency immediately”.

The goal here is to attempt to address any potential misunderstandings between what the customer told you or thought that they told you and what you heard. By simply documenting the conversation in the agency management system does not help to identify a misunderstanding. If the misunderstanding surfaces after an uninsured loss occurs, this is when could turn nasty.

How about the scenario of the agency providing the customer with a proposal and the customer orders the package, the auto and the workers compensation but states “let me think about the umbrella and I will get back to you”. There should be some form of documentation back to the customer advising them “at this time, per your request, the umbrella coverage has not been placed.”
 
Customer questions
Probably a day does go by where your agency is asked a question pertaining to an insurance matter. It could be a question such as:

  1. Do I need to let you know if my son is taking the car to college?
  2. Mom and Dad are in a nursing home, the house is vacant. Is there anything that I need to know regarding their homeowners insurance?
  3. Do I have full coverage for my wife’s ring under my homeowners’ policy?

Again, these conversations need to be documented…why? There is a good chance that the customer is not only documenting what you told them but they are also heavily relying on what you told them. Obviously be certain that you know the answer to the questions. Documenting back to the customer the essence of the conversation will confirm the discussion.

Offer limit options
Virtually every E&O class has advised agencies to get rejections on various coverages or limits provided. One very effective manner to do that is to offer a variety of options. Don’t just offer a proposal for a $1mil umbrella; offer multiple options. By the insured accepting the $1mil umbrella proposal, this then is confirmation of the rejection of the other limits offered.

Customer contact providing information
Let’s assume that you are completing an app with a customer and you ask them if they have been cancelled for non-pay in the last 3 years. They don’t know so they pledge to call you the next day with the answer. When they call you the next day, they advise you “no, we have not been cancelled for non-pay in the last 3 years”. This should be documented and confirmed back in some form of written communication. Once again, the goal is to build a file that contains quality documentation and while this takes time, it could make all the difference if an E&O claim were to develop.

Bottom line, if your agency is really looking to hold your customers accountable, documentation is the key. Getting a document with the insured’s signature is the best approach but that is not possible, then document the various conversations in your file and send some form of written communication back to the customer memorializing in detail the discussion.

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What’s changed in the world of Agents’ E&O?
by Curtis M. Pearsall, CPCU, AIAF, CPIA
President – Pearsall Associates, Inc., and Special Consultant to the Utica National E&O Program

Let’s go back in time to 1983. It was around then that some court cases addressed different scenarios of when and by whom an agent could be sued. In many respects, these cases helped shape the landscape for the types of plaintiffs we see with greater frequency today.
About 30 years ago, the typical E&O claim was made by an agency customer alleging the agency did not get the client the coverage he or she wanted. A customer suffered a loss and the agency was the logical entity with which to try to find fault. These cases were somewhat predictable and, in most situations, there was tremendous consistency with the types of E&O cases – whether it was a first-party or third-party claim/property or liability.
The allegations essentially boiled down to the position by customers that they had no coverage due to one or more of the following allegations: 

  1. the policy had been cancelled or non-renewed and the agent had not provided replacement coverage.
  2. the agency procured the wrong type of policy and the policy procured did not cover the loss the customer just sustained.
  3. a customer’s lack of awareness of applicable policy conditions or exclusions.
  4. the agency misstated the exposure on the application and the customer was unaware of what the agency had advised the company the exposure was.

Regardless of the reason, the customer had suffered a loss and insurance did not respond the way he or she hoped it would, so the customer was “out of pocket” some money. The agency seemed to be the logical entity to blame. In other words, the agent was the “deep pocket.”
Insurance companies sued agencies 30 years ago and continue to do so today, probably with greater aggressiveness. The main issue was often that the agency did not follow the underwriting guidelines and bound the carrier to a risk it is alleged it would not have written. Because this customer suffered a claim, the carrier looked to the agency to recoup those claim dollars.
What changed?
Court cases started to emerge that were being brought by other than the named insured. One of the issues dealt with the following question: was the coverage the agency failed to provide a compulsory coverage, such as workers compensation, or not? Two of the prominent court cases were brought in Massachusetts. While there have been many other court cases with somewhat similar fact patterns, these two really get to the heart of the matter.
The first case was Rae vs. Air Speed, involving the death of an individual employed by of one of the agency’s clients. The client’s request was for workers compensation coverage and benefits. In this case, there was no workers compensation coverage – a compulsory coverage – in effect. The employee’s estate attempted to make a claim directly against the agency, pursuing claims in negligence and breach of contract. The estate claimed the agent agreed, but failed, to procure a workers compensation policy for the customer. The trial court dismissed the claim on the grounds the agency owed no legal duty to the estate (or the deceased employee). That is, there was no duty to a party other than the insured.

This decision was challenged and the matter wound up with the Massachusetts Supreme Court. The court reversed the decision with two critical positions that remain in law today. It found that the estate could bring a direct action against the agent as a third-party beneficiary and, in essence, represent the deceased employee. The allegation was that because the agency did not procure the coverage, the estate of the deceased employee did not receive the benefits to which it was entitled.  

The court also found in its ruling that the estate could bring a negligence claim (a tort action) against the agent because the agent failed to provide coverage that was mandatory in the state. Thus, the court alleged that the agent should have provided the coverage – or at least had discussion with the customer on the issue of workers compensation because the coverage was mandatory. The court was stating it was an instance of, “You knew that I needed the coverage, why didn’t you provide it?”
Agreed and disagreed
The second case that modified the landscape was Flattery vs. Gregory, involving an auto accident where the agency’s customer had insurance, but not enough to cover the injuries caused. The agency customer was underinsured for the type of accident that occurred. The injured party in this case was not a customer of the agency; in fact, this individual had no relationship with the agency. However, this did not stop the victim from bringing a suit against the agency for failure to provide the agency’s customer –the party that was in the accident with them – with sufficient limits. The allegation was that the agency had agreed, but failed, to provide its customer with higher limits.
After the lower level court dismissed the claim, the case was appealed and was elevated to the Massachusetts Supreme Court. The court agreed with the decision in part, but also disagreed in part. The Supreme Judicial Court held that the contract claim was viable because the plaintiff was an intended beneficiary of that agreement. In other words, they had a claim of damages against the agency customer because they had suffered damages that were not completely paid for by the insurance that was in place.
The court held that the negligence claim against the agency was not viable because it was not realistic to think the agency could foresee any injured party relying on its customer to expect any greater coverage than the statutory minimum. The customer had coverage and, while it was only the minimum, the agency had met its obligation to the customer.
The difference in the cases:

  1. If the coverage is a required coverage, an injured third party can assert a negligence claim against the agency that should have provided the coverage.
  2. If the issue is not one of compulsory coverage, the only possible claim must be based on that there was an agreement between the agent and the customer that certain coverage at a certain amount was made but not honored.

Something to think about
These decisions will not stop a third party from bringing a negligence claim against the agent even when non-compulsory coverage is the issue. These claims continue to occur, but the odds are in the agents’ favor to prevail.
Who are some of these third-party plaintiffs alleging they have suffered a loss potentially because of an agency’s actions or lack of action?

  1. Insurance companies. While carriers continue to sue their own agents today, the courts are seeing suits where an insurance carrier that is not even one of an agency’s carriers suing an agency. This is driven heavily by various policy language that that looks to transfer liability to another party, such as “the additional insured.” When “errors” occur where the agency does not structure the coverage properly or issues an incorrect certificate of insurance, there is greater possibility that the agency could be involved in an E&O matter.
  2. Property owners, contractors, subcontractors and maintenance companies.
  3. Banks and credit unions are suing agents when these financial institutions suffer a financial loss and look to blame the loss on the agency, possibly for an incorrect binder that was issued. Among the allegations is failure to list the bank/credit union as loss payee.
  4. The courts are seeing cases where agents are suing other agents. A retail agent or a wholesaler that has been sued ends up is suing the retail agency because it’s believed that the retailer is the party at fault.

The E&O world is a different place than it was 30 years ago. Who knows what changes will occur in the next 30 years? That’s certainly something to think about.

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