Errors and Omissions, more commonly known with agents and producers as E&O, is a conversation that usually leads to bellowing about a seemingly endless premium payment and an “it won’t happen to me” mentality. This is where a shift in the paradigm of agents and producers’ mind-set needs changing.
E&O insurance is, as the name implies, insurance that covers professionals or quasi-professionals for mistakes of professional judgment (or lack of judgment) that injure their clients/customers. E&O coverage generally includes a duty to defend claims and attempt to defeat or settle them without trial. However, in the event your E&O coverage has lapsed, you could be personally liable for any negligence or malpractice on your part. Before going further, let’s first break down key terms pertaining to E&O.
Key Terms to Understand
In general, there are two types of E&O policies: Claims-Made or Occurrence. A Claims-Made policy will cover claims that occur while the policy is in effect. Coverage starts with a lower premium which increases as the liability increases. If policy holders wish to extend the amount of time you can report a claim after the policy expiration date, they will need to purchase what is known as a “tail coverage” or an “extended reporting period.”
Occurrence coverage is a lifetime coverage for the policy period. Meaning if there is a claim or suit against you, as long as you are insured at the time of the incident or treatment that resulted in the claim or suit, this policy will still apply. The premium will also remain the same every year and each will be secured with its set of limits for whichever option was chosen (i.e. $1 million/$3 million).
Knowing what a retroactive date is and when it’s applicable is key knowledge any agent needs to be aware of. A retroactive date defines how far back in time a loss can occur for your policy to cover your claim. In the event a claim happens prior to your retroactive date, your E&O policy will not provide benefits. A retroactive date is a feature of Claims-Made policies that determines whether your policy covers losses that occurred in the past. If damages happened before this date, any legal judgment, settlement, or attorney fees will be your responsibility. To provide a continuous safety net, you must avoid any lapse in insurance coverage.
Important consideration: Dropping your professional liability insurance policy for a few days or weeks can have damaging consequences many years in the future if an incident with an insured occurs during the gap. These costly expenses might fall entirely on you instead of your insurance company.
Another area of consideration is Defense Outside the Limit. It is imperative to understand this option clearly because this will impact coverage under your E&O policy. Defense Outside the Limit, also known as Claims Expenses Outside the Limit, provides substantially more protection than Defense Within the Limit. The difference is how the expenses incurred defending you against any E&O claim impacts your limit and what you have available to pay in damages, if any, when the claim is resolved. Under either option, any costs incurred defending a covered claim will be by the E&O policy after any deductible is paid, but with Defense Outside the Limit option the payment of these costs will not reduce the limit of liability you have available to pay damages that may be awarded to a plaintiff. If you choose Defense Within the Limit, any costs defending the action will reduce the amount you have available under your policy to pay damages.
Examples: Good and Bad
An agent recently found himself in hot water with a client. Here, the agent attempted to obtain coverage for the client’s home but failed to adequately communicate that coverage was not available. Following a hurricane, the client’s roof was destroyed. Naturally, the client submitted a claim to the agent, who then stated that no coverage was bound on the home. With this unfortunate news, the client brought suit. In this case, the agent was smart and knew in order to protect himself from being personally liable in any potential lawsuit, he should purchase a tail on his Claims-Made policy. This agent’s foresight was well worth it. He purchased a three-year tail and protected himself and his agency.
The next example is what happens when an agent’s E&O policy lapses. Upon working on an E&O renewal, it was discovered that the dates on the agent’s E&O policy were not aligning. It turned out the agent had allowed their E&O policy to lapse and unknowingly now faced personal liability should any claim arise. Unfortunately, lapses like this are not uncommon. Do not let you or your agency have a lapse in coverage.
Events Triggering a Claim
For a plaintiff to be successful on a claim against an E&O policy, they will likely need to prove negligence on behalf of the agent. Negligence is a type of legal action, also known as a tort. The law requires people to conduct themselves in a way that conforms to a certain standard of care. If you fail to conform to that standard, you can be liable for the damages. Sometimes, the standard of conduct requires a person to act. The omission of an act can give rise to a negligence claim.
What is my duty?
As an insurance agent, your primary duty is to use reasonable care, diligence, and judgment in selling insurance policies. If you claim to be a “specialist,” you may be held to a higher standard of care. You have a unique relationship with your clients which requires you to sell appropriate coverage. Each state has its own specific laws pertaining to the duties of an insurance agent. The following are some examples of “land mines” that may amount to negligence in your state:
Failing to sign up a client for requested coverage available in the marketplace
Failing to pass on notification of a client’s claim
Failing to notify a client that their policy is about to cancel; this can occur when the insurance company or agent did not provide the required legal notice to a policyholder due to non-payment or other reasons
Failing to notify a client of an insurer’s financial problems (i.e. insolvency)
Failing or omitting to provide underwriting all details of a risk
Misrepresentation of insurance coverage to a client
Forgetting to add coverage
Failure to obtain, add, or accurately identify additional insureds or loss payees
Incorrectly writing a risk
Ways to Protect Yourself
If you have a lapse in your E&O coverage, as an agent, you face the serious reality of exposure to lawsuits that could leave you losing everything you own. This is especially prevalent in plaintiff-friendly jurisdictions like Georgia, where the courts have handed out nuclear verdicts.
Statistics have shown that one in twelve agencies would report an E&O claim incident. To avoid being another statistic or victim of a hefty verdict, agents and agencies should adopt a “best practice” approach. Some of these practices may include:
Create a uniform practices and procedures manual
Train all employees in office practices and procedures
Continually review and update practices and procedures as necessary
Consider conducting periodic audits to ensure adherence to agency practices and procedures
Provide frequent training for agents
Maintain adequate documentation and log notes on clients
Record calls (depending on your state’s laws)
Hire the right people
Lead by example in maintaining a culture that always promotes professionalism
In conclusion, having the correct E&O coverage is important for your business. Equally important is avoiding the “land mines” mentioned above. This can be accomplished by creating uniform practices and procedures that all personnel in your agency follow. Always track your E&O coverage to prevent any lapse from occurring. The risk is not worth the reward.
If you have questions about your own E&O coverage, do not hesitate to consult with a qualified insurance professional or your E&O provider. Members of Pacific Crest Services receive many services to help run their agencies, and compliance support is part of those offerings.
To explore the possibilities of becoming an independent agent within an alliance—and if you’re a licensed insurance agent with 12–18 months of experience—visit Pacific Crest Services to set up a confidential discussion, or call us now at 888-938-4197 to speak with one of our sales team.
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