I can’t help but think that the economy is largely responsible for these increased claims, but other than insureds going bankrupt and incurring D&O claims due to such bankruptcy, or EPL claims when laying off a substantial number of employees,  the connection may not be all that apparent.

I put on my noodling hat the other night and came up with the following thoughts, mostly pertaining to E&O:

How is the economy causing claims for our insureds?

Financial pressures, cost-cutting measures and layoffs can cause disruption in previously well-managed processes.  I can’t tell you how many times I’ve seen a reduction in staff where all the work just gets parsed out to the remaining employees.  Many of those employees have never done that work before, they don’t receive proper training, and the work is piled on top of an already-full desk with no incentive to put on the afterburners other than fear that their job is next if they don’t make themselves indispensible.    Is this conducive to quality output?  I think not.

For most businesses, the downturn in revenue occurs before the fall-off in demand, so it’s almost impossible to service an account throughout its lifecycle if payment is loaded up front and recognized immediately.  When I was on the retail side, one of our accountants asked why we didn’t earn our revenue over the 12 month policy period, versus recognizing it when bound.  The insurance folk guffawed at the accountant – “Why, that’s never done!” they said.  True, but why not?  Because policies rarely cancel mid-term?  Not so in many lines.  Because the work attendant upon that piece of business is completed at the time the account is invoiced?  Also not the case.  Because we assume nothing will ever go wrong, and we plan for constant growth?  Yeah, that’s the ticket.

The folly of this optimistic belief system hit me hard when one of my prior employers lost an underwriting program due to the carrier going into receivership.  Revenue ground to a complete halt in one month, but we had to service hundreds of policies for the remainder of the policy year.  We went from seven or eight people working on that program to one person pulling loss runs and trying to manage the endorsements and another trying to re-market and salvage what we could.  It was not a pretty picture on many levels, but it was particularly painful because it could easily have been avoided.  What if we had recognized the income on that program as it was earned and staffed accordingly?    We would have had a slow, predictable step-down in revenue corresponding with the step-down in servicing demands.

All that being attractive from a stress and humanitarian perspective, the E&O-related question here is – what is the likelihood that errors were made during that run-off period with the staffing stresses that existed, versus if we had taken a more conservative approach to recognizing our income and kept a more suitable staffing level throughout run-off?

It also occurs to me that while our insureds may be suffering from financial stresses that could lead to claims, at least we can ferret that out by looking at financials and asking for information if any red flags are raised.  But what about the financial condition of their clients?  If your insured is providing services of an advisory nature, or services that roll up into a larger deliverable for the client’s customers, you can bet your bottom dollar that if something goes wrong, the client will be looking under every stone for someone to blame so he can recover money for the loss.  Either he’s trying to avoid being sued, or he already has been and figures he’s not going down alone. 

Back in the day, circa 2005 and earlier, if there was any kind of relationship between your insured and his client, a mistake that damaged the client in some way would not necessarily result in a claim.  A lot of times the insured could make it good.  If not, the relationship tempered a client’s desire to make a claim against the insured.  But now…The insured doesn’t have the resources to fix a problem, and the client doesn’t have the resources to absorb the problem or honor the relationship and work through the issues.  It’s all about keeping your head above water, and a kinder, gentler response to a perceived wrong is not long considered, if at all.

How can you tell if the insured’s clients are under financial strain?  You can sort of assume that they are these days, but clearly that is not helpful, unless you choose to stop insuring anyone at all until the economy turns around.   It used to be that E&O apps asked the insured if he ran a credit check and/or background check on prospective clients.  This was to ferret out payment/credit problems and any history of litigation.  I haven’t seen that question in a long time (except maybe on an LPL or APL app), but agents and their insureds would do well to resurrect that process.

And of course, a client’s financial stress will cause them to cut corners and have more errors in their own services – but they will still try to pin the causation on someone else so they can get reimbursed for their troubles.

Where does this leave us?  In a fine pickle.

We find ourselves with cost-cutting/cost-saving measures, requirements to be ever more productive with less staff and fewer resources, cutting corners on best practices because we’re doing the work of 2, 3, or 4 people.  We have unmotivated staff, untrained support people (or producers/underwriters), and are looking over our shoulders wondering what’s coming after us next, and how bad it is really going to get.

Our clients are in exactly the same place, unless they’re a debt collection company or something similar, with a contrarian prime time for maximum profitability.  Our clients’ customers have the same problems and are looking for the best value and scrutinizing everything they pay for.   If one cut corner or under-staffed error in the insurance program intersects with one mistake made by the client – you’ve got an uncovered claim with a very high likelihood that it will roll uphill to become your E&O problem.

What can we do to address these issues?

As agents, we can and should take a closer look at who we bring on as clients.  I know it’s hard to second guess a potential account at any time, let alone when you’re scraping and clawing for every penny of revenue.  But failing to vet your potential clients can result in unpaid accounts receivable, an overabundance of servicing issues, an insured that doesn’t have time to provide sufficient and accurate information regarding their exposures, and in the end anything that goes wrong will be your fault and your commission income has been frittered down the drain with the handling costs of that account.

How can you evaluate potential clients?  It’s probably wise and reasonable to run a credit check, and research any Better Business Bureau  or similar complaints.  Knowing the potential client through the community or associations is always a good way to gather background information.  Requesting a copy of financials can be helpful, if the insured is willing to share them, and if the type of insurance you’re placing generally requires the financials.  The downside to the financials is that they are always  retrospective, and you are most likely to get ’09 year-end financials this early in the 2011 year.  A lot could have changed.  I’d say year-end financials and the most current interims would provide an adequate picture.

It may also be prudent to execute a contract with your client that defines the rights, duties and obligations of each party.  The insured must provide thorough and accurate answers to all questions in the information-gathering process, must notify you of any changes, and must pay premiums.  You would offer whatever services detail your level of engagement.  My philosophy here is that if the insured goes off the rails and doesn’t inform you of what’s going on, you can trot that contract out to reinforce your defense that you only had an obligation to respond to the needs of which you were informed.  If the insured engaged in shenanigans you didn’t know about and therefore didn’t insure or didn’t explain the exclusion applicable thereto, the contract will again bolster your defense.

The fact that we provide so many services for free and without contracts is a constant source of amazement to me, but that’s a topic for another day.

For the underwriters out there, I believe a return to some good old-fashioned questions would be helpful.  Perhaps the creation of an “Economic Conditions Impact Questionnaire” would be suitable.  Over the last many years, questions about financial condition and how the insured relates to its clients have slowly faded away. 

Certainly, one of the growing drivers of claims is a client retaliating against our insured alleging unsatisfactory rendering of services in response to the insured attempting to collect monies owed.  This is a tried and true way to get the wolf to back away from the door, and the less liquid the insured’s client is, the more likely the response will be particularly venomous.

The following questions could help identify an insured that is sliding into a profile of higher potential for claims:

1. Do you check the litigation history of your potential clients?
2. What is the average length of your relationship with your clients?
3. Are clients allowed to pay in arrears for your services?  If yes:
   1. Do you run credit checks on your clients before extending terms?
   2. Does your contract for services document billing rates and payment terms?
   3. What percentage of your accounts are over 90 days past due?
   4. What actions do you take to recover monies for aged receivables?
   5. Do you turn past due accounts over to a collection service?
   6. Have you filed or threatened suit against any clients in the last 24 months in order to collect monies owed to you?
   7. Do you anticipate taking action against any clients in the next 12 months in order to collect monies owed to you?
   8. Does your contract for services include a provision for you to return fees to the client, if the client is dissatisfied with your services?

I believe these questions, and similar ones you might cook up on your own, can be very helpful in identifying incipient problems.

I’ve also noticed in a few policies an exclusion for countersuits brought in response to a suit for fees brought against a client by the insured.  That approach would certainly insulate the carrier from these retaliatory claims by disgruntled (or broke) clients.   I’m not sure that any particular carrier would want to be the first to jump wholly into that pool, and the exclusion might be a deterrent to the purchase of that carrier’s policies, all other things being equal.   However, excluding these countersuits on an action-specific basis could be a brilliant solution.  This is similar to the “seek counsel” warranty exclusions in some older London EPL policies.

To implement this scenario, the carrier would add an endorsement to the policy that binds the insured to conferring with qualified counsel prior to filing a suit for fees.    Such counsel could be a risk management/mitigation person at the carrier, or it could be an approved panel counsel.  If the insured does not confer with qualified counsel there would be no coverage for any countersuit arising from their action against the client.  If the insured does confer with qualified counsel, there would be coverage.   Reasonable, wise, risk-management oriented, and tremendously helpful in getting the insured through the minefield of collecting debts without generating an attack on itself.

 Bottom line, if the microcosm I’m observing does exist in a broader form, we are either experiencing an anomaly that will correct itself soon enough, or we are experiencing the beginning of a new “normal” which is not all that attractive.  Taking a more considered approach to accepting any given insured as a client, both at the agency level, and at the carrier level, could be the cure for many ills.  It’s time to look at more than the insured’s likelihood of a claim arising from their operations, and add the contemplation of the likelihood of a claim or other unpleasantness arising from their financial condition.

The insured is an architect firm, and the agent sent me the contract for a potential job to make sure our existing coverage met the limits requirements and there were no problems with the indemnification wording. 

However, the very first thing I noticed about the contract when I started to look it over is that it requires the following:  “The policy shall include without limitation contractual liability coverage to the maximum extent possible for the indemnification obligations…”

I feel like this is one of those pictures where you pick out how many things are wrong:

How many policies have you ever seen that included coverage “without limitation”?  How many policies cover contractual liability coverage (and contractual damages)?  How can you have coverage “without limitation” and “to the maximum extent possible” at the same time? “Possible” meaning – as circumscribed by policy language?  Or “possible” meaning — that which is provided by the broadest coverage available in the world?

The indemnification wording combined with the requirement quoted above work to create sort of an Additional Insured situation where the client is looking for an agreement that the carrier will fund the insured’s defense and indemnification of them in the case of a loss arising from the insured’s negligence.  Yet they did not ask to be named as an Additional Insured (which I don’t encourage anyway). 

Interestingly, the drafter of this contract knows enough about claims-made coverage to require that if the policy is claims-made the retro date must pre-date work done under the contract.  But the contract does not require that coverage, or an Extended Reporting Period, be kept in place for a period of time after the work is done.

Last, but not least, and a tip of the hat to one of my loyal readers who shared a similar situation with me after last week’s Knugget, the contract requires a 2mm “per Occurrance” (sic) limit.  Notwithstanding the mis-spelling, have you ever seen a per-occurrence limit on a professional liability policy?  If it happens at all, I suspect it’s extremely rare.  Our policy limits are put up on a “per claim” basis, with the exception of some specialty lines which focus on line-specific language.   I don’t think I’ve ever seen the word “occurrence” on the dec.  So if one were to be exceedingly particular, virtually no policy would ever be able to meet that requirement.  Could there be a situation where this difference in terminology could result in an unexpected difference between what the client wanted and what the policy provided?

The important thing to deal with here is that the professional liability policy is not a contractual coverage.  It’s a negligence policy with exclusions, conditions and other limitations.  If a client is damaged by the insured’s errors or omissions, the policy will respond accordingly, and that’s what the client should be looking for when wanting proof of coverage.  If the insured does anything that triggers a contractual obligation, and the client seeks compensation under the contract — no dice.  So we generally cannot provide coverage that would meet a contractual liability requirement.

And I wonder if any client has ever withheld payment due to lack of an insurance policy that meets the contractual requirements.  Hmmmm.

You could drive yourself (or your insured) crazy analyzing contract requirements to the nth degree, and advising when disconnects like the above occur so the insured can go back to the client and attempt to resolve the problems with the contract wording.  And it’s always problematic for an insured to be relying upon the advice of his agent to bring up contract wording problems while the client is relying upon the advice of his attorney — who may know a lot about transfer of risk and contracts, but not much at all about insurance.  I think it’s worth it in the long run to fight the good fight.  Eventually, the clients will get enough of the same feedback and mend their ways.

 * * * * * *

Some interesting things have come up lately regarding insureds’ contractual requirements, and whether they’re attainable or whether they’re being covered by the insurance purchased.  I’m sure you’ve seen the same issue in GL as we have in PL where a contract requires something that just plain is not available, or doesn’t even exist. 

Notwithstanding the potential breach of contract problem the insured is getting into by allowing such wording to stay in a contract and putting his head in the sand, the situation is pretty straightforward if the coverage sought doesn’t exist, or is so rare as to be nearly impossible to find or afford.

But what if the insurance required is easily available and is priced to sell — but the insured still doesn’t comply with the contract because his agent provides the wrong policy?

Sometimes jargon is the problem.  The insured’s client may be using language that is not what we’re used to.  Kind of like when lawyers say “personal injury” when they mean what we call “bodily injury”, or “public liability” when we use “general liability.” 

There is a relatively high-profile case from 2006 where a surplus lines broker was found to have a duty to a third party for not providing the insurance required by the third party.  This was a 9th circuit decision, and some believe it is bad law and will not be the precedent referenced in other jurisdictions. I believe that liability is ever-expanding with rare exception, but time will tell, either way.  In this case, the court found that the insured’s client was the “intended beneficiary” of the insurance, and so the placing broker had a duty to place coverage that would fulfill the needs as expressed.  This is similar to the theory that creates liability for an accountant when the audited financials he prepared are used to fraudulently secure a loan, and the lender is harmed.  The lender has a cause of action against the accountant, even in the absence of a contractual relationship because the accountant had reason to believe that his work product would be used by third parties, and those third parties have a right to rely upon the validity of that work product.  You can imagine how lack of confidence in audited financials would grind the machine to a complete halt.

In this case, the insured had operations in India and was doing programming for a US client.  The US client wanted to be sure coverage would be in place in case the tech company did not deliver the product appropriately, so they required coverage be placed for the India company’s technology E&O.  When the claim occurred, the client sued the insured, and lo and behold!  no coverage.  The policy that had been placed specifically excluded all work done in India.  And this was even in light of the specific request that coverage be provided for work done in India.

I have long heard the theory that in the absence of a “special relationship” agents’ duties (and to an even lesser extent wholesalers’ duties) are to provide a policy generally in the same line of coverage as the insured requests.  i.e., “I want a general liability policy” so you place a general liability policy.  And if your insured is a roofer, and roofing is excluded, what the hay!  You got him a GL policy.  I know that NONE of my agents (especially the ones whose own E&O I write) conduct business like this.  But there are agents who are just that slap-dash, or who will cut any corner to get the cheapest price, and these half-baked policies are often the result.  

I would propose that there is a growing trend to hold agents and brokers to a somewhat higher standard.  We are not required to be prescient and to figure out exposures the insured cannot even recognize.  But when an insured comes to us and says “I need coverage to fulfill this contract’s requirements”, gives us the contract, and then we provide 75% of what’s needed without ever addressing the shortfall, would that not be cause for the insured (or in some cases his client!) to come back against us for failing to perform in the manner in which all parties were relying upon us to do?  

I would hope that liability could only possibly occur if the placing agent were aware of the contractual requirement.  I’ve been shocked sometimes when I see a contract late in the game (or god forbid after binding) and just then discover what provisions the insured was needing to have in their policy.  Up until that point, I was unaware, and in many cases the retailer is not familiar enough with the policies or the terminology to know whether what is being requested is normal, unusual, available, included in a regular policy, or anything else.

This has made me contemplate requiring the insureds’ contracts prior to quoting, but at the end of the day, there could be dozens of them, and I couldn’t possibly have the time to go through them all and ensure that the policies meet them, or disclose when they don’t.  If you have a sophisticated insured, they might be able to determine if the coverage matches the contract requirements.  But most of the time, I would imagine the insureds rely upon you to figure out that very thing.  So the best we can do is be aware that this issue lurks, and help each other avoid it as much as time, energy, awareness and courtesy allow.  But don’t let it keep you up at night.  Yet.

Below you will find my recent Knowledge Knugget discussing the dangers of agents serving on boards.

I’m adding a new danger here, thanks to a discussion with one of my favorite agents in CA who noted a particular problem.

What happens if the agent has to make a claim against his insured, on whose board he sits?  There are not many circumstances under which this could happen, but it is a possibility.  How does he reconcile his duty of loyalty under those circumstances?  And I cannot imagine the befuddlement of the carrier that receives a claim on an insured where the agent who placed the business is the claimant.  And what if there’s no coverage, and the agent then gets sued by the client, yet he’s the claimant in the first place?  Theoretically, at that point, they would stop the insanity, consider the claims to be offsetting and dismiss the whole thing.  But maybe not.

The particular situation that brought this topic up had to do with a potential personal injury claim against an entity.   But I’ve also contemplated — what happens if an agent’s on the board of an entity, and the entity doesn’t pay its premium, and the agent needs to take action to recover the premium?  As you may know, defaults can be subject to a D&O policy if the Ds & Os knew they were misleading the creditor at the time credit was granted.

What if the agent director was kept in the dark and thus extended credit (ordering coverage bound, let’s say, on a policy with 25% minimum earned — like a non-standard condo HOA), and now is stuck with that 25% minimum earned because the insured’s check bounced.  How is he going to unravel that?  What if there’s an uncovered claim due to the policy being cancelled and they sue him, and he feels he must counter-claim against them to protect himself?  How do you explain that to the carriers you just bound the insured with, and your E&O carrier?  Weee, What a Predicament! (as John Travolta exclaims in Face-Off, one of my all time favorite movies).

Imagine how complex it could get if an agent sat on the board of the HOA where he lived and wrote all their coverages and had a property or GL claim.  Covered or uncovered.  Wow.

Anyway, chew on all that (yes, I know — I worry too much) while you read the below Knugget, and let me know your thoughts….

* * * * *

Twice last week I had occasion to discuss the topic of agents writing insurance for entities on whose boards they sit.  This is a common road to production for many agents, but let me share with you why it might not be an course of conduct in which you want to engage:

First problem –

If you’re sitting on a board, it is your duty to put loyalty to that entity above any loyalty to yourself.  If you are placing insurance for this entity, can you honestly say that you are doing the very best for this entity that can be done?  Do you have all the markets that are appropriate for its business?  Are you giving up your commission so as to procure the lowest possible pricing?  Are you doing what it takes to ensure the entity buys all needed insurance, even if you are not overly familiar with some lines of business?

Can you possibly ever avoid the inherent conflict of interest that comes with making money off of a service you provide the entity?

To complicate matters, what happens if you’re also on the board of your agency?  How can you reconcile those two entities’ needs?  You can’t.  You have to put loyalty to one above loyalty to the other, and therein lies the rub.

If the question ever arises as to whom you placed first, you will have very few defenses.

Solution?  Possibly, you could hand the account to someone else in your agency and act only as a referral resource.  Your agency would still make the revenue, and if you don’t profit personally from the placement, you will be at less risk.  Still, not completely free of risk because at the end of the day, your agency, and the coverages and pricing it can provide may not be deemed as the best possible for the entity.

Second problem –

Check your insurance agents E&O policy, and you may find that claims arising from your services rendered to any entity for which you are a director are excluded.  This is not an uncommon exclusion.  There is usually some form of exclusion that eliminates coverage at least for claims made by entities over which you exercise control (by ownership or by directorship), and sometimes the exclusion extends to all services rendered to, not just claims made by, those entities.  That means you may have no coverage even if a third party makes a claim against you, rare though that might be.

So if the worst case scenario occurs, and your entity has an uncovered claim, there will be no coverage simply because you sat on the board.  No coverage for you, and most of the time, no coverage for the agency.  How, then will you resolve that claim?  Out of your own pocket?  Scary stuff.  And again, what if you’re on the board of the agency?  How could you have exposed it to such financial harm?  Now you’ve violated your duty of loyalty and duty of care to the agency.  Not good.

My recommendation both from an agents E&O risk management perspective and from a D&O risk management perspective is that you should not place coverage for any entity on whose board you sit.

If sitting on boards is a large part of your networking and business-building process, use it for networking, and write every other board members’ coverage, and that of all their friends.  But when it comes to the entity’s coverage take the high road, and advise the board that you cannot write the entity’s coverage yourself without creating an inherent conflict and sacrificing the protection of your E&O policy, and refer them to another agent or three.  You’ll sleep better at night if you do.

I think most agents who write insurance under these circumstances have not thought through the ramifications.  It all looks so simple on the surface.  But it’s not.

Next week’s Knowledge Knugget will discuss this topic in more depth.  Sign up prior to 2/4/10 to receive the KK in your mailbox bright and early.  I’ll post it here sometime after its distribution to my mailing list.

I’ve noticed that most, if not all, standard physicians companies offer the doctor a lifetime tail upon retirement.  Sometimes the tail is free, if the doc has been with that insurer long enough.  Other times it’s at a relatively reasonable premium.

I’ve seen this provision in an accountants’ policy or two.

However, I have not seen it extended on architects or engineers policies or in the handful of lawyers professional liability policies I have recently reviewed.

What’s up with that?

Notwithstanding the fact that many of these professionals work in a firm environment and don’t carry individual policies, they still have the issue of coming to retirement age with an incredibly long loss development horizon.  They frequently have no control over the ability to purchase tail on their own, having been just a cog in the wheel of the firm, yet they are personally liable for their professional errors in many jurisdictions.  If the firm does not maintain coverage, or somehow moves to a policy that does not include these hapless retirees, they are bare.

I would love to see the market respond to this issue by providing an individual tail trigger (and quite possibly limit) for professionals reaching retirement age.  Maybe in the next soft market, it will evolve.