E&O Insights: MGAs Carry a Heavy Errors and Omissions Load
Having met the management of many managing general agencies (MGA), and managing general underwriters (MGU), I have been somewhat surprised by their perspective on their errors and omissions (E&O) claim potential. Some have recognized the issues that could lead to a problem. However, many believe that because of their status and authority levels, what could possibly go wrong? Let’s count the ways.
MGA Underwriting Duties
Do you know what your contract says? Does your staff? Probably the No. 1 duty MGAs perform that has significant potential to cause an E&O claim involves your duties in underwriting on your carrier’s behalf. These agreements are specific in detailing underwriting expectations and the types of risks for which the program is looking. There is a large expectation by the carrier that you will honor these expectations to achieve the desired loss ratio. Should a loss ensue from an ineligible risk that was written or through sloppy underwriting, the carrier, based on the size of the loss, may take action against you. There are many MGA programs that did not succeed due in large part to unwarranted underwriting flexibility exercised by the MGA. It’s not a bad idea to periodically review these expectations with your staff.
Reinsurance: Part of Your Duties?</p>
Depending on the program you are managing on behalf of your carrier, there may be some responsibilities to secure reinsurance, either on a quota-share or excess-of-loss basis. If one of your accounts has a significant claim and it is subsequently discovered you had not secured the necessary reinsurance, there is a strong possibility the carrier may bring action against you. In addition, when arranging reinsurance, make sure the reinsurer meets the necessary financial security requirement.
Claims Duties
Improper handling of your claims duties has significant potential to bite you. Oftentimes, MGAs are contractually obligated to perform specific claims-handling responsibilities. Improper claims handling is a rising cause of E&O claims among retailers, so the potential for an E&O claim at the MGA level certainly exists. If a claim was improperly denied by the MGA staff and a bad-faith action developed, the carrier may consider an E&O action against the MGA firm. There could also be reporting requirements that dictate at what the MGA should be reporting specific claims to the carrier.
To help prevent these scenarios, clearly know the expectations of the carrier, ensure they are reinforced with the staff and make sure proper training is conducted.
The Services Role
After you receive the request to bind and issue the policy, how confident are you that the policies are being processed correctly? I am aware of an E&O claim involving an MGA because someone in their services department was issuing policies for their tavern program without the required assault and battery exclusion. When claims occurred, the carrier sought to deny them since their guidelines stated policies should contain this exclusion. When the policies were reviewed, it became evident the exclusion was left off. Needless to say, the carrier brought an action against the MGA.
Make sure proposals and policies are provided in accordance with program guidelines. An active quality control program should be in place. In addition, when policies need to be cancelled or conditional renewal notices issued, are the proper number of days being provided? Failure to meet these requirements will probably result in the notices being declared “void.”
Contractual Issues
Several years ago, there was a claim instituted against an agent by a carrier who happened to be in liquidation. The amount of the claim against the MGA totaled $20 million. The claims included allegations that the agency wrongfully deducted premium credits, wrongfully took commissions prior to remitting premiums after a liquidation order (which forbade them to take commissions), failed to collect earned premiums (which was called for in their contract) and violated their underwriting guidelines and placed risks in the wrong classes of business, costing significant premium dollars. Following a settlement conference the claim was settled for just short of $3 million, with the E&O carrier paying close to $2 million. Carriers expect you will abide by these contractual commitments. Failure to do so could have significant negative ramifications.
Pay Attention to Carrier Audits
Typically, carriers perform underwriting and claims reviews every three years or so. These reviews essentially evaluate the quality and discipline you are performing on their behalf. If the audit details some deficiencies, correct them quickly. Failure to do so will damage the necessary relationship. Plus, if a loss occurs in an area that should have been corrected, beware – the carrier will not be happy.
Throughout this discussion on MGAs and their potential for an E&O claim, there have been many references to the agreement between you and the carrier. Do you know what it says? When was the last time you reviewed it? Are you confident that all of the staff are aware of your obligations and commitments to the carriers?
Let’s face it. Who drafted the agreement – you? No, they did and you can count on the fact that they probably drafted these agreements to protect themselves. Will they bring action against you if you fail to honor the necessary obligations? You bet they will.
Make sure you are not next.