Other Issues

Company Service Centers
Employee Absence
Insurer Solvency
Life, Health and Financial Services
Mergers and Acquisitions
Premium Finance Agreements
Privacy and Fair Credit Reporting
Records Retention
Suspense and Diary Systems
Claims Made Policies

Company Service Centers

More and more agents are turning to service centers offered by the insurance company to alleviate handling of routine transactions by agency personnel. While this can be a time-saver for the agency, it also represents a loss of communication with the client and limits the opportunity for the agency to review the entire account for changes that should be made on other policies.

The Best Practices for Avoiding E&O Claims When Dealing with Company Service Centers

  • Carefully consider the cost of the service center against the loss of contact with the customer
  • Obtain a hold harmless from the insurance company for errors made by their service staff
  • Create a procedure to review activities handled by the service center when notified by the carrier
  • If possible, create an activity in your agency management system whenever a change is initiated by other than an agency staff member

Employee Absence

When an employee is out of the office for illness, vacation, etc., it is important to see that any incoming voice mail or e-mail is checked and that suspense items are viewed by someone in the agency. The use of direct dial phone numbers and e-mail has proved to be a convenience many agencies utilize, but it also requires a system and procedure to deal with times when an employee is out of the office for an extended period of time.

Insurer Solvency

Probably no other area of agency operations has the potential for catastrophic consequences as does the insolvency of an insurer represented by the agency. Not only is there a potential for an errors and omissions claim exceeding the agency’s limit of E&O liability, but the agency’s reputation within the industry as well as in the community is also at stake. Agency principals and personnel must understand the legal and ethical duties imposed by law and good business management principles.

Legal Duties

Short of doing business only with the highest rated insurers, there is little any agency can do to absolutely avoid its exposure to company insolvency. The Texas Supreme Court recognized this fact in the landmark 1987 decision in Higginbotham v. Greer, considered a victory for insurance agents. The ruling clearly established the following legal duties with regard to agency selection of an insurer and monitoring of financial condition:

    1. The agent has an ongoing duty to place coverage with a solvent insurer.
    2. The agent has an ongoing duty to reasonably monitor an insurer’s financial condition.
    3. The agent has a duty to disclose solvency information to the insured.
    4. The agency has a duty to protect the insured when the risk of insolvency becomes too great.

The best way agents can satisfy these duties and avoid financially troubled companies is to use several risk management tools to reduce the exposure. Loss control measures and good file documentation are the keys.

Placing Coverage

It is relatively easy to fulfill the duty of placing coverage with a solvent insurer. While it might be unreasonable to expect the average independent agent to have the time or expertise to conduct a detailed financial analysis of a company, sufficient information can be obtained from outside sources to make a reasonable determination of a company’s strength.

One of the most respected sources for insurer financial information is the A.M. Best Company. The Best website allows viewers to search for company ratings without a subscription.

Besides Best, insurer rating services are available from Standard & Poor’s Corp., Fitch Ratings, and Moody’s Investors Service , principally as a sideline to their main business of rating stocks and bonds. The rating provided by these services are based on strict financial analysis and somewhat less concentrated in the “A” range than Best’s ratings. In addition, Weiss Research is a popular rating service with consumer groups because it uses only publicly available data rather than figures provided by insurers.

The Texas Department of Insurance provides on-line company profile information (go to www.tdi.state.tx.us and select Look Up Company in the Consumer Area), including financial data, on admitted insurers. The Texas Surplus Lines Stamping Office provides financial summaries on non-admitted insurers.

With insurer financial rating information in hand, an agent can establish a minimum standard “no-questions-asked” rating for insurers to be used by the agency, and develop appropriate disclosure procedures when it becomes necessary to place coverage with an insurer that has a lower rating. Many agencies use a simple form which is attached to a proposal or quotation. (See Sample Letter #2.) The form advises the client that the company’s rating does meet the agency minimum standard, explains the company’s rating, and assures the client that the agency tried to place the coverage with a company that has a better rating but that none was willing to provide coverage. If a rated company did provide a quotation but at a considerably higher premium, the agency should include that information in the quotation and let the client decide.

Monitoring Solvency

The Higginbotham court said an agent should reasonably monitor an insurer’s financial condition during the term of a policy, but provided no guidance on what is “reasonable.” Industry periodicals are a source of up-to-date information on company solvency matters. The Best rating organization constantly monitors and updates its ratings. Revised ratings and industry developments are reported in weekly and monthly publications.

Keeping Insureds Informed

Having access to financial information is only half the chore. The agency must also react to the knowledge of a company rating change by identifying the clients placed with that particular company, if that becomes necessary. An important function for the agency’s automation system is to be able to produce a customer list by company upon demand.

When an agency learns that a company’s rating has dropped or is involved in some regulatory action because of a financial problem, the clients placed with the company should be advised. A simple disclosure form letter giving them the necessary information should suffice, inviting the client to contact the agency if they have any questions or want to move the policy to another company. See Sample Letter #1.

While sooner is better, it’s never too late to inform an insured about a solvency problem and recommend some course of action. Even when a company is in receivership and under a temporary restraining order, the agency can explain the options available to the insured.

The Best Practices for Avoiding E&O Claims When Dealing with Insurer Financial Positions

  • Establish a minimum agency Best rating and instruct producers and CSRs that coverage cannot be placed with a company that has a lower rating (or no rating at all) without obtaining permission from management
  • When coverage is placed with a company that doesn’t have the minimum agency Best rating, disclose this fact to the insured in writing (see Sample Letter #2)
  • Keep informed on company financial issues and regularly monitor the ratings of carriers you represent
  • Advise clients when the rating of a company has dropped below the agency’s standards and what, if anything, will be done to replace coverage (see Sample Letter #1)
  • Be familiar with laws and regulations and limitations of the Texas Property & Casualty Insurance Guaranty Association and the Texas Life, Accident, Health and Hospital Service Insurance Guaranty Association (the guaranty funds) 

Life, Health and Financial Services

Remember that E&O issues arise out of any line of business the agency handles and may be heightened whenever new products and ventures are undertaken by the agency. Be sure you have the infrastructure and expertise in place to handle ancillary products and services. Check on applicable licensing laws as well!

Mergers and Acquisitions

Certainly the insurance industry is not immune to the frenzy of mergers and acquisitions that are taking place worldwide. It is important to address E&O issues whenever you begin the process of merging with or acquiring another organization. Seek legal advice early on and during the entire process. For more information on E&O implications of agency mergers and acquisitions, read this article, "Beware of the Urge to Merge" by Lustig and Brown LLC, a New York-based law firm that serves as an E&O defense counsel. Also, refer to this Merger and Acquisition Checklist.

One issue that should be addressed is "tail" coverage to cover prior acts of the acquired agency. See "E&O Tail Coverage - How Long" for information on this subject.

Insurance carriers are also going through a great deal of merger and acquisition activity. This can impact an agency in many ways. Keep the lines of communication open and discuss any concerns you have with your carrier partners.

Premium Finance Agreements

Americans are used to paying for things on installments, and insurance is no different. Therefore, use of premium finance agreements must be addressed in the agency’s procedures manual. Some agencies have set up premium finance companies as a separate profit center in the agency. Special care should be exercised for agency-owned organizations.

The Best Practices for Avoiding E&O Claims When Dealing with Premium Finance Companies

  • Deal only with reputable finance companies
  • Disclose all charges to the customer using the proper forms
  • Comply with all state laws and regulations that deal with premium finance arrangements (see Premium Financing)
  • Be aware that financing a deposit or down payment may violate state law or the premium finance agreement
  • Examine all finance company contracts to determine if personal indemnity agreements are included that may require the agency to reimburse the finance company

Privacy and Fair Credit Reporting

The Financial Services Reform Act (Gramm-Leach-Bliley), signed into law in November 1999, has imposed new privacy laws for insurers, their agents, and others in the financial services industry. In addition, Texas has laws that deal with the gathering, use, and dissemination of private information obtained in the process of transacting insurance. It is important to be thoroughly familiar with the privacy issues contained in GLBA and the Fair Credit Reporting Act to ensure an agency’s complete compliance with these laws and surrounding regulations.

The Best Practices for Avoiding E&O Claims When Handling Private Customer Information

  • Become familiar with all federal and state laws dealing with your clients’ right to privacy
  • Establish a written policy for dealing with private information obtained in the underwriting process
  • Inform your staff that private information must be kept confidential—have them sign your privacy policy statement to acknowledge their acceptance and understanding

Records Retention

Federal laws require maintenance of records of any business, including an insurance agency. There are no laws or rules in Texas that require insurance agents to keep policy records for any particular length of time.

IIAT suggests as a minimum that you keep policy records for a minimum of 3 years past the expiration date.

Agents may decide to keep records a longer period of time as a business practice. However, what is kept is also discoverable in an E&O action, so caution should be exercised when determining the length of time to keep records that may not be required by law.

The Best Practices for Avoiding E&O Claims When Storing and Maintaining Records

  • Consider retaining commercial lines files longer than personal since E&O claims may take longer to develop
  • When in doubt, use a conservative approach

Suspense and Diary Systems

Most agency management systems automatically create a suspense following a transaction. This has greatly improved follow through in the independent agency, but there are still issues to be addressed.

The Best Practices for Avoiding E&O Claims When Using Suspense and Diary Systems

  • Use realistic dates when setting suspense items
  • Use only one diary or suspense system and require all staff members to use it, including producers and CSRs
  • Monitor suspense items to ensure that action was taken and not merely re-suspensed
  • Be sure to clear old suspense items since those with dates older than the current date are likely to be overlooked or create a backlog situation
  • Establish a written procedure for creating, following up and clearing suspense items

Claims Made Policies

According to statistics published by Swiss Re / Westport, the leading provider of E&O coverage for independent agents, E&O claims involving claims-made policies account for approximately 12 percent of all claims in its national E&O program. While the ratio of claims-made liability policies to all other types of policies written by independent agents isn't known, the number is likely considerably less than 12 percent. This suggests an agent is more likely to make a mistake leading to an E&O claim when handling the occasional claims-made policy. Why? Most agents have been exposed to claims-made policies in the professional liability area, including their own E&O policies, but many have not taken much time to study the mystifying features of such policies, including coverage triggers, retroactive dates, prior acts coverage, extended reporting provisions, claims reporting requirements and tail coverage. This fact makes the claims-made form a relative time-bomb for E&O claims against the agency.

The Claims-Made Policy – A Simple Concept

In its pure form, a claims-made liability policy provides coverage for a claim made against the insured during the policy period when the claim arises out of a covered wrongful act that causes harm to a claimant.

With this simple concept, it doesn't matter when the insured committed the wrongful act, it doesn't matter when the claimant suffered the harm, and it doesn't matter when the insurance company receives notice of the claim.

This differs significantly from an occurrence type of liability policy, which provides coverage for a claim if the injury to the third party occurs during the policy period. The occurrence policy covers the claim even if the injured party makes a claim against the insured after the end of the policy period.

The simple concept of a claims-made policy, however, is modified by features that make such policies troublesome for agents who don't handle them on a regular basis, including prior claims exclusions, retroactive dates, claims reporting conditions, and extended reporting period ("tail") provisions.

Prior Claims Exclusions. The insurer writing a claims-made policy is at a disadvantage if the insured has already committed a wrongful act that will later cause harm to a third party, since the policy covers any claim that is made during the policy period. This is a significant problem for the insurance company if the insured – or someone who works for the insured – knows that a wrongful act was committed prior to the inception of the policy. To overcome this problem, insurers ask very pointed questions during the application process about prior claims and incidents that might give rise to future claims. Some companies make the application a part of the policy with a provision that voids coverage if the insured makes a misrepresentation – intentional or otherwise – on the application. If the applicant reveals a prior claim or incident that wasn't already reported under a prior policy, the policy may include a specific exclusion to preclude coverage for that claim or a future claim that might arise out of the incident.

Retroactive Dates. A "retroactive date" is generally established when the insured first purchases a claims-made policy. When there is a retroactive date on the policy, there is no coverage for claims that are based on wrongful acts committed prior to that date. Subsequent policies – whether written by the same or another carrier – should use the same retroactive date, thereby maintaining coverage for wrongful acts committed by the insured earlier than the effective date of the policy but which are unknown to the insured at the inception date of the policy. When a claims-made policy contains a "retroactive date" that precedes the effective date of the policy, the policy provides "prior acts coverage." A policy that does not contain a retroactive date is providing "full prior acts coverage." If the retroactive date is advanced to a later date on a subsequent policy, the insured will have a gap in coverage.

Claim Reporting Provisions. The simple claims-made concept requires only that the claim be made against the insured during the policy period. Some claims-made policies also require the insured to report that claim during the policy period in order for the claim to be covered. This is called a "claims-made and reported" policy. A claims-made policy without this requirement is referred to as a "pure" claims-made policy, generally requiring only that the claim be reported "as soon as practicable." A policy that allows an extended time period after expiration to report claims (typically from 30 to 90 days) is referred to as a "modified claims-made-and-reported" policy. If a claim is not reported to the proper carrier within the specified time frame, the claim may not be covered. In addition, most policies define a "claim" such that it must be a written demand from a third party. If the insured knows a wrongful act has been committed, but the third party hasn't yet made a written demand, most policies permit the insured to report the incident as a "potential claim" and preserve coverage under that policy for a subsequent claim.

Extended Reporting (Tail) Coverage. When a claims-made-and-reported policy is canceled or expires, the insured loses the right to report a claim even if the claim is made against the insured prior to the termination date. With a "modified claims-made-and-reported" or "pure" claims-made policy, the insured has extra time to report a claim made during the policy period. But all claims-made policies require that the claim be made against the insured during the policy period, thus providing no coverage for a claim made after the policy terminates without being renewed or rewritten on the same terms and conditions, even if the claim is based on a wrongful act committed during the policy period. Claims-made policies, therefore, contain a provision that permits the insured to pay additional premium to gain the right to report a claim made against the insured after the policy terminates. This extended period of time to report a claim is called "tail" or "extended reporting" coverage. This right must be exercised in accordance within a limited time-frame and conditions shown in the policy. Most policies allow the insured to purchase tail coverage when either the insured or the insurance company cancels or declines to renew, but some policies allow that right only when the company cancels or declines to renew.

The Best Practices for Avoiding E&O Claims When Selling and Servicing Claims-Made Policies

The unusual features described above create E&O flash-points for agents who sell and service claims-made policies. These flashpoints can be addressed by using the following checklists for each step of the selling and servicing process: