Protecting Against E&O Claims

I would like to comment on the March 2012 Canadian Underwriter article entitled, ‘How Much is Enough?’ When I look at the question, I want to add: “…to avoid underinsurance and a possible broker E&O claim.”

The possibility of an errors and omissions (E&O) claim should be uppermost in the mind of a broker in all things undertaken. But it should not create a sense of panic or paranoia that might block good and proper judgment.

At the risk of too generously applying this as a panacea for the broker’s work ethic, I believe some conditions, if they are in place prior to the acceptance of new business, can have a positive effect on the broker’s ability to avoid the disaster of an E&O situation.

In the following, my commentary is not to be taken as a critique of any comment made in the article, nor is it to be considered as having greater substance than the opinions expressed within that article.

CONDITIONS IN PLACE

A proper mindset

First and foremost, the broker must carefully consider whether or not the client is a potential one for the brokerage based on consideration of the extent of the client’s risk, the broker’s ability to examine exposure to risk and if coverage can be offered to minimize or eliminate financial loss. Here is a question to be asked:

Is this a risk in which I should be involved?

The answer should take into account market availability, coverage constraints for liability limits and whether or not my E&O insurer would frown upon me for venturing into a domain in which I have had no previous experience. If the response to any one of these points leaves any doubt at all, it is best to back off and rightfully inform the client. The client will respect your honesty more than he or she will appreciate the heart-stopping thrill of a premium reduction — especially if the reduction comes at the expense of the client’s protection and your E&O.

Client capitalization — deductible concerns

It is highly unlikely that the owners of private companies will wear their financial reports on their sleeves. But the degree to which clients are capitalized can and should be the basis for considering the extent of client protection from a number of angles. For example, a high deductible may have some effect on premium, but it applies to property damage, not bodily injury (where a substantial loss is most likely to occur). Property damage for the most part has a measurable limit, but not so in an

injury loss. Therefore, to a thinking insurance buyer, a high deductible may not be financially sound: the buyer may view the reduction in premium as being inversely proportional to the ascending deductible limits. Of course, that same buyer may be financially prepared to make an insurance investment in the protection of corporate assets, as he or she likely does with R&D and product improvement. But if initial conversations and observations cast any doubt on the client’s capitalization, the broker should be aware a careless agreement to a high deductible could cause the client serious financial difficulty.

Is the client onside?

Luckily for insurance brokers, fewer insurance haters buy insurance than potential clients who agree to work with you. When dealing with insurance haters, you will be in the unfortunate position of hearing the client emphasize premium saving. No amount of advocacy for viable protection will justify spending even a dolar more than the incumbent’s existing premium cost. Avoid this client at all costs. Limits agreed to for the sake of cost and that do not cover loss will come back to haunt you. In this situation, if the insurer does not cover the loss or the majority of it, the insurance broker most likely will.

Top management — getting involved

No quotation to be given to a prospective client should bypass the owner of the brokerage or the second in command. Much will depend on the size of the account, but that should not preclude observation and scrutiny by a higher authority. There are no “small accounts.” Every risk is subject to a catastrophe loss.

Colleague critique

In the process of preparing a quotation, during the stages of aligning coverage and premium to risk, have a meeting with your office colleagues to review what has been developed and initially put together for the eventual meeting with the client. Listen carefully to suggestions and be prepared to make changes that best suit the client, the quoting insurer and the guy at the top paying your commission. As an adjunct to this, do yearly critiques to avoid stale dating. While you’re at it, have a copy of the Directory of Directors on hand to determine from the recorded company profile if other divisions exist about which you haven’t been told. All of the limits in the world will not help if an associated, affiliated or subsidiary company is not named in the policy.

Umbrella liability

Treaties may apply separately to this coverage, with rating leniency allowing some saving in premium. It may have a drop-down provision but most likely not, so it’s probably follow form. The client needs to know that a self-insured retention is not a deductible: it is his portion of risk that applies before the ground of the liability limit, thus allowing full application of the limit. Umbrella liability is an essential unit of protection for clients with high liability potential — i.e. products liability.

Making the intangible tangible

The point here is not to make the improbable probable, but more along the lines of possible. Effectively, the client holds a piece of paper, albeit a legal document, consummated through offer and acceptance to create contract. If I were David Copperfield, I would not have any difficulty in making that piece of paper something physical, much like a newly purchased dining room table. But I am not, and I can’t.

However, we can try to have the client come away thinking that the piece of paper he’s holding is more than it is. The client must understand that the contract represents a potential physical reality beyond just the piece of paper on which it is written. It represents protection against the unfortunate spectre of a future injury — including personal injury — and/or property damage.

It may be difficult for the client to accept that it has real value before a claim or loss event. In his mind, he’s paying for something that has yet to return value, unlike the dining room table he just bought. For him, the potential for injury or loss may, in fact, never materialize. If he does not accept the value you are attempting to explain, stop talking. Persistence will create aggravation. This is not the way to begin a broker/ client relationship.

CONCLUSION

In terms of the probity, honour and rectitude in the acknowledgment of duty of care by the insurance broker, there is no real conclusion: it is ongoing. The daily practice requires constant honing, care and understanding. In the eyes of our clients, we are effectively teachers. Our fervent hope is that as a result of our dedication and the skillful management of our respective abilities, we’ll earn an ‘A’ on our report card.