How to Avoid E&O Claims from New Products
Print this Article | Send to Colleague
An ancient proverb would have us believe that, "There's nothing new under the sun." That may have been true once upon a time, but beyond question, the speaker was not referring to modern insurance markets. As new risks emerge at a dizzying pace, new insurance products are being developed to respond and protect insureds from these new (and some old) exposures. It goes without saying that even a good insurance agent can get into trouble placing these new coverages, which begs the question: how can an insurance agent dealing with these new products protect themselves from an unwanted E&O claim?
1. Understand the Changing Needs of Your Client.
This means asking the right questions, listening to the answers and following up appropriately.
For example, an association filed a construction defect lawsuit against a client roofing company. The lawsuit alleged that the client was hired to provide roof and structural engineering consulting, assist in preparing bid documents, selecting contractors, selecting types of products and selecting the installation process for the new roof. A few years after the work was completed, numerous defects appeared in the work and materials used. A claim was submitted to the client's general liability carrier, which denied the claim on the basis that there was no coverage for breach of contract, breach of express warranty, and professional malpractice, as they were not caused by an "occurrence" as defined by the general liability policy.
The client proceeded to bring a claim against the agent for failure to recommend and procure a professional liability policy. The client's claim was defeated by evidence from the agent's files, which reflected that on numerous occasions the agent, aware that its client had begun doing consulting work, offered professional liability coverage to the client -- which was rejected every time.
To stop an E&O claim from developing, an agent should be sure to document each time a new insurance coverage/limit is recommended to a client along with the client's response. Follow up appropriately. Questions left hanging are often used to hang E&O claims on agents.
2. Understand How the Insured's Business is impacted by the Policy's Terms and Conditions.
In jurisdictions and situations where a duty to advise exists, the agent-insured relationship cannot operate in a vacuum. There has to be two-way communication.
For example, an insured's client - an architect - designed a truck terminal for its owner. During the construction of the project the owner alleged the architect's design contained mistakes that resulted in construction delays and additional costs for its customer.
After some time had passed, the architect came into his agent's office to procure a claims made and reported professional liability policy. The agent and architect agreed to move the coverage to a new carrier, for which the client completed a new application. The architect failed to disclose, however, that a potential 'negligent design' claim by the truck terminal's owner was in the wind.
The new carrier bound and issued a claims made and reported professional liability policy. A few months later the owner made a demand on the architect, who at that time reported a claim to his new professional liability carrier. The new carrier promptly denied coverage for the claim on the basis of prior knowledge. The architect knew about the possibility of a claim by the truck terminal owner prior to the new carrier's policy inception, and therefore, the claim was denied.
The architect then brought an E&O claim against the agent for negligent procurement and breach of contract claiming that the agent failed to provide him with matching and continuous coverage, and further failed to advise him that the new policy did not contain first dollar defense.
Context is key here. Is this a new business or a going concern? A new policy or a replacement? If the latter, thought should be given to how the new policy will address old business. In order to avoid an E&O claim the agent should review the differences in coverage between the expiring and new policies looking for gaps and changes, then communicate and document that these differences were discussed with, and selected by, the client.
With respect to claims made and reported professional liability policies, in particular, it is imperative that an agent encourage clients to list all incidents on its application. That way, if an incident needs to be reported to an expiring carrier, as discussed above, such notice is timely provided. Additionally, in order to keep the lines of communication open with clients, the agent should be responsive and helpful to all client inquiries.
3. Report Claims to All Carriers
What if you and your client only have a 'meeting of the minds' concerning a new risk after a loss already has occurred? All is not lost. Existing coverages and policy forms can be slow to adapt to new exposures. Consequently, even after a loss has occurred it can be hard to determine which will cover it and which will not. The smart agent does not try to answer those questions, rather they simply direct the insured to submit the claim to every carrier that might provide coverage.
A company that designs and builds industrial production facilities submitted a bid for a redesign of a cement facility. The bid was accepted and the facility built. After completion, the property owner alleged significant movement and deformation of certain tunnels. The owner alleging construction and design defects filed a lawsuit.
The agency had procured Commercial General Liability (CGL) and Professional Liability policies for this new client. Although well versed with general liability policies, the agency had just begun to procure professional liability policies. When the claim was first reported to the agency, their natural inclination was to report the claim to the CGL carrier. The CGL carrier provided coverage under a reservation of rights and filed a separate lawsuit against the client to determine coverage. A few months later, the agency reported the claim to the Professional Liability carrier who declined coverage as the claim was not reported within the effective dates of the policy period or within 60 days of the expiration of the policy. Ultimately, the coverage lawsuit was decided in favor of the CGL carrier and the client was left without coverage. The client then filed a lawsuit against the agency alleging a failure to report the claim to the Professional Liability carrier when they were first notified.
Always remember that it is the carrier's duty to determine the availability of coverage for their policyholder. If the Professional Liability carrier had been put on notice of the lawsuit when the agency was first notified, the client would have had coverage for the claim and litigation against the agency would have been avoided.
Professional liability insurance policies have many similarities, but do evolve over time as new products enter the market. Take time to learn the needs of your clients and educate yourself about the policies in the marketplace and their impact on your clients and you.
Article written by
Barbara Rocco and Kristina Miller are Assistant Vice Presidents and Claims Specialists with Swiss Re Corporate Solutions and work out of the Chicago office. Insurance products underwritten by Westport Insurance Corporation, Overland Park, Kansas, a member of Swiss Re Corporate Solutions.
Reprinted with Permission of Big “I” Advantage, Inc. and Swiss Re Americas. All Rights Reserved
