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 What
is the true cost of an E&O claim?
by Curtis M. Pearsall,
Vice President, Agents' Errors and Omissions Department
Over the past 15 years, I have spoken with
many instructors who educate agents on the world of E&O. Obviously,
a big focus of the seminar is how to avoid being faced with an E&O
claim. Historically, the three pieces of advice that are given are: Document,
Document, and Document. I would have to believe
that most agents would not argue with the concept; what they have an issue
with is the time that is needed to do the necessary documentation. This
documentation is of many types. It could be the type that a CSR should
do when dealing with a customer on the phone or it could be a producer
documenting that a customer did not want a certain coverage. Or it could
be the lack of documentation a producer gives a CSR when asking them to
process an account. What most agency staff will state is that they know
they should do it; they just don't have the time.
Taking the time now just may save you
more time and money later. Let's look at the monetary and non-monetary
costs of an E&O claim.
- Obviously, if there is liability found, you have
a loss award that is recorded against the agency.
- Legal fees. Utica has a couple of deductible
options available that determine whether the agency incurs any
part of the legal expenses. The vast majority of the Utica policyholder
customers select the loss only deductible. For your information,
the average legal cost is around $12,000. If your agency has selected
the Utica Loss & Litigation deductible where you will incur
some of the costs of litigation (in return for a premium savings),
the legal expenses up to the limit of your deductible will now
be your responsibility.
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The above are two main monetary expenses.
Now to the non-monetary.
- When a claim is made involving a producer, that
producer and potentially others will lose time as they prepare
the necessary documentation to defend the agency. When a producer
is not producing, there is less of commission. Also, the anxiety
faced by a producer who is alleged to have made an error can
be huge. Good sales people have big egos. A lawsuit against
a producer
exposes the vulnerability of a producer and can severely impact
their confidence in how they do business. The cost of this
- difficult
to measure but definitely significant.
- When an agency is faced with an E&O claim,
E&O carriers will work with the staff involved (including
agency principals) to analyze the allegations and the account
in question. Once again, time taken away from handling insurance
- the business that you are in.
- Someone will need to locate and produce the documents
of the account involved. This may not sound like much but if you
have to go back a couple of years for documentation, the time
commitment can be significant.
- During the discovery and litigation aspect of
the claim, there will be trips to the attorney's office/court
locations, etc. From an insurance standpoint, not very productive
time.
- Also, the individuals that were parties to the
transaction will be interviewed by adjusters, attorneys and experts
to determine whether your agency personnel acted in a professional
and businesslike manner.
- Stress not only on the individuals involved but
also for the entire office. An E&O claim can bring paralysis
to an agency as it becomes the main topic of discussion. Also,
employees become more paranoid to make sure that an E&O claim
does not happen to them. The mental distraction can be huge.
- Since your objective is to demonstrate that your
agency did nothing wrong, shifting the liability to the client,
the carrier or another broker is going to be one of your objectives.
What type of damage will result from this? Hard to say but most
times, the impact is significant.
- Adverse publicity to your agency if the community
becomes aware of this issue. Count on it - they will find out.
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Add all of these up and you can see that
the impact involves much more than dollars. If you add it all up and the
cost in lost productivity, stress, etc. equals $15,000, let me ask you
how much business would you need to write to generate $15,000 of commission?
That number is probably $100,000.
So take the time now because it just might
save you some time (and money) later.
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