Does Your Agency Have a Procedure for Handling This?
Curtis M. Pearsall, CPCU, AIAF, CPIA
President – Pearsall Associates Inc.
Consultant to Assurex Global and E&O Plus
Most agency procedures include many of the key areas that are extremely important to an effective loss prevention program. Issues such as documentation, the use of exposure analysis checklists, memorialization of client acceptances and rejections of coverage and policy checking. There is however, one area that does not seem to get the necessary level of attention yet over the last number of years, it has been one of the leading causes of E&O claims.
The root cause of this issue starts with the agency looking to replace coverage for a client at renewal time. Possibly, this was necessary because the client was looking to save money or maybe, the agency was remarketing the account in hopes of getting better terms. How often does this happen? In many agencies, multiple times every single day!
So what is the issue? Let’s take the scenario that the agency remarkets the account and receives what appears to be an upgrade in coverage with very favorable pricing terms. The agency presents the client with a proposal and it is agreed to move the coverage to the “new” carrier. At this point, the client is under the impression that the coverage is an upgrade over what they previously had and maybe for the most part, the coverage is an upgrade. However, somehow some areas where there was a reduction in coverage were not identified by the agency and thus not brought to the client’s attention. As “fate would have it”, the area where the coverage was reduced was where the underlying claim occurred.
The E&O Plus program has experienced a significant number of claims with this type of fact pattern. The claims involved a host of areas including the definition of the named insured, the deductible for sub-limit coverages, a change in the retro date on a professional liability policy and the scope of covered perils, just to name a few. In a recent case, the replacement property coverage was written on ACV while the expiring coverage was on a replacement cost basis. Unfortunately, the agency did not catch the difference and this did not bring it to the client’s attention. The client is now not going to receive the funds necessary to rebuild the structure.
The key issue when moving the account from Company A to Company B is to have a process / procedure to compare the coverage and note any differences, especially the reductions. These differences should be confirmed in writing. Many agencies include this information as part of the proposal when they address areas where the coverage was improved. Failure to advise the client of the differences would lead the client to believe the coverages were at least the same. At the time of a claim where you advised the client that they don’t have the necessary coverage, the client will probably say they wanted to save money, but were not looking to give up coverage. Bottom line, the client may take the position they never would have approved you moving the account if they were aware coverage was being reduced.
The best approach is to take the carriers you are considering and put the details on a spreadsheet, noting the various pertinent issues. This will take time, but it will be time well spent. On the spreadsheet, it is crucial to note the differences because simply moving the account and not advising the client of the differences could cause a problem down the road. Some agencies share this spreadsheet with the client and bring to his or her attention the detail the client needs to know. Most importantly, the client sees the differences and can make an educated decision. At a minimum, the reductions between the expiring policy and the other carriers you are considering should be brought to the client’s attention.
When the client has made their final decision, the client’s signature should be secured noting which decision was made. This documentation will be vital if a claim occurs and your client finds out they didn’t have the coverage they thought. Your client may choose the lower price with the lesser coverage but if that does occur, your agency should have a defense should a problem occur and the client’s decision is in writing.
From time to time, agencies will find it necessary to move coverage from the standard market to the excess-and-surplus-lines market. In these situations, the differences can be significant. This issue is further compounded by the fact that it is likely the wholesaler is not providing all of the coverage that was requested. Therefore, be sure to review the E&S proposal, comparing it to the prior policy and to the coverages requested. Identifying the differences is up to your agency to uncover.
When coverage is being switched from one carrier to another, agencies should be doing the necessary comparison. This involves identifying the differences, bringing those differences to the client’s attention and getting his or her written sign off. This is a great way to keep this issue from becoming a potential E&O problem in your agency. Does your agency have such a procedure?
E&O Plus is offered through Assurex Agency, Inc., a subsidiary of Assurex Global. Any redistribution, publication or sharing outside of individual E&O Plus insured firms is strictly prohibited without written consent from E&O Plus.