The mirror test - a significant E&O hotspot

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

While Errors & Omissions frequency is generally down compared to a couple of years ago, this is still an area causing E&O claims. In fact, some E&O carriers believe this is so significant it has the ability to generate enough E&O claims to cause claims frequency to rise.

Many commercial and personal lines customers have been looking for pricing reductions in recent years because of the soft market. There has been a tremendous amount of internal remarketing of those accounts to your various carriers to address the situation and ensure you retain the account. For example, if you marketed the account to five other carriers, there is significant potential for there to be differences between the incumbent carrier and the additional markets. When you look to move the account from Company A to Company B to save the customer money on their premium, it is critical your agency identifies any coverage differences and brings them to the customer’s attention.

What could happen?
Say you moved the account to another carrier and the coverage was not as broad in some areas. If the customer subsequently suffered an underlying claim that would have been covered by Company A, but was not covered or not fully covered by Company B, the customer may very well question your agency why the coverage was moved. There is also a good chance they will say they never would have approved you moving the account if they knew they were giving up coverage. This obviously speaks to the need to document these discussions with your customer.

There are several areas of possible difference: sub-limits, the actual coverage grant, specific endorsements, definitions for areas such as “who is an insured,” what is excluded on one policy compared to another, and the rating of the carrier. In addition, advise the customer of a change in premium payment handling (agency bill to direct bill) as this could cause some confusion and potentially result in cancellation of coverage.

The recommended approach is taking all the carriers you are considering and putting the details on a spreadsheet. Note all pertinent issues, limits, sub-limits, coverage grants, etc. While this will take time, it is crucial to note all differences. Simply moving the account and not advising the customer of the differences could cause you a problem down the road. Some agencies share this spreadsheet with the customer and bring to their attention the detail the customer needs to be aware of. Most importantly, the customer sees the differences and can make an educated decision. At minimum, the differences between the expiring policy and coverage from the other carriers you are considering should be brought to the customer’s attention.

Get the customer’s written approval, regardless of their final decision. This will be key if an underlying claim occurs and your customer then finds out they didn’t have the coverage they thought. It is fine if your client chose the lower price with the lesser coverage, but get in writing that they realized they were giving up some coverage.

Important for all coverages
The above scenario can occur even if you keep the account with the same carrier. This is probably more common with Excess & Surplus Lines business because E&S carriers are not required to give a conditional renewal notice if they want to add an exclusion on the renewal. You should still identify any differences on the renewal policy, bring them to the customer’s attention and get their signoff. Due to the nature of E&S, it is best to do this review with the customer before you bind the coverage in case the customer subsequently decides they don’t want the coverage. This will help your agency avoid the typical minimum earned premium associated with E&S business.

This detailed comparison is important for all coverages. If you write professional liability and/or Directors & Officers, you are aware that no two policies are the same. Thus, there are probably more things to look at. E&O claims have occurred because an exclusion was in one policy but not the other. It is best to identify the differences and bring them to the customer’s attention for their approval, regardless of how subtle you believe the issues to be.

A detailed comparison is needed with these lines of business. Consider asking the respective carriers how they compare with another carrier. They may have a comparison they can share with you or a checklist that identifies many of the issues you must watch for. In addition, there are firms that will perform these comparisons for you for a fee. They are extremely good at what they do and worth the cost.

For whatever the reason you would switch the coverage from one carrier to another for a customer, make sure it passes the Mirror Test. Remember, too, to identify the differences, bring them to the customer’s attention and get their written sign off.