INSURANCE AGENTS AND BROKERS ERRORS AND OMISSIONS/PROFESSIONAL LIABILITY INSURANCE UNDERWRITING CONSIDERATIONS

(March 2023)

RISK IDENTIFICATION

Named Insured Activities

The first step in underwriting an insurance professional is identifying the exposure. This begins with determining who the named insured is and what the named insured does.

When there are multiple named insureds, each must be identified along with their activities. In addition, it is important to determine the relationships among those named insureds.

The application should provide all of this information. If not, a supplement should be obtained.

The first distinction is whether agents are primarily Property and Casualty or primarily Life, Health and Benefits. Many agencies do both, usually specializing in one area.

The next is personal lines vs commercial lines. An agency that specializes in one or the other will write the other as an accommodation for its existing clients but stays focused on one area for prospecting.

Another distinction may be industry type. Some agents write only one type of industry such as construction or recreation. They will write other industries as accommodation but focus on their specialty industry in prospecting and training.

Some agencies specialize in a particular size of premium. Small premium specialists can produce profit by generating significant volume and using efficiencies in automation along with company underwriting and claims handling agreements. Other agents work only with higher premium clients who can generate a certain minimum amount of revenue for the agency. This agency will often provide extra services and work with similar minded insurance carriers.

Other agents operate as generalists within their particular geographic area.

Some producers within an agency may act as consultants. These represent a different type of exposure that must be carefully reviewed because consultants provide services that may be outside of coverage provided within the professional liability policy.

Employees/Independent Contractors

The type of sales associate is important. Some firms have multiple agents who are acting as independent contractors while others have employed associates and many operate with a combination. A copy of the contract between independent contractor and the firm is important. The contract should stipulate the services provided by the firm and the expectation of the agent, especially regarding the agent maintaining his or her license.

PROFESSIONAL QUALIFICATIONS

Insurance and brokers are considered professionals, so they are highly accountable to the public. Their practice is regulated by a system of state licensing. Continuing education (CE) for license holders is common in most states but even without that requirement, it is important for the agency to have regular continuing educations requirement for their agents, brokers and other staff. Many agents pursue designations through the Institutes, National Alliance, The American College of Financial Services and other nationally recognized insurance education organizations.

PROCEDURES

A procedure manual is key to controlling professional exposure losses. The manual should be updated regularly and required reading for all employees. This manual should explain a consistent manner in which files are maintained and how client activity is conducted.

Documentation or record keeping, including notes and correspondence, is of the utmost importance. Comprehensive and continuous data on client contact is vital. Good records, including and E&O checklist can assist in avoiding or reducing litigation costs.

Periodic staff meetings devoted entirely or in part to procedures and loss prevention measures and concerns, maintain awareness of the problem and attention to detail that might, otherwise, dissipate in the course of the work routine.

Insureds should periodically review their procedures and other risk management programs. Trial and error and the experience of others strengthen internal guidelines (keep an eye on court decisions). While insurance protection is the ultimate backup, the publicity and expense in time and money associated with a lawsuit are unwanted. Advice and information provided by the insurer in this connection, as well as by associations, can be most helpful.

LICENSE MAINTENANCE

A person or persons should be in place with responsibility to maintain a log of licenses and monitor the status of renewals. No individual should be allowed to provide any professional service unless his or her license is current.

Close attention must be paid to indications that an applicant firm or any of its associates has had a license revoked or has been subject to disciplinary action by the state licensing board or other regulatory body. If there have been such occurrences, details are required, including dates, fines paid, period of suspension, and description of activities that led to the disciplinary action or license revocation. It may be important to also develop information on what changes the firm may have made in light of any serious disciplinary action (personnel changes, different procedures, etc.)

LOSS HISTORY

Information on past claims and awareness of situations that could lead to claims is reviewed carefully and has a decided bearing on acceptability for coverage. The type, frequency and severity of claims experienced by a given operation must be evaluated carefully. Since the protection of a policy extends to a number of individuals, their combined claim experience must be examined.

POTENTIAL LOSS SITUATIONS

Example: Andrea runs her own agency, representing nearly a dozen insurance companies. She tells a new client that she will bind insurance on his property immediately. A fire seriously damages the property before Andrea notifies any of her companies that she has bound coverage; so, the client was unprotected. Andrea's client sues her because of her failure to secure promised coverage.

There are a variety of situations that have resulted in serious financial consequences to agents and brokers. The following are some examples:

• Failing to prepare the policy properly (especially typographical errors)
• Failing to renew a policy through oversight when coverage was supposed to renew automatically
• Failing to provide the coverage the insured needs or requested
• Failing to notify the client concerning coverage (or lack thereof) on a timely basis
• Failing to periodically review a risk in order to maintain adequate insurance
• Placing insurance with a company generally known to be insolvent or not authorized to operate in the state
• Failing to transmit information to the insurance company resulting in coverage being denied
• Misrepresenting or failing to clearly explain the insurance policy’s terms and conditions
• Giving advice outside of the agency's area of expertise
• Failing to tell the insured that the policy is cancelled
• Failing to exercise the specific skills the insured reasonably expects in order to obtain the best coverage available for a reasonable premium according to insurance industry standards

Most agents know that their acts or omissions may create a third-party liability obligation for the insurance company. Agency law clearly establishes that, in cases where a principal becomes liable to a third party because of an agent’s mistake, the principal may, in turn, hold the agent liable for that loss. Liability to the company may arise from a variety of circumstances. The following are some examples:

• An agent violates the company's instructions or rules specified in the agency contract.
• An act that extends beyond the scope of agent's authority.
• The agent or broker fails to adequately investigate or inspect a risk.
• The producer misrepresents the facts about an insured resulting in the company unknowingly accepting an ineligible risk.
• The producer fails to share information that denies the company the opportunity to accept or reject a risk that has been substantially altered.

APPLICATION

Agents and Brokers Errors and Omissions/Professional Liability insurance applications usually require the following information:

Name and address	Policy limits and deductible options desired	Inception date	Optional coverages desired
Non-employee solicitors to be added	Business conducted in addition to insurance	Entities that the named insured owns or controls to the extent of 10% or more	Agency principals’ names and insurance experience
Annual personal and commercial lines written premium	Types of business written in the current year and projections for the future	Premium volume and commission income from life and health and pension business written	Estimated number of accounts
Number of licensed and unlicensed staff	Memberships in associations	Training and professional courses any staff members have completed	List of largest companies contractually represented
Whether the entity has adopted automated processing	Records of errors and omissions losses or claims and whether additional such claims are expected	Previous errors and omissions carriers

The applicant's signature on the application does not require that it purchase the coverage. However, signing the application creates the basis for a policy to be issued based on the information and statements it contains being true.