Most insurance companies that retain independent insurance agents require they have professional liability’s coverage. The purpose of this paper is to explore the major aspects of E&O coverage as well as the challenges today’s insurance environment presents to insurance agents in connection with E&O issues. Finally, the paper seeks to explore ways to assist agencies in avoiding having to use its E&O coverage.
TYPES OF COVERAGE AFFORDED
Errors and Omission’s coverage is provided under an agent’s professional liability policy. Typically, policies are “claims made” policies. In other words, the policy covers claims made and reported during the policy period regardless of when the claim error or omission occurred. Most other commercial liability policies are “occurrence” policies. Under an occurrence policy, the event must occur during the policy period. If it does, there is coverage regardless of when the event is reported, so long as it is reported promptly. Under an occurrence policy, the error may occur months and even years prior to it being asserted to the agency by the Claimant. So long as the error took place during the policy period, coverage is afforded under an “occurrence” policy.
Even though most professional liability policies (including agent E&O policies) are claims made policies, there are some are occurrence policies. It is absolutely critical that claims made policies not follow nor precede occurrence policies. In other words, if you begin with a claims made policy, stick with claims made policies. If you begin with an occurrence policy, stick with occurrence policies. When an occurrence policy is followed by a claims made policy, there can be severe (several?) lapses in coverage that are not intended, even though the policy periods on both polices are consecutive. The same is true if a claims made policy is followed by an occurrence policy.
EXTENT OF COVERAGE
It is important to understand the extent of coverage afforded by the agent E&O policy. Most agent E&O policies are “all risks” polices as opposed to “specified perils” policies. An all risk policy provides coverage for all risks of loss or claims, except for those that are specifically excluded. The named peril policies do not provide any coverage, except for those areas of coverage that are specifically named. It is always better to have an all risk policy. However, even though an E&O policy may start out as all risk, by the time all the exclusions are taken into account, very little coverage may remain. Therefore, it is important for the agent to analyze the exclusions set forth in an all risk policy.
One of the most critical exclusions is the Intentional Acts Exclusion. Some policies exclude intentional acts of the principal of the agency and anyone in conspiracy with him. Other agent E&O policies exclude intentional acts committed by any principal or employee of the agency. Under the “any employee” exclusion, an employee of the agency can be intentionally harming an Insured without the knowledge of the owner, yet no coverage would be afforded. Obviously, it is always better to have an intentional acts exclusion that is as narrow as possible.
Another exclusion to watch out for is the Criminal Acts Exclusion. This comes into play when an employee of the agency issues a fake binder; collects premium and pockets the money. Later, when the customer makes a claim and it is discovered that no policy was issued, the agency is typically subject to a claim/lawsuit. The principal and the management of the agency may have been completely unaware of what was happening. However, the loss resulted from a criminal act and would be excluded under a broad Criminal Acts Exclusion. If possible, an agency should attempt to restrict the Criminal Acts Exclusion to criminal acts by, or at the direction of, the principal agent. Also, it would be beneficial for the Criminal Acts Exclusion to apply only where there has been a criminal conviction.
Obviously, all of the exclusions are important to analyze in an all risk E&O policy. The time allotted for this presentation prevents a discussion of all them. In most cases, it is beneficial for the E&O policy to be analyzed by an independent insurance professional/attorney. Most policyholders, including insurance agents, have a belief that the terms of a policy cannot negotiated. It is surprising how many times underwriters will pull out “secret endorsements” that modify or even eliminate particular exclusions. Therefore, don’t be shy about discussing these exclusions with your E&O carrier. Also, make contact with as many E&O carriers as you can to compare exclusions listed as well as the exclusion language. It is recognized that this is much easier said than done, but once an agency has taken the trouble to thoroughly analyze and negotiate its E&O coverage, the benefits will inure to the agency for many years.
CONSENT TO SETTLEMENT CLAUSES
Some professional liability policies contain a “Consent to Settle” clause. This is especially true in medical malpractice policies. However, there is no reason why a consent to clause cannot be included in an Agent E&O policy. A Consent to Settle clause provides that the policyholder, when sued for malpractice, has the right to direct the company to proceed to trial and not accept a proposed settlement offer. Most agent E&O policies do not contain a Consent to Settlement Clause. However, it is an important provision that can be very beneficial to an agent, especially in property claim cases where some policyholder attorneys routinely sue the company, the adjuster and the agent. These attorneys typically come in after a storm, heavily advertise and take literally hundreds, if not thousands, of cases. They depend upon the insurance company settling in order to avoid the expensive litigation. However, these cases severely harm the agent. If the policyholder’s attorney found out that the agent had a Consent To Settle Clause and all the agents refused any settlement, the policyholder’s attorneys would typically be drowned in cases. As a result, that attorney may decide to dismiss your agency and not include your agency in future litigation. Consent To Settle Clauses are rare in agent E&O policies, but they certainly exist and companies that write medical malpractice policies certainly know what they are.
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OF COUNSEL CLAUSES
Typically, when an agent is sued, the E&O carrier has the power to choose the attorney to represent the agency. Sometimes, insurance companies have “captive” law firms where the attorneys are actually employees of the insurance company. The purpose of these pseudo law firms is to attempt to reduce legal expenses. However, in doing so, some companies have robbed their attorneys of support staff, clerical help and legal research capabilities. Also, the caseload imposed upon these attorneys is sometimes unrealistic. As a result, the policyholder receives sub-standard legal representation from the captive lawyers. This sometimes results in defensible cases being settled for greater amounts than what the case can possibly be worth. This also results in a higher loss history for the agency and creates difficulties in the agency obtaining renewal coverage at reasonable premiums.
Some carriers will allow the policyholder to choose counsel, as long as the cost is comparable to the attorney that would be chosen by the insurance company. This is sometimes set forth in the policy itself. More often, if policyholders request an attorney of its own choosing to defend a lawsuit, most liability insurance carriers will accommodate the Insured. This is especially true if the claim could possibly exceed the policy limits. If your agency is sued, don’t be shy about requesting a competent independent insurance defense counsel.
SELF- INSURED RETENTIONS
Many commercial liability policies contain Self-Insured Retentions. These are similar to deductibles. In other words, if the policy provided for a $5,000.00 self-insured retention, the policyholder would be responsible for paying the first $5,000.00 of any claim. Most self-insured retentions include legal expense payments as well as indemnity payments. In other words, in our example of a $5,000.00 self-insured retention, the policyholder would be responsible for paying the first $5,000.00 of attorney’s fees. Afterwards, the company would be responsible for payments over and above that amount. On rare occasions, there are dual risk retentions. In other words, there is one risk retention for indemnity and another for legal expenses. If your agency has a high self-insured retention, it is more likely that the agency will be able to designate counsel to represent it in any lawsuit.