In regard to severity, the average claim runs about $40,000 in losses, plus around $12,000 in defense costs. Most agents E&O policies, incidentally, provide unlimited defense coverage. In 2004, we closed 86% of our claims for no payment. That shows you don't have to do anything wrong to get sued–and also the importance of defense coverage.

Some agents may conclude from the figures above that they can get by with perhaps a $500,000 limit, but that wouldn't be prudent. Any agent can get hit with a $1 million claim. For instance, suppose you write the auto and homeowners insurance for a client, but not an umbrella. The client is involved in a major accident and sues you for $1 million for not offering the additional protection. Despite the relatively low average cost of an E&O claim, $1 million losses occur with some regularity, and you want to protect yourself from that possibility. It doesn't hurt to have even higher limits. You can double the limits of a $1 million policy without coming close to doubling the premium.

Where do E&O claims come from? About half arise from producers' activities and half from the work of CSRs. Most claims are caused by one of two errors: failure to obtain proper coverage and failure to place coverage after agreeing to do so. Another major loss cause is failure to renew or service policies.

Agents should be mindful that their carriers, as well as their clients, can sue them for errors and omissions. Insurer suits against agents appear to be on the rise. Your insurance companies hold you to a standard–and you had better know what it is. Often the standard will be spelled out in your contract in regard to matters like binding authority. If you violate that contract, odds are that you will be sued. Some companies seem willing to take agents to court for even the smallest infraction of their contracts, so be careful. It's often said the agency-company relationship is a “partnership,” which sounds warm and fuzzy. But if a company you represent pays a claim because of what it believes was your error, it may well come after you to recoup its expenses.

Contracts between carriers and agents often contain what one insurer calls a “terms of use” agreement. When you get into automation, what are the expectations of each party? You need to know what the agreement says. Make sure your staff knows too. Once again: these are the expectations that you're going to be held to. The agreement may spell out expectations in regard to how you use information and how it is to be retained when relationships with insureds are terminated. Often the agreement will contain a hold-harmless provision, which essentially says that if you commit an error and the insurer gets dragged into the case, you're required to defend them. (Typically it will be a two-way obligation. If they make an error and you're brought into the case, they would defend you.)

Agency principals who have been around awhile probably have noticed the difference between today's company contracts and those of 15 or 20 years ago. Once, marketing people prepared many of these agreements, but these days lawyers draft them all, so you need to examine them carefully for things like hold-harmless agreements.

What happens when you get hit with an E&O claim? The E&O carrier assigns counsel, who will talk to anybody involved in the incident: the bookkeeper, the receptionist, the producer, agency principals, etc. It's important to report a claim as soon as possible, so the event still will be fresh in everybody's mind when counsel arrives. That way the E&O carrier will have the best possible data on the event and can make an informed estimate of how the claim will play out.

The E&O carrier will ask for the agency's files pertaining to the incident. This leads into the issue of computer systems and documentation. In setting up your system, think of what you'd want it to contain if you were handed a subpoena. You should want to be satisfied that the file accurately reflects your ongoing dialogue with your clients. Among other things, the file should include records of transaction dates and correspondence, both regular mail and e-mail. By examining a comprehensive, updated file, your E&O carrier will be better able to ascertain what really happened–and better able to defend you.

Downloading and uploading

Downloading is perhaps the most common form of agency-company interface. It takes place when an insurer sends you information electronically. Download is used predominantly in personal lines, although it also is becoming more widely used in commercial lines, particularly for BOP business.

When an insurer downloads client information into your agency management system, it must match the fields you have set up in your electronic files; otherwise, your data will not be accurate. So you want to ensure that when information is downloaded to you, it fills your data fields properly, and that no information is missing. Insurers also use download to update agents' billing and claims information, among other things.

Insurers should update your files via download every night, so you start each day with accurate information. If you go a couple of days before accepting a company download, you could wind up giving a client inaccurate information. That could come back to haunt you.

As part of the download, the company typically will let you know what transactions have been processed, via a list. By checking it, you can determine which tasks have been taken care of, and which ones you still need to diary.

An agency should make someone responsible for the download and should designate a backup person as well. Monitoring the download should be part of someone's job description, be it the agency manager's, an IT person's or someone else's. Make someone accountable for this task; don't just assign it to whoever has the time to look after it on a particular day.

Companies typically assign passwords to agencies to use when retrieving downloaded data. If the person who looks after download leaves the agency, you should make sure the password is changed. This is a matter of ensuring the data remains confidential.

Download doesn't free you from the obligation to ensure that transactions are processed accurately. If you ask for a particular coinsurance amount on a policy, and the company sends back a different figure, you need to catch the discrepancy. So what if it was the company that made the mistake? You still need procedures for detecting it, because information isn't much good if it isn't accurate.

Let's turn to the subject of upload. If handled properly, it can be a great help in reducing an agency's E&O exposure. When you send information to insurers by regular mail, there can be some uncertainty about when they get it and when you sent it. These issues can have a bearing on claims processing. With upload, on the other hand, you will have a hard-coded date stamp documenting when materials left your agency. That can be a big help in fighting certain E&O claims. When you upload data to a carrier, it will let you know that the upload was successful and give you a confirmation number. You should file that confirmation number.

When information is uploaded, policies are issued quicker, particularly in personal lines. In many states, the law says insureds have a responsibility to read their policies. After last year's hurricanes in Florida, we wound up defending about 30 E&O claims made against agents who were sued by their clients over lack of wind coverage for pool enclosures. In some cases, the insureds hadn't yet received their policies before the damage occurred. “Well, how was I to know about the exclusion?” an insured could say. “I still don't have my policy.” So the quicker you can get a policy issued–and upload can help you speed the process–the stronger your E&O defense.

Transactional filing

Some 20 years ago, most agencies kept a folder for each account, and all paper associated with the account went into it. After automation became widespread, agencies began using transactional filing. The dates on which correspondence and other documents were received were noted in the computerized customer files, and the documents themselves–for all accounts–were kept in a single paper file for each date.

I think there are a lot of benefits to transactional filing. Agents have told us it enhances morale–maybe because when people come to work in the morning, they don't see a stack of paper files on their desks anymore. With T-filing, anyone can respond to customers' calls. A paper file doesn't have to be found first, because everything needed to respond to the call is likely to be in the computer file. So T-filing has enhanced customer service. How long should you retain T-filed correspondence? We say seven years in general, but you need to look at the statute of limitations in your state and the type of coverage you're dealing with.

We've heard that T-filing has increased efficiency. Agents have told us it enables them to handle work in less time, and that they're more current as a result. In our view, the more current an agency is in the processing of its work, the lower its E&O exposure. When folks are just buried under a mound of work, claims are more likely to arise.

Make sure you are backing up your automation system. In some cases, this may need to be done hourly to make sure you are not losing either temporary or permanent records. In most cases, it should be done at least daily. Make sure you have a disaster plan that protects your data, too. In this regard, it is essential that a set of backed up data is stored off premises.

Exposure analysis checklists

I'm a big fan of automated exposure analysis checklists, like those in AMS' PS4 product. In fact, our company gives a credit to our E&O insureds who use such checklists. That's because failure to arrange the proper coverage is the No. 1 cause of E&O claims. Using an exposure analysis checklist is a great way to make sure all your clients' needs have been identified and that you've at least offered them coverage. You certainly should not just ask for a copy of the prospect's current policies and assume the incumbent agent identified all the exposures. In duplicating what the pros-pect previously was offered, you also might wind up duplicating someone else's errors.

Following 9/11, we experienced eight E&O claims. The most common was for failure to obtain business interruption coverage. A checklist can ensure that you talk with prospects about BI and other exposures and at least give them the chance to insure them. If they decline the opportunity, be sure to obtain the prospect's signed acknowledgement. Without such documentation, the issue in any ensuing litigation becomes whether you or your prospect has greater credibility. Unfortunately, agents tend to lose more of those contests than they win.

How often should you ask clients to sign statements acknowledging that they decline recommended coverage? Ideally, every year. That means we also recommend that you do some sort of annual exposure analysis. You might not find that realistic, particularly for personal-lines accounts, but it's the safest way to go.

We had a claim several years ago involving a California restaurant. The agent offered the restaurant liquor-liability insurance three years in a row–but didn't offer it the fourth year. The restaurant sustained an uncovered liquor-liability claim and sued the agent. We had to pay the claim, because the agent hadn't recommended liquor liability at the fourth renewal. This is an extreme case, but it demonstrates the advisability of getting a written acknowledgement every year.

I was in a car with one of our insureds a couple of years ago, and we drove by a building owned by one of his clients. An addition was going up. “I'm waiting for them to call me,” he said. I was pleased to hear he was on top of the issue but told him not to wait. If you know a client is adding more space, you have a responsibility to call and say, for example, “I see you're putting on an addition, and you don't have enough coverage for it.” If a client has an uncovered claim, and it can be shown that you knew about the exposure but said nothing, you could find it difficult to defend an E&O claim.

Annual coverage reviews (completed with the help of a good coverage checklist), are important in personal lines as well as commercial lines. Following such a review, you may learn that someone has inherited some heirlooms–or acquired a pit bull. You can make the appropriate coverage recommendations or point out any exclusions or limitations in their coverage.

If you can't get a client to sign a statement, the next best thing is to send the client a letter documenting that the client declined to follow your recommendations. Such a letter could state, for example: “Per our conversation, you do not want the personal umbrella liability policy we talked about. If this is contrary to your understanding, please let me know as soon as possible.” That way, you have at least something in the file.

There should be something to document that the letter was sent on a given day. Faxing the letter is better than sending it by regular mail, because the fax report can provide good documentation that the letter was sent and received. When sending a letter by regular mail or even e-mail all you have is “presumed delivery.”

Automated coverage checklists can make producers more knowledgeable about specific risks. Someone may want to go after dry cleaners, for instance, but may not be sure what the exposures are. A lot of information can be found about those exposures in a good coverage checklist. They also can help ensure the producer gets the right class codes. The more accurate the submission, the lower the E&O risk.

Newsletters, which you easily can prepare with desktop publishing systems, can be powerful tools for defending E&O lawsuits. An insured in Florida would find it more difficult to pursue an E&O claim for wind damage to a pool enclosure if the agency used its last three newsletters to stress the exposure isn't covered.

E&O and the Internet

When an errors and omissions claim is made against one of our insureds, our claims people visit the agent's Web site to ensure it accurately describes the scope of the agency's services. If it says something like, “We make sure all clients are fully covered for all their exposures,” we could have a problem. And, yes, we've seen sites that make claims of that sort–and they can come back to bite you.

As agencies promote “24/7″ service through their Web sites and voice-mail systems, they also must take care to inform clients of any limitations. Suppose an insured buys his wife a $25,000 anniversary ring–which you don't have the authority to bind without documentation–and requests an endorsement for it via your Web site. Your insured may well think coverage is bound. To avoid giving that impression, make sure your Web site informs visitors that coverage cannot be bound, deleted or modified without talking to someone at the agency. (The same caveat, of course, should be recorded in your voice-mail system.)

Some agencies also are opening their doors on Saturdays to gain a competitive edge. That's fine, but if your carriers' underwriters are not also available on Saturdays, be aware of the implications. If you can't bind a particular risk without an underwriter's approval, don't give the client the impression that he or she has coverage over the weekend. If you send a client an e-mail message on a Saturday that doesn't explicitly point out this limitation, and a loss occurs Sunday, you could have a problem. And remember: The e-mail message will precisely document the date and time you sent the message.

One way that technology can help you lower your E&O exposure is by making it easier for you to track your insurers' financial condition. For instance, you can make ambest.com one of your favorite sites. Then be sure to visit it once a month. This is a lot easier than picking up the phone once a month and calling a marketing rep at each of your companies. Many insurance agents E&O policies state that if a carrier's rating drops below a certain level, you no longer have solvency coverage for them following the next renewal. The Internet can help you keep abreast of these rating downgrades.

More agencies are scanning documents these days and storing the “paper” electronically. Such document imaging and management systems certainly make it easier to retrieve information. Be aware, however, that some states require you to retain original documents in a paper file. Make sure you check with your state insurance department or state agents association. They should be able to give you some guidance on this issue.

On the whole, automation has had a positive effect on agents' E&O exposures. But I hope you now see that automation can be a double-edge sword. I hope this article will help you become more adept at using that sword to cut away your E&O risks–without also nicking yourself.

Curt Pearsall is vice president of Utica National Insurance Group and since 1987 has been responsible for the day-to-day management of Utica's errors and omissions program. He joined the company in 1981 after working five years as an independent agent. He can be reached at [email protected].