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ERRORS AND OMISSIONS COVERAGE - How Not To Let E&O Stand For “Engulfed and Obliterated” - Part 4: Avoiding E&O

Tue, 25 Mar 2014
Published in Articles


As with most insurance coverage, it is much better to pay the premiums and never have to use the coverage. The more claims that are made against the agency, the greater the chance that E&O coverage will become unavailable or prohibitively expensive. As mentioned earlier, most insurance companies require their independent agents to have E&O coverage. If that coverage is unavailable, the independent agent is out of business. Unfortunately, agencies are being sued when they have done nothing wrong. A recent trend has been where attorneys representing policyholders to routinely sue agents, especially in cases where coverage has been denied. One reason is that most insurance companies are not located in Texas. If the policyholder were to sue only the insurance company and the amount in controversy was over $75,000.00, the insurance company would have the option of removing the case from state court to federal court. The federal courts are typically more equipped to thoroughly analyze legal issues, especially policy provisions that would support the denial of the claim. Since the agency is typically from Texas, the policyholder can sue the insurance company in state court and the insurance company and agent cannot remove it to federal court.

Another reason for suing agents as a matter of course is to create a “ping pong” effect. In other words, if the policy did not afford coverage, then the claim should nevertheless be paid by the insurance agency because the policyholder always claims that the insurance agent stated that a claim like this would be covered. Never mind the fact that the policyholder never read the policy. As a result, agencies are repeatedly being sued when the real complaint is against the insurance company itself. This results in agencies having to pay high premiums, if they can find coverage at all. Sometimes, the agents are sued in their individual capacity which creates even more problems. Pending lawsuits are damaging to one’s credit rating. Also, the dependency of one lawsuit against an individual can severely limit that individual’s access to mortgages, professional organizations, etc.

This begs the question as to whether agents are merely helpless. The following are some suggestions that may be useful in attempting to limit the exposure of agents when they are not the “target” defendant.

A. Incorrect Recording Of Underwriting Questions

In today’s World, many insurance policies are sold over the telephone or even over the internet. Underwriting questions are asked that have a critical bearing upon whether coverage is bound. When a claim arises and it is discovered incorrect information was given in the underwriting questionnaire/application, coverage is often denied by the insurance company. The policyholder then looks to the agent and claims the correct information was provided to the agent, but he incorrectly recorded that information on the application/underwriting questionnaire. It is advisable that the application/underwriting questionnaire be sent to the Insured by the agency, preferably attached to the policy. The cover letter should instruct the policyholder to carefully review the questions and the answers to make sure they are accurate. The letter should also advise the Insured that if a question is not accurate to inform the agency immediately. Also, the policyholder should be advised that incorrect information on an application/underwriting questionnaire can form the basis of a denial of coverage.

B. Incorrect Representation Of Coverage

It is not uncommon for an agency to give a synopsis or outline of coverage to a policyholder. However, in doing so, it should be clearly communicated that the terms of coverage are contained within the policy and the outline is not intended to be a statement or representation of coverage. It is suggested the policyholder be provided with written communication informing him any statements made by the agency relating to the terms of coverage are simply a general outline and are not intended to take the place of the terms of the insurance policy. The policyholder should be strongly encouraged to read the insurance policy for himself and also seek independent advice as to any policy terms that he does not fully understand.

C. Stay Out Of The Claims Process

Agents typically like to get involved in the property claims process in order to demonstrate to their policyholders that are concerned about them. However, this is extremely dangerous! For a more detailed analysis of the exposure that agents can incur by getting into the claim’s process, please request a copy of our paper on the liability of agents who involve themselves in the claim’s process.

D. Get Organized!

Many mistakes arise out of simple disorganization. An organized office where information can be readily accessed is an important tool to prevent mistakes. Also, calendaring expiration dates of policies are critical so that the policyholder can be contacted in advance when his policy is about to expire. Claims that agencies allow policies to elapse without notifying the policyholders is a common complaint found in agency malpractice lawsuits.


Hopefully, this paper provided some ideas that you can use in formulating your E&O risk management and to prevent your agency from being engulfed and obliterated by E&O claims and lawsuits.


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