E&O Insights: How Well Are You Managing Your Agency’s Commercial Lines Accounts?
Ask errors and omissions (E&O) carriers about their results when dealing with commercial lines shops and most, if not all, would comment that heavy commercial lines agencies definitely generate their share of E&O claims and when those claims occur, they can be extremely significant. In commercial lines, $1 million-plus E&O claims can and do occur.
When analyzing E&O results, there are typically four commercial lines of business that are generating the bulk of the activity. Those lines of business include commercial property, commercial liability, workers’ compensation and professional/management liability. These four lines of business need to be well managed in an agency’s office to avoid an E&O nightmare.
Commercial Liability
Starting with commercial liability, one of the more significant issues that won’t seem to go away (it is actually getting worse) is the additional insured issue. There are a number of contributing factors starting with the importance for agents to understand that there are numerous additional insured endorsements that provide different degrees of coverage. To illustrate that, all one has to do is to look at some of the various organizations that provide quality educational resource material. They have books available that detail the differences, some of which can be significant.
For example, what is the exact coverage that the client is looking for or needs? This needs to be determined to be able to properly determine which form of coverage is desired. Most often, this is spelled out within the contractual requirements. Is the coverage for the additional insured’s own negligence or only for claims arising out of the named insured’s negligence, a vicarious liability exposure?
Another key area deals with language that is contained within many of the industry’s blanket additional insured forms. A common fallacy in the industry is that the blanket additional insured form automatically provides coverage for all additional insureds. Many forms will contain language that requires the presence of a written contract for coverage to apply.
Commercial Property
A key issue with commercial property centers around the issue of limits that at the time of the loss are not sufficient to provide the settlement that the client was expecting. Typically, the co-insurance provision is at the root of the problem.
Actually a key question is “whose duty is it to advise regarding appropriate limits?” Many E&O carriers contend that the clients are the ones that should ultimately choose their own property values. The position behind this is that who knows the cost to replace the building better than the insured themselves. It is still important that there be a discussion on the need for insurance-to-value and the application of the co-insurance provision.
Another area of E&O activity involves when a job goes from a construction site (builder’s risk) to a completed job – when is the conversion/change in policies made? Is the coverage under the completed building form equivalent to the builder’s risk policy?
Ordinance or law coverage (or the lack thereof) has been generating a fair amount on commercial property risks but also on homeowners. Essentially, this coverage includes: a) the cost of demolition and removal of the debris of undamaged portions of the structure that must be torn down or modified; and b) the increased cost of reconstruction to meet current code requirements. Agents would be wise to discuss this issue with their customers.
Workers’ Compensation
Allegations of failure to procure are the most common. In many of those situations, the matter focused extensively on the providing (or lack of providing) workers’ comp for clients who work in multiple states. Agents would benefit by having established procedures to identify the states where their commercial workers’ comp clients are currently conducting business and to periodically identify those states where the employer may, at sometime in the future, conduct business operations. There are specific ways to handle this issue and agents (producers and internal staff) need to know those requirements.
For contracting risks, especially on general contractor type accounts, not only does the client need workers’ comp but it is important that the client know that any subcontractors they hire have workers’ comp as well. If an employee of the sub is injured on the job and the sub does not have any workers’ comp, the contractor that retained the sub could be deemed to be the employer and have to provide the workers’ comp benefits.
Other issues include ensuring that your clients know when their workers’ comp policy is “subject to audit” and what that means as well as determining to what degree, on your sole proprietorship and partnership accounts, if the owners want to be covered by their own workers’ comp policy.
Professional Liability
Last but no means least is professional liability. There are a whole host issues, including:
Moving coverage to another carrier.It is widely known in this area of business that no two policies are the same. Some of the differences could include the definition of the named insured, the coverage (claims made or claims made and reported), the definition of covered professional services, etc. If the agent is looking to move the account to a new carrier, a full review should be conducted to determine any differences. To do this, it is suggested that a specimen policy be secured.
The “retro date.” This is one of the most important elements of a professional liability policy. For an “error or omission” to be potentially covered, the act that is alleged to have caused the injury/damage must be after any applicable “retro date.” The best coverage is “full prior acts.” If the carrier requires a retro date, it is important to maintain that date. When switching claims made coverage from one carrier to another, do not advance the retro date.
Other noteworthy issues include relying on the general liability coverage to provide coverage for all services rendered. If your client has a professional liability exposure the general liability carrier may be including a professional liability exclusion, so look to identify upfront whether a professional liability exposure exists.