E&O Loss Control Center
One of our goals at NAPA is to help provide our insureds with outstanding benefits. Our E&O programs meet that goal. You may be considering purchasing Errors and Omissions (E&O) Insurance but first you want to get a better understanding of what a typical policy covers and how the policy would help protect you in case of a covered claim. Or you may be looking for help in reducing your E&O exposure.

That’s why NAPA has created the E&O Loss Control Center. These webpages are broken down into three main topics:

E&O Facts, Figures and Definitions
This section will help you learn more about E&O insurance, your exposure and definitions of terms

E&O Loss Control – Why Claims Occur
See what really causes e&o claims

E&O Loss Control – Ways to Reduce your Exposure
Provides more information as to how you can reduce your E&O exposure.

E&O Facts, Figures and Definitions
What is errors and omissions insurance? E&O insurance is a specific form of professional services liability insurance written for the insurance practitioner. It is also written for many other professions including mortgage lenders, real estate agents, business consultants and other professionals.

It is important to understand that insurance agent’s e&o insurance specifically covers you as an insurance agent in the case of an error or omission that is made while servicing and/or selling insurance products. In most cases E&O insurance is very specific with regard to the products covered and in many cases, may be product-line specific.

It is very important for you to understand this, especially if you write multiple lines of insurance. The NAPA E&O products typically cover life and health products. Most of our plans also cover variable insurance products and mutual funds (Series 6 activities).

They do not cover property and casualty product sales/servicing, or the sale/servicing of individual stocks, bonds or other investment vehicles (Series 7 activities).

1 in 7 insurance professionals will be named in some type of E&O claim at some point in their insurance careers. The average claim is in excess of $18,000, and this figure does not include the cost of legal representation.

All E&O insurance policy forms are referred to as claims-made. In a claims-made policy, coverage is triggered if a claim is made during the policy period for an error or omission that occurred after the policy’s retroactive date (prior acts coverage date).

The retroactive date of inception (R.D.I.) or prior acts coverage date is one of the most important issues to understand when purchasing E&O coverage. Prior acts coverage defines just how far back in your professional services career your e&o coverage will extend. Some plans may offer no prior acts coverage. This means that you are only covered for E&O claims that arise from activities occurring after your policy effective date.

A comprehensive e&o plan offers prior acts protection. All of NAPA’s plans offer prior acts coverage beginning with your original date of continuous E&O coverage. Some of our plans offer unlimited prior acts coverage.

The purpose of an Extended Reporting Period (ERP), commonly referred to as “tail” coverage is to provide some degree of e&o protection to an agent who has left the business, become disabled or retired. Instead of purchasing a new claims-made policy year after year, an agent can purchase an ERP for usually one to five years. The ERP does just what you’d think; it allows the agent to extend the period of their last active policy under which claims may be filed, following the original policy’s expiration date. An ERP does not cover any new business activities; rather it only addresses claims that arose after the insured’s prior acts date and before the termination date of the insured’s last in-force policy.

So there you have the three basic coverage components of a claims-made policy: Prior Acts Date or Retroactive Date of Inception, an in-force policy and an Extended Reporting Period (ERP). If available and structured correctly, these three pieces can be seamlessly combined to provide the comprehensive coverage demanded by an insurance professional.

You’ll note the word seamlessly in the previous paragraph. It is extremely important that you understand the crucial need to avoid “gaps” of any kind in your e&o coverage. If you allow any gap to occur, even a gap of 1 day, between one policy’s expiration and the next policy’s effective date you could ultimately lose years of prior acts protection.

Benefits of having E&O insurance

• Peace of mind against future claims
• Expert professional and legal counsel provided to represent you 
• Protection for current and future wage earnings

E&O Loss Control – Why Claims Occur
It is important is for you to understand the main reasons that E&O claims occur.

• Failure to Document
• Misrepresentation
• Inadequate Coverage
• Standard of Care
• Breach of Duty
• Breach of Contract
• Special Relationships
• Lack of (the L Syndrome)
  Action, Attention, Communication, Concern, Consistency, Control and Knowledge

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."
 

E&O Loss Control – Ways to Reduce your Exposure
So what can you do to reduce your risk now that you know how many claims occur? Here are some simple things that you can do to protect yourself.

1. Make sure that you have adequate E&O coverage and a good understanding of the policy. NAPA can not only help provide you with coverage but a NAPA representative can also help you if you have any policy questions.
2. Think defensively, act professionally.
3. Standardize and document your policies and procedures.
4. Put communications in writing.
5. Listen to and respond to your clients.
6. Don’t generalize, be specific.
7. Stay within your area of expertise.
8. Stay current, train yourself and your staff.
9. Do your own due diligence, investigate the companies you represent.
10. When co-brokering business don’t assume anything, follow up.
11. When filling out an insurance application with a client, don’t assume anything, make sure that the client answers the questions.