I n the last three and a half years I have done a number of E & O audits as an authorized auditor for Swiss Reinsurance. For those of you not familiar with the Swiss Re audit program, Swiss Re authorizes people that have experience in E & O risk management, or defense, to conduct E & O audits of insurance agencies insured by Swiss Re. The auditors try to identify areas where the agencies may be vulnerable to E & O claims and recommend improvements in the agencies’ procedures to limit the risk of claims. I was approved as an auditor because I did E & O defense work for Swiss Re, and its predecessor companies, for thirty-six years, until I limited my practice in 2013 to just representing the KAIA. Swiss Re has very throrough guidelines for auditors to use in doing the audits and a template for the report the auditors submit. If the agency is willing to implement the auditor’ s recommendations, Swiss Re will give the agency a ten percent credit on their E & O premiums for five years. I want to share five things I learned in doing audits:
1. Most agency websites need some work.
Statements and representations on agency websites can create E & O exposure. Under Kansas law, and in many other states, an agent’ s legal duty is limited to providing the insurance coverage the customer requests or telling the customer the agency cannot obtain the coverage. In other words, the agent does not have a duty to be an insurance advisor to the customer. This legal duty, however, may be expanded to that of an insurance advisor which can significantly increase the agent / agency’ s E & O exposure. There are basically two ways of doing this. The first is to enter in to an agreement where the agent specifically agrees, either in writing or orally, to become the customer’ s insurance advisor. The second, and much more common way, is where the agent makes representations implying he is acting as the customer’ s insurance advisor. For example, the agency’ s website might state,“ We will make sure we get you the insurance you need” or,“ We will tailor your insurance to your needs.” Also the website might state its agents are experts in insurance, or certain lines of insurance, and will obtain the best coverage for the best price. Agencies should probably have their websites, Facebook pages and other marketing materials reviewed by someone with experience in E & O risk management or defense.
2. In most agencies there are staff members who are not doing things the way management thinks they are.
One of the cornerstones of E & O prevention, and defense, is ensuring operations are performed by all staff in the same manner. For example, that change orders are processed the same way, that all staff are documenting contacts with customers and companies, that agency approved checklists are used, that signed applications are obtained, that quotes are checked for accuracy, etc. The advent of sophisticated agency management systems has helped a great deal in maintaining the uniformity and consistency of operations, but never-the-less in nearly all the audits I’ ve conducted I’ ve found one or more employees that were not doing things the way management thought they were. For example, in one instance I found one of the CSR’ s did not have access to the expirations list in the manner management thought she did and, as a consequence, was not checking the expirations she was responsible for in the manner management thought she was. In another instance, some staff were entering prospects in the AMS system while others weren’ t. Management was under the impression all prospects were being entered in the system. All of the instances I found were simply matters of miscommunication and not the result of employees willfully failing to comply with agency procedures.
3. Producers failing to document conversations with customers.
In my experience most E & O claims involve producers in some fashion. Often these arise from conversations producers have with customers. For example, the producer meets with a prospective customer and they discuss coverages, including optional coverages. The prospect accepts the basic coverage but rejects one or more optional coverages. A loss occurs. It is not covered by the basic coverage, but would have been covered by an optional coverage the customer rejected. The customer claims the agent never offered the optional coverage, and had it been offered he would have accepted it. Obviously in order to prevent, or defend, an E & O claim, under this scenario, and many others, it is very important to document the producer’ s discussion with the customer, particularly any coverage rejections. Although producers are getting better at documentation there are still some out there that don’ t document their customer conversations that well. In their defense, commercial producers are often out in
| September- October 2016 | KANSAS INSURANCE AGENT & BROKER
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