Insurance Community University Insight on Errors & Omissions: A Lesson Waiting to Be Learned 1 The webinar will begin shortly. There is no audio at.

Insurance Community University

Insight on Errors & Omissions:A Lesson Waiting to Be Learned

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The PowerPoint presentation is also available under ‘Materials’.

You will receive the course number for your state near the end of class.

Use the ‘chat’ window for questions on the content.

100% Participation in Polling Questions is required to receive credit for this class. Even if you do not intend to receive credit, please participate in the polls.

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Welcome to your Insurance Community University

• All of you are currently on mute – Un-mute your own system– Telephone Option

• Select Telephone on your screen• Dial in the PIN number so that your number becomes active

– Microphone and/or Speaker Option• You can use this option if you have a headset that you use with

your computer

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Audio

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Participation & Chat Window

• You will receive information from the monitor via the ‘Chat’ window. – Please locate window in the control panel

• Q & A is welcomed during the presentation and at the end of the presentation

• You will find the question box on your control panel– Write your question in that box and send it to the presenter/organizer

• The presenter will take those• questions in the order submitted

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DOI Requirements

• When you see a slide with the hand up symbol, touch the “hand” icon on your control panel– Click ONCE only

• If you do not raise your hand, the monitor will be in contact with you in the chat box

• If you are in a group, the designated proctor is responsible to make certain you are all in attendance at all times

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= Hand is down

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Polling

• Throughout the class we will be conducting periodic polls

• We need 100% participation on the polls• The polls are intended to check

participation but also to create discussion topics throughout the presentation

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Forms To Complete for CE

• After class ends– Return attendance form– Proctors – return your form to email

address• Email address is in chat window or in

email sent to you today

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DOI Requirements

• We will file your hours with the DOI after the completion of this webinar and we have received the attendance form.

• You have 48 hours to return the form• You will be sent a Certificate of

Attendance/Completion by email. Please retain this for your records for five years.

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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 – 2012 All Rights Reserved

www.insurancecommunitycenter.comLaurie: 714.803.5830 [email protected]

Marjorie: 714.206.9583 [email protected]

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Your Instructor Today

Al Parizo AFIS ACSR

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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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Tips on How To Avoid Errors and Omissions

Don’t make mistakes

Don’t forget anything

Don’t have uncovered claims

Don’t get suedOnly write for clients that remember and follow what you sayWrite everything down

Keep everything

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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

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Avoiding Errors & Omissions

P •Procedures

R •Responsibility

I •Implementation

D •Documentation

E •Education

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Procedures

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Polling Ahead

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Procedure Manual

Well written•Says enough to provide guidance to staff•Does not put in writing rules that are not or cannot be followed•Must provide ….. coverage

Up to date

•Laws and regulations change•Procedure manual must change

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Procedures (Exception = E & O)

Must be written

Must be communicated to ALL staff

Must be followed by ALL staff members

Must be monitored for compliance

Must be updated

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The Process & Procedures

Qualify Risk Assessment

Company Guidelines

Sell Promises, Promises

38.58% Frequency= Producers

ProposalMatch

Coverage Request

Extra Contractual

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The Process & Procedures

Application Complete Accurate

BindersCertificates Authority COI = 25% of

claims

PolicyMatch With

App / Proposal

Check the policy

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The Process & Procedures

Endorse Change

Per Request Timely

Renew Within Guidelines Update and Review

Cancel Proper Notice Notify “all” required

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Proposals

Any difference between what’s told and what’s sold?

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Polling Ahead

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Proposals

Update master

proposals with

specific account

and policy informatio

n

Include disclaimer language

on any proposals

Include an expiration

date or time limit

on all quotes and proposals

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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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Al’s Rule

• Signed or initialed and dated acceptances of proposed coverage avoids my rule of inverse ratio.

• The greater the financial harm, the lesser the memory any client has of discussion of the coverage.

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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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Polling Ahead

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The Proposal Said TOO Much

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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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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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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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Applications

• Need to be reviewed with the client• Need to be complete• Need to be signed by the insured• Professional liability and other

“Warranty "applications must be entirely completed and signed by the insured

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Who filled it in?

• Broker partially completed EPLI app.• Sent to insured for review and signature.• Block checked “no” for knowledge of

incidents that could give rise to claim.• Proved not true when claim submitted.

Since application is warranty, coverage denied.

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The Argument is Expensive.

• Insured maintained Broker prepared application and they merely followed instructions to sign where indicated.

• The broker countered that they asked them to review it before signing.

• How could the argument be avoided?• Remember, defense for our E&O is

subject to deductible and policy limit.

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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

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Example: Binding Authority

• Agency Agreement authorizes binding up to $500,000 for Property in protection classes 1-5.

• Agent binds newly acquired location for $1,000,000 on Fri. PM with intent to call in on following Monday.

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Murphy’s Law

• Property burns to total loss on Sunday.• Binder $1,000,000. Authority $500,000.• What do you think the Insurance

Company owes?• What are complications for the agent

and E&O policy?

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Changes

• Obtain authorized persons• Confirm with main contact in writing• If adding or deleting coverage

– Confirm in writing– Notify authorized party of consequences

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Polling Ahead

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What’s In A Name?

Married couples and their insurance policies

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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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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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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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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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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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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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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

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That’s It For Today

Come Back Tomorrow – Same start time / Same log in

MUST attend both sessions for credit!

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Welcome Back to the Errors & Omissions Class

We will be starting in a few minutes

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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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Polling Ahead

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You Did EVERYTHING Right!

It was a BIG account

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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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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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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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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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Outcome

• 8 years of litigation• E & O claim filed against agent• Agency lost• Court ruled in favor of the insured

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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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Polling Ahead

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Responsibility

Regulation

Relationships

Requirements

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Define The Terms OrWho Are We, Really?

• Agent• Broker• E & S Broker / Wholesaler• MGA• Or a combination

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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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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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Read Your Agreements

• Do you protect the wholesaler?• Does the wholesaler protect you?• Is it mutual?

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You Didn’t Mean To Do It

But you bound the account

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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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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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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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Result

• The insurance carrier did not treat that as a material misrepresentation

• Both carriers paid on a “contributory” basis

• What if the 500 ft distance was on a “warranty” application instead of ACORD?

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Material Misrepresentation

• Agent submitted ACORD application for property insurance on tire sales and service.

• For prior loss experience, attached the hard copy loss runs from prior carrier.

• As is customary, Acord app had agent’s signature and no other.

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Is this “Material”?

• When fire claim submitted, adjuster learned there had been earthquake damage one month prior to effective date.

• No EQ coverage on prior or present policies so did not show on loss runs.

• Coverage denied due to misrepresentation.

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What do you think?

• Look at wording of question on Acord Applicant Info Section.(I’ll switch screens to show you)

• Does it meet that standard?• Since agent’s signature is the only one

on the application is there a problem here?

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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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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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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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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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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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Polling Ahead

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The Client Asked You For Full Coverage

And It Burned

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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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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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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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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 83

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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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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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California Rules for MVR

• DMV information may only be used for the purpose for which it was approved by the department. It may not be combined with any other information.

• DMV information must be destroyed when it is no longer needed for the reason for which it was originally requested. The method of destruction must be in a manner that it cannot be reproduced or identified in any physical or electronic form.

• Security measures must be in place to prevent unauthorized access to any DMV data

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Implementation of Procedures

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Polling Ahead

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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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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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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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Documentation

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The Old Way The New Way

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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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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

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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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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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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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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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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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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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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.

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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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Upcoming Classes

8/24/11 Property Valuation9/14/11 Manufacturers - Insurance

Coverages That Are Unique and Essential to Consider

9/20/11 Property Valuation 10/12/11 Construction Contract - Five Key

Issues You Need to Know

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Upcoming CE Classes

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10/10 Directors & Officers Liability

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9/18 Wage & Hour Issues9/20 Landscapers10/17 Moving & Storage

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