Don’t Risk the Agency – E&O Tips on Trials and Trends

When it comes to agency errors and omissions liability there’s nothing more important than playing it safe. One proven way is ensuring that everything is documented properly. But because there is always the threat of an E&O allegation turning into a large jury verdict, agents need to think about what it means to “play it safe” in managing the risk of going to trial.

While social inflation isn’t always a big subject when discussing E&O claims, it’s still there “lurking,” says Elizabeth Whitney, JD, head of professional liability US, senior vice president, Swiss Re Corporate Solutions.

“I won’t get into the details, but we recently had a case that we were round tabling and the underlying facts were horrific,” she said. “Even though we don’t think the agency had any blame in the proper insurance not being placed, we were still really concerned about a claim like that going to a jury.”

That concern and the unknowns of taking a case before a jury are always on the minds of underwriters, she says. “Even in claims that aren’t horrific from a human standpoint, just more of a concern over a financial loss, can be scary because you just don’t know how it’s going to turn out with a jury,” she said.

Whitney said insurers still try E&O cases. “We still win cases,” she added. “We won a case in Florida a couple weeks ago, but we are really thoughtful in what we try and how we try it.”

Brent Winans, vice president of Clear Advantage Risk Management, who has served as an expert witness in more than 150 insurance agent E&O cases in 21 states, advises agents not to take umbrage if a carrier decides it’s best to forgo trial.

“Insurance agents often come into these claims wearing their ‘righteous indignation hat,’ saying, ‘I did nothing wrong, so I will fight it to the end.’ But that can be very counterproductive,” Winans said.

“First, sometimes the agent doesn’t clearly see their own responsibility, and even if they’re right, that may not be the way a jury is going to see it.”

Whitney understands why an agent may not want to settle if they feel they’ve done nothing wrong. “It’s because we are insuring reputations; that is part of what we do,” she said.

Of course, an agent can choose not to give consent to a settlement offer, she added. “But if I’m an agent hearing from my carrier to settle, I have to stop and think, why are they saying that? What have they seen? What do they know that I don’t know?” she said. “And at the end of the day, if you get a $10 million verdict against you, whether you were right or wrong, it’s not going to matter that much next time you try to go get agency E&O insurance.”

Deciding whether to settle is a business decision in a lot of ways, she added.

According to Winans, it’s definitely a business decision for the agency because not only does their E&O policy have a policy limit, but it’s also likely to contain a “hammer clause” forcing the agency to put some “skin in the game.”

A coinsurance hammer clause is often found in professional liability policies and calls for “a sharing of defense and indemnity costs (between the insured and the insurer) incurred after the insured refuses to consent to a settlement proposed by the insurer,” according to IRMI’s definition.

Whitney noted that different E&O policies read differently on the consent to settle clause. For example, if the carrier recommends a settlement but the agency refuses to consent to the settlement amount, then the agency will be on the hook if a jury verdict results in a higher amount than originally offered in the settlement.

“So I say, ‘Yes, we really should settle this for $1 million,’ and you say, ‘No, we go to trial,’ then the carrier will be on the hook for that $1 million, but anything beyond that is going to be on the insured,” she explained.

Winans says in American litigation, justice is not always done. “Even if you’re right, it could cost you a lot of money,” he said.