errors & omissions claims it is important for you to understand the main reasons why errors...

Errors & Omissions Claims• It is important for you to understand the main

reasons why Errors & Omissions claims occur.

• Here are some of the most common causes for E&O claims:

Errors & Omissions Claims

• As a professional you must be aware of how important documentation is. Communication between yourself and the client may be the focal point of litigation. If you have failed to document your communications with the client, in 9 out of 10 cases you will be held liable.

Failure to Document


• Failure to properly explain policy provisions or unintentionally/intentionally making mistakes in completing an application for insurance can get an agent sued for misrepresentation. In the majority of cases, misrepresentation has been alleged, but there was no actual evidence of purposeful misrepresentation.

• In cases of intentional misrepresentation the agent can be found not only liable in civil court, but also found guilty of fraud. In some occasions, criminal charges will also be filed. Remember that no E&O policy will cover a case of intentional misrepresentation or fraud.

Misrepresentation


• These cases involve allegations of either a total lack of coverage, inadequate limits of coverage, or failure by the agent or broker to place proper or adequate insurance for the risk to be insured.

Inadequate Coverage


• The allegations in these claims state that the agent or broker failed to live up to the acceptable and recognizable standard of care, that is a generally accepted practice within the industry. Unfortunately, since the agency and brokerage business is not legally classified as a "profession," there are no established rules for professional conduct such as those established for the medical, dental, and other professions.

• For example, the California Insurance Code contains a section that states: "The purpose of this chapter is to protect the public by requiring and maintaining professional standards on the part of all persons licensed hereunder." However, they do not define professional standards, nor do they outline any set of standards. Unfortunately, this leaves the courts to make decisions regarding what constitutes "standard of care," based on the judge and jury‘s inclination at the time.

Standard of Care


• It is an accepted rule of law that once an agent or broker agrees to undertake a task such as the placement of insurance, they owe the insured a duty to place that coverage, if possible. In the majority of cases, the courts will hold the agent responsible and guilty of breach of duty for failure to fulfill this required. In the absence of or failure to place the coverage properly or to notify the insured within a reasonable time that they were unable to place the coverage, the agent/broker has breached their duty to the insured and can be held liable for the consequences of the failure to act.

Breach of Duty


• When an agent or broker agrees to undertake some task for an insured and then, through negligence or carelessness, fails to perform, the agent can be held liable not only for breach of duty but also for breach of implied contract. In another area, consider the situation where an agent exceeds their authority under their agent contract-and, as a result of this alleged breach, there is a loss in which the insurance company is named as a defendant. The company may pay the claim but then turn around and sue the agent for breach of contract.

Breach of Contract


• In this class of action, courts generally hold that as a result of the actions of the agent and the business relationship over a period of time, a "special relationship" developed. Courts hold that because of this special relationship, the agent/broker is held to a higher standard of care in handling the insured's business.

Special Relationships


Most other claims are classified as “Lack Of” or the Syndrome causes of loss. The most common claims issues stem from:• Lack of Action• Lack of Attention• Lack of Communication Lack of Concern• Lack of Consistency • Lack of Control• Lack of KnowledgeWhile all of these classifications fall into the general legal definition of "negligence," there is also liability assigned under "breach of contract.”

The "L" Syndrome


• Telling your clients only what is covered and not explaining policy exclusions. Studies have shown that customers are more interested in what is NOT covered rather than what is. You should always provide specimen policies and endorsements with proposals. This will help insured’s coverage. This also helps identify exclusions of concern. As a result, prospects may ask you to sell them additional coverage.

• Writing business in states that you are not licensed in. Know where your customer‘s exposures are and make sure that you have a license in all states where those exposures exist. You can't write business in a state in which you are not license.

Causes of E&0 Claims


• Selling clients what you want rather than what they need. Remember, failure to provide proper coverages in the No. 1 cause of E&O claims. Don't fall into the "renew as is" trap. Conduct an exposure analysis and offer the proper coverages. Get a sign—off on coverages they do not want.

• Giving clients the lowest limits. • Failing to document transactions.• Failing to understand the products you sell. When a client asks whether an

exposure is covered, can you supply an accurate answer? Know your coverages. Above all, be honest.

Causes of E&0 Claims

Claim Examples• Agent doesn’t review the policy and there is an exclusion that specifically

exclusion all or part of the insured’s services• Agent completes the application on behalf of the insured and misrepresents

the risk to the insurance company• Agent fails to place coverage in a timely manner• The insured has a claims and notifies the agent who forgets to notify the

carrier• Agent does not recommend a possible policy for an exposure the insured

faces• Agent misrepresents a carrier’s policy to the insured stating that an exposure is

covered when it is not.• Agent forgets to let the insured know there is 25% min earned clause on the

policy, insured goes out of business within a month of purchase of the policy and wants to cancel the policy but is now stuck with the 25% min. earned.

Claim Examples

An insurance broker placed professional liability for a marketing consultant. The policy excluded coverage for claims arising from any contest or sweepstakes.

The insured marketing consultant introduced a client to a promotional company, and the client worked with the promotional event company to establish a promotional contest. As part of these services, the promotional event company was expected to purchase prize indemnification insurance. When a contestant won the $1 million jackpot and tried to claim the prize, the client turned to the promotional event company for payment from the prize indemnification insurance policy. Since the promotional event company never purchased the insurance, it refused to pay. The contestant brought an action against all involved, including the marketing consultant, for failure to pay the prize.

First Claim Example

Claim Examples

While the marketing consultant had no direct involvement in the contest, they are a party to the action and require defense and coverage from their insurance. However, their insurer has denied the claim due to the exclusion for claims arising from contests or sweepstakes. The marketing consultant has brought an action against their insurance broker for failure to place proper coverage, and the insurance broker‘s professional liability insurer is providing coverage and a defense.

The insured marketing consultant claims that they were never told and were not aware of the contest exclusion. Additionally, it appears that the policy was not produced in a timely manner. The claim is currently being litigated.

First Claim Example

Claim Examples

EPL Insurance Company assigned defense counsel and paid for the defense of the claim without incident or reservation. At a mediation of the claim against Widget, approximately one year later, EPL Insurer's counsel inquired of ABC if there were any other policies applicable to the claim. ABC then forwarded the general liability policy to EPL insurer‘s counsel, who recommended to ABC to tender the claim to GL Insurer.

Second Claim Example

Claim Examples

Despite late notice, GL Insurer agreed to contribute to the defense of Widget with respect to those allegations that were covered under the Personal Injury Coverage Section of the GL policy (defamation, malicious prosecution and abuse of process). Subsequently, the Court granted a motion of summary judgment filed by Widget dismissing the non-employment claims (defamation, malicious prosecution and abuse of process). Thereafter GL insurer refused to cover any future defense costs or contribute towards any settlement. The Doe case settled a few months later for approximately $175,000.


Claim Examples

A recent claim situation demonstrates how complicated our business can become. While the names have been changed, the situation is real.An insurance agent, whom we will call ABC Insurance Agency, placed a range of coverages for one of their clients, Widget Manufacturing. The coverages included an employment practices liability policy placed with an insurer, whom we will call EFL Insurance Company, as well as a general liability policy placed with another carrier, whom we will call GL Insurer.


Claim Examples

Widget terminated one of its employees, John Doe, and brought an action against him to collect certain payments he had received during his employment. Doe then commenced an action against Widget alleging wrongful termination, sexual harassment, malicious prosecution, abuse of process, defamation, etc., etc., etc. The claim was passed to ABC Insurance Agency who, in turn, notified EPL, Widget's employment practices insurer.


Claim Examples

However, the case was not over. EPL Insurer then made a claim against ABC Insurance Agency asserting that ABC was negligent in not tendering the claim to all of Widget's insurers. EPL Insurer claims that if ABC had tendered the claim to the general liability insurer EPL would not have had to pay for the defense of the claim and Widget would not have had to pay the large deductible on the employment practices policy. Widget has not brought any action against ABC Agency. The claim between EPL Insurer and ABC Agent is currently being litigated.


Claim Examples

On the surface it seems that EPL insurer is going way overboard in bringing an action against ABC. Yet the case is open and its resolution will hinge on a number of narrow issues, including the following:

Does EPL have a cause of action against ABC? Surprisingly, EPL Insurer may have a cause of action against ABC due to their subrogation rights

Will GL Insurer be brought back into the case? It is possible that GL could be added back into the case.


Claim Examples

Can additional defense costs be allocated to GL insurer? Since the GL coverage would not respond to loss payments the primary damages issue in the suit between EPL and ABC will be allocation of defense costs..

Does late notice remove GL from any additional obligations? GL insurer may not be able to deny additional defense obligations regardless of notice requirements since there appears to be no prejudice.

Does EPL Insurer's attorney have any obligations? Some states have held that it is the attorney's obligation to ascertain all potential coverage for a claim, and EPL Insurer appointed the attorney. Therefore the attorney may have liability.


Claim Examples

Does ABC have an obligation to report the claim to all insurers? This could be a critical issue in the case between ABC and EPL. ABC Agency should be following the direction of the insured, Widget, but Widget's direction will be heavily influenced by ABC's professional advice. If EPL can establish that an industry standard exists that requires an agent to report all claims to all carriers for its insured, ABC will be liable.

Even when things go right they can go wrong. As extraordinary as EPL Insurer's case is, this case is far from over. Fortunately, ABC Insurance Agency's E&O cover will take care of the legal issues raised and provide a strong defense.


Claim Examples

A simple lack of attention to detail in the normal processing of daily business can have severe consequences. An insurance agent received a notice of claim and copies of a lawsuit filed against an insured client. The agent prepared a fax to the insurer and left it for an assistant to send out. The fax was put in the fax machine but did not actually go through, and the documents were put in a claim file and filed. The fax confirmation was never checked to ensure that the fax had gone through to the correct number.

Approximately 30 days later the insured called requesting the status of the claim. The agent discovered that the claim had never been received by the insurer and faxed the original claim notice and lawsuit. However, the plaintiff had filed a motion for default in the meantime, and the default had been granted in the amount of $1,250,000.

Third Claim Example

Claim Examples

The insurer immediately assigned counsel and filed a motion to overturn the default judgment. The motion was denied and the insurer and client have each brought an E&O claim against the agent.

This claim could have been prevented if the assistant had checked the fax confirmation thoroughly prior to filing the documents.

Third Claim Example

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