Clearing up Six Misconceptions
About E&O Coverage
By Bob Porten, Account Underwriter,
Utica Mutual Ins Co.
If you have never had an E&O claim
(and hopefully you never will!), you might have some
misconceptions about E&O coverage and E&O claims. We’d
like to clear up six that we come across frequently:
Misconception
#1: My E&O policy is another resource I have available
to offer my clients in the event they have an uncovered
loss.
Reality: Your
E&O policy is a “liability” policy. If
you have an incident or a legal action against you that
could be a claim you need to report it to your E&O
carrier. After inquiry/investigation of the facts your
E&O carrier may determine that you were not liable,
and deny the claim. In fact, you need to keep in mind
that some claims against agents may generate defense
payments (remember, your E&O policy is there
to indemnify your agency, not the third party) but
most claims are closed without a loss payment. Why? Well,
in some cases the underlying carrier may have wrongfully
denied coverage. Also, consumers play a bigger role than
you may think in making sure they have adequate protection
for themselves. Other reasons include good documentation
on your part as well as a number of defenses that support
the agents’ role in the insurance transaction.
(Did I mention good documentation?!) Bottom
line is that if you have a claim or incident that could
become a claim, you need to report it to and work with
your E&O carrier so they can investigate and determine
liability. But don’t assume that your agency is
liable for every uncovered loss a client may have.
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Misconception
# 2: If my client has an uncovered loss, I can pay
for it and then turn it into my E&O carrier for
reimbursement.
Reality: Most
E&O policies spell out your duties in the event of
a claim. This includes reporting it as soon as possible,
cooperating in the defense and not assuming any obligation,
making a voluntary payment or incurring any expense --
except at your own cost. If you admit liability or make
any voluntary payments you may prejudice the E&O
carriers ability to provide an adequate defense. Don’t
put your agency or your E&O coverage at risk, you
want your E&O carrier on your side so work with them
from the start.
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Misconception#
3: If the extent of client damages that are uncovered
are within my E&O deductible, I can just settle
it on my own and not involve the E&O carrier.
Reality: Sadly,
this happens all too often. But as a wise person once
said, he who represents himself has a fool for a client.
This would be the case even if the claim is not in suit.
One can’t deny that some situations are just flat
out errors and omissions and that the facts suggest there
are just no defenses. Still, you want to bring your E&O
carrier in from the start. They have the experience to
assist you in what to say and not say, making sure the
claim is not over paid and get proper releases of further
liability. You may innocently pay for uncovered damage
to a motor vehicle only to find out later that a passenger
was hurt and is making a claim for bodily injury for
hundreds of thousands of dollars. By then you may have
prejudice the E&O carrier and their ability to defend,
violated the conditions of your policy and put your agency
at great risk. Some courts have thrown out an agent’s
attempts to self-settle when subsequent facts give rise
to greater liability issues. Also, the way in which you
self-negotiate a claim can exposure the agency to business
law/good faith law violations.
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Misconception
# 4: If I bring my E&O carrier into a matter that
is within my deductible or in which I am not liable
or I feel it will just go away, they will non-renew
me or increase my premium.
Reality: Consider
the consequences if you don’t. In the big picture,
each factual circumstance has to be evaluated on its
own merit. Every E&O carrier has their own way of
dealing with claim activity and frequency. Just because
you “heard” this or that happened to another
agent because they reported a claim or incident doesn’t
mean the same will happen to you. You need to feel comfortable
working with your E&O carrier so consider your relationship
with them. Having an E&O policy should be more than
just the ability to prove to your markets you have E&O
so you can do business with them or, as need be, to turn
in a worst-case claim. Your E&O carrier should be
viewed as a resource. Your relationship and ability to
communicate with the persons who make the decisions about
your claim, your policy and your premium should be a
big part of what you are paying for when you buy E&O.
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Misconception
# 5: I can hire and work through my own attorney to
handle an E&O claim without bringing my E&O
carrier in to it.
Reality: It
would be a shame to pay for an E&O policy and not
use it when you need it. Hopefully by now this article
has convinced you to involve your E&O carrier from
the start. If not, and you hire your own attorney without
involving the E&O carrier you do so at your own risk.
If your E&O carrier is worth their salt, they have
experienced people handing your claim so there is a good
chance they and their attorneys have seen it all, and
know the defenses that are available to agents that you
and your own counsel may not be aware of. Make sure you
know where to report a claim if you have one. Know and
feel comfortable with the expertise of the E&O carrier
in handling claims -- that’s what you’re
paying for.
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Misconception
# 6: The uncovered client’s claim is with an
insurance company with whom the agency has a contract
and this contract includes defense and indemnification
language. I can report it to them and they will defend
and protect the agency.
Reality: You
lose nothing by notifying your E&O carrier first
and you have everything to gain. After your contracted
carrier has done their investigation into the facts and
finds out that your agency made an error, or violated
your binding authority, their first comment to you may
likely be “If you haven’t notified your E&O
carrier as of yet you need to do so.” Reporting
an incident or claim to your E&O carrier after another
party (especially one who may be an adverse party)
has had a head start on the investigation is a dangerous
game. You may not realize it but at that point you may
already stacked the cards against yourself and significantly
impeded your E&O carriers ability to foster a defense
for your agency. Again, notify your E&O carrier first.
If appropriate, the E&O carrier can work with other
parties, including your contracted insurance companies,
to consider the best course of action.
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Here’s another important reason
to call your E&O carrier first: Some E&O policies have
a reporting feature that provides for the reporting of detailed
facts regarding an incident or circumstance but does not constitute
an actual or immediate claim. The E&O carrier will still
consider the date you originally advised them of these same facts
or circumstances to be the date the claim was made, should an
actual claim develop. If you have a claims made policy, this
would be important should anything happen to your E&O policy
in the meantime, such as a lapse or gap in coverage.
Generally
speaking -- It is always the right choice to report a claim
or potential claim to your E&O carrier. If
someone has suffered a loss that is not covered, you cannot
count on them to seek redress from another party. When big
money is at stake, your long-standing client relationships
can deteriorate quickly. The safer course is to report the
matter to your E&O carrier where you can work as partners
in bringing about proper resolution.
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