Avoiding the E&O pitfalls of Personal Auto

by Curtis M. Pearsall, CPCU, CPIA
Special Consultant to the Utica National E&O Program

It’s no real surprise that E&O claims arising from personal auto continued to occur with some degree of frequency in 2009. However it is interesting to note that the percentage of E&O claims resulting from this segment has dropped over the last couple of years and is down to around 12%. This is no doubt due to the positive actions that many agents are taking.  Let’s examine this in greater detail.  

What could an agency do wrong that could result in an E&O claim? Overall, roughly 40% of the claims involve the liability coverage, 40% involve physical damage and 20% are in the uninsured / underinsured motorist area. 

Failing to recommend the proper liability limits was the center of the allegations against an agency in this following claim example: Mr. Jones, somewhat wealthy, had purchased liability limits of only $25,000 on his automobile policy and then after an accident, claimed the agency should have made sure he had higher liability limits. The accident was severe involving the death of the driver of the other car (a 23 year-old married man with a child) and Jones was determined liable for his death with a potential claim of in excess of $1.5 million. The estate refused to accept the policy limit in settlement and decided to go after the assets of Mr. Jones. On its face, this appeared to be a defensible case.  The agency argued that they told Mr. Jones to increase his limits. However Mr. Jones, in addition to being wealthy, was a simpleton with a drinking problem. He indicated that he did not remember these discussions.  The agent was aware of Mr. Jones’ shortcomings and financial position. The case was made that the agency, in view of his client's considerable wealth, should have insisted he have higher limits. Due to the absence of a solid paper trail, the case against the agent settled for $325,000. One could only wonder what would have happened with better documentation.

Here are five of the more common mistakes that agencies are alleged to have made that caused an E&O claim in 2009. As you read them, ask yourself: What could the agency have done better?  Could they happen in your agency?

1. Issuing an ID card or some type of evidence of coverage for a cancelled risk
2. Failing to adequately document discussions regarding limits. Either the client alleged that they thought they secured the higher limits, or the agent had recommended that higher limits be secured.
3. Failure to obtain proper waivers for UM/UIM
4. Failure to identify all drivers in a household
5. Failure to maintain limits that satisfy the minimum required by an umbrella carrier (thus causing a gap in coverage)

Some tips worth considering:

Completion of the application -- Did you review each question with the customer and did you have them review the application completely before signing? Did you explain all of the coverages in detail? For you, personal auto is probably old hat; for your clients, this may be more complex (see above story about Mr.Jones!). Educating your clients is a very positive way to reduce E&O claim activity.

Account review / analysis – Ask the customer if they have a personal umbrella policy. If they do, it would be appropriate (if it is not through your agency) to get a copy to determine what underlying limits are needed. If they don’t have an umbrella, this presents a great sales opportunity.

Receipt of the policy -- Advise clients, verbally and in writing, that when they receive their policy, they need to review it to make sure that everything is in order. The agency should also review the policy to make sure that it matches what was requested.

Billing – With the understanding that most personal auto is now done on a direct bill basis, advise the customer they will be getting premium notices directly from the carrier and they need to respond to these as the agency will not be reminding them of any pending cancellations. There have been situations where the customer will stop in the agent’s office to pay the premium, typically around the due date. Many agencies simply advise the customer they cannot accept these premiums and provide the customer with a company envelope requesting that they send the premium in themselves. If you do want to accept these premium payments, suggest that you first check the payment / account status to be certain that it has not already been cancelled for non-pay.

Education and training – Both your staff and your customers can benefit. The goal is to be certain that the staff understands all of the coverages and how they apply. If they are asked by a customer how their personal auto policy responds when renting a car while on vacation, are you confident that the correct information is being communicated? Also, while personal auto may appear to be fairly standard, there are potential differences that you want to be sure to communicate. For example, if your insured has pets, does the auto insurance provide coverage if they are harmed in an accident? This distinction could be the reason why a customer would choose one company over another.   

Developing a newsletter that covers a multitude of topics is a great way to educate your customers. This can be sent in paper form or via e-mail blasts. In addition, a website that helps your customers understand what they have will pay tremendous dividends (protection as well increased sales).

Discuss E&O with your personal auto staff. Talk thru the issues and what measures can be put into place to protect the agency. Develop procedures that are applied consistently.