Running a successful insurance agency is akin to putting together a winning sports team. You want to get the best athletes available and ensure that those players perform at a high level by implementing a well-conceived regime of skill development. But athletic prowess, by itself, is not enough. Nothing is more frustrating than seeing an undisciplined player get penalized during a game for failing to follow an established rule. In the sports world, these errors routinely end up changing the outcome of the game.
Likewise, in the insurance arena an agency can have great producers and a solid marketing plan in place, but if key agency processes aren’t being followed, the resulting E&O claim can be quite painful.
Consider the following:
An agency has specific procedures in place for the issuance of Certificate of Insurances (“COI”). Its manual provides that, if a COI is given for an additional insured, the agency must make sure the carrier is notified and that an endorsement is issued for the certificate holder. A well respected CSR is faced with multiple COI requests and, due to a heavy workload, delays notifying the carrier of one of the issued COIs, then forgets to follow up. A lawsuit is filed against the certificate holder after an accident on a job site. The certificate holder demands a defense from the insured’s GL carrier, but the carrier declines to defend or indemnify because the certificate holder was not an insured. A claim is then made against the agency. Total Cost: $180,000
An agency is contacted by a customer for homeowners coverage. The agency’s manual requires that all files must have a completed application. The producer inputs information into the carrier’s web portal for a quote with a plan to update the inputted information as needed upon receipt of the application and the policy is bound. Several months later a fire occurs and the agency cannot locate the application. The carrier pays the claim but then sues the agency on the theory that the agency failed to follow its own guidelines by not getting an application, insisting that it never would have written the policy had the correct information been relayed. At deposition, the producer has no choice but to admit that the procedure was to get the completed application before binding coverage and has no explanation as to the whereabouts of the missing application. Total Cost: $500,000
A producer procures coverage on multiple commercial properties for a longtime client. Subsequently, at the client’s request, the producer asks the carrier to remove property coverage for one of the properties as it was to be leased to a tenant. The agency has a “best practices manual” which states there should be a deletion/reduction request in writing, but the producer did not get one (in fact, very rarely did this producer get anything in writing). A subsequent vandalism claim occurs on the property, which the carrier denies due to the lack of coverage. The client then brings suit against the agency for the uncovered vandalism loss and maintains that the property was supposed to have coverage. Total Cost: $470,000
An agency procures commercial auto coverage for a client whose principal is “John Doe, Sr.” The agency manual specifies that an insured’s complete legal name must be entered on all applications. The application has a list of individuals who would be covered by a Broad Form Drive Other Car Endorsement. The producer lists “John Doe” as a covered person. Subsequently, the principal’s son and former employee, John Doe, Jr., is involved in a car accident. He seeks coverage under the policy on the theory that he was covered as “John Doe,” The court ultimately agrees that, due to the “ambiguity” as to who the intended insured was, the carrier must cover John Doe, Jr. The carrier pays its limits and then seeks this sum from the agency for causing the ambiguity. The carrier asserts that the agency violated its own guidelines in not using the legal name of the insured. Total Cost: More Than $1 Million
While mistakes happen (after all that is what insurance is for), there are simple ways an agency can reduce claims arising from procedural errors.
- The “Four eye” approach. Before any policy is issued, have another staff member do a review to make sure nothing was missed. Yes, this can be time consuming but the payoff can be substantial.
- Random audits. Select a number of files to review on a periodic basis. Do not limit this audit to new or junior employees. We often see that the more senior staff members are the ones who forget to follow the rules.
- Periodic refresher sessions for all staff members. While these can be dry and boring, try to make them more appealing. Try a “game show” type of approach in which “contestants” get prizes for answering questions correctly. This can be a great team building exercise as well.
- Checklists. Have a checklist that is used every time, by every staff member – NO EXCEPTIONS. There is nothing more demoralizing for a staff member to find out that the rules only apply to certain people.
- Workload management. Make sure that staff members are not overloaded. It is much harder to follow expected procedures when overburdened. That’s when all of us start cutting corners.
- Audits. Retain an outside auditor to come and review the agency from top to bottom. While these do come with a price tag, pull out the Declarations Page of your E&O policy and compare the cost of an audit to having to pay your deductible on even a single E&O claim, not to mention the premium increase that could result from a serious claim and the loss of customer confidence.
Procedural errors have proven to be just as costly as substantive mistakes, particularly when the plaintiff is able to highlight the agency’s failure to follow its own rules. In each of the examples above the agency had good procedures in place and the agency principals were confident that those processes were being followed. It was only when a penalty flag was thrown, i.e., an E&O claim came to light, that the agency realized its rule book was being ignored.
Legendary wrestling coach and Olympic gold medalist Dan Gable once offered a simple path to success: “If it’s important, do it every day.” He’s right. The ramifications of failure underscore the importance of having your team in full compliance with established agency procedures. Every day.
Ellen McCarthy is a vice president and claim expert at Swiss Re Corporate Solutions and teleworks out of the Overland Park, Kansas office.