Errors and Omissions Claims

It is important is for you to understand the main reasons why Errors & Omissions claims occur.
Here are some of the most common causes for E&O claims:

 

Failure to Document

As a professional you must be aware of how important documentation is. Communication between yourself and the client may be the focal point of litigation. If you have failed to document your communications with the client, in 9 out of 10 cases you will be held liable.

 

Misrepresentation

Failure to properly explain policy provisions or unintentionally/intentionally making mistakes in completing an application for insurance can get an agent sued for misrepresentation. In the majority of cases, misrepresentation has been alleged, but there was no actual evidence of purposeful misrepresentation.

In cases of intentional misrepresentation the agent can be found not only liable in civil court, but also found guilty of fraud. In some occasions, criminal charges will also be filed. Remember that no E&O policy will cover a case of intentional misrepresentation or fraud.

 

Inadequate Coverage

These cases involve allegations of either a total lack of coverage, inadequate limits of coverage, or failure by the agent or broker to place proper or adequate insurance for the risk to be insured.

 

Standard of Care

The allegations in these claims state that the agent or broker failed to live up to the acceptable and recognizable standard of care that is a generally accepted practice within the industry. Unfortunately, since the agency and brokerage business is not legally classified as a "profession," there are no established rules for professional conduct such as those established for the medical, dental, and other professions.

 

For example, the California Insurance Code contains a section that states: "The purpose of this chapter is to protect the public by requiring and maintaining professional standards on the part of all persons licensed hereunder." However, they do not define professional standards, nor do they outline any set of standards. Unfortunately, this leaves the courts to make decisions regarding what constitutes "standard of care," based on the judge and jury's inclination at the time.

 

Breach of Duty

It is an accepted rule of law that once an agent or broker agrees to undertake a task such as the placement of insurance, they owe the insured a duty to place that coverage, if possible. In the majority of cases, the courts will hold the agent responsible and guilty of breach of duty for failure to fulfill this required. In the absence of or failure to place the coverage properly or to notify the insured within a reasonable time that they were unable to place the coverage, the agent/broker has breached their duty to the insured and can be held liable for the consequences of the failure to act.

 

Breach of Contract

When an agent or broker agrees to undertake some task for an insured and then, through negligence or carelessness, fails to perform, the agent can be held liable not only for breach of duty but also for breach of implied contract. In another area, consider the situation where an agent exceeds their authority under their agent contract and, as a result of this alleged breach, there is a loss in which the insurance company is named as a defendant. The company may pay the claim but then turn around and sue the agent for breach of contract.

 

Special Relationships

In this class of action, courts generally hold that as a result of the actions of the agent and the business relationship over a period of time, a "special relationship" developed. Courts hold that because of this special relationship, the agent/broker is held to a higher standard of care in handling the insured's business.

The "L" Syndrome

Most other claims are classified as “Lack Of” or the "L" Syndrome causes of loss. The most common claims issues stem from:

• Lack of Action
• Lack of Attention
• Lack of Communication
• Lack of Concern
• Lack of Consistency
• Lack of Control
• Lack of Knowledge

While all of these classifications fall into the general legal definition of "negligence," there is also liability assigned under "breach of contract."

 

Even More Causes of E&O Claims

• Telling your clients only what is covered and not explaining policy exclusions. Studies have shown that customers are more interested in what is NOT covered rather than what is. You should always provide specimen policies and endorsements with proposals. This will help insureds understand their coverage. This also help identify exclusions of concern. As a result, prospects may ask you to sell them additional coverage.
• Writing business in states that you are not licensed in. Know where your customer's exposures are and make sure that you have a license in all states where those exposures exist. You can't write business in a state in which you are not license.
• Selling clients what you want rather than what they need. Remember, failure to provide proper coverages in the No. 1 cause of E&O claims. Don't fall into the "renew as is" trap. Conduct an exposure analysis and offer the proper coverages. Get a sign-off on coverages they do not want.
• Giving clients the lowest limits.
• Failing to document transactions.
• Failing to understand the products you sell. When a client asks whether an exposure is covered, can you supply an accurate answer? Know your coverages. Above all, be honest.