Professional Liability Tidbits » claims

Caution! — Agents on Boards – 2/4/10 Knowledge Knugget

Chris Christian — Sat, 06 Feb 2010 00:27:22 +0000

This topic created a lot of discussion on LinkedIn, and I thank all the participants. Great input!

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.

Agents and Boards

Chris Christian — Sat, 30 Jan 2010 19:24:22 +0000

Many agents serve on boards of directors, frequently non-profit, sometimes for-profit, and end up writing the entity’s insurance. From a D&O perspective, this creates an inherent conflict of interest, and from an Agents E&O perspective, often creates an uncovered cause of loss, should a claim arise.

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.

Missing your Tail?

Chris Christian — Tue, 18 Aug 2009 16:53:03 +0000

Extended Reporting Periods are a critical feature of professional liability coverage whenever a professional reaches retirement.

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.

The Perils of Self-Management of Claims

Chris Christian — Fri, 05 Jun 2009 15:23:16 +0000

The 6/4/09 Knowledge Knugget is below. A related posting on LinkedIn has generated a lot of commentary, as has another posting from a colleague questioning insureds’ propensity to report late. I have not yet begun to delve in to the possible Agents’ E&O exposures of an agent knowing his insured is doing this and not bringing these problems to their attention.

I was recently reviewing an EPL account where there were four claims but none reported to the carrier. Upon discussion with the agent, I discovered that the insured turned claims and allegations over to their own attorney, who resolved matters. None of these incidents were turned in to the carrier, on the assumption that if something spun out of control that would be the time to get the carrier involved.

I asked the agent if the current policy had a provision for the insured to manage its own claims within the retention, and he responded that it did not.

What is this insured doing to itself?

Clearly, there are three issues:

1. Inaccurate claims reporting and possible voiding of future coverage. If loss runs are pulled, they show a clean slate. There isn’t one. Luckily for all underwriters involved, this insured discloses its claims, but if it were not so forthcoming, it could easily mislead underwriters, and loss runs would support the deception. The only time the omission would come to light is if investigation of a later claim turned up evidence of the prior ones. There is a clear loss and frequency pattern, of which knowledge the underwriters would be deprived. If this lack of reporting were to come to surface later, a policy could be rescinded for material misrepresentation.

As far as the insured is concerned, it’s no harm, no foul because the claims have been resolved within the deductible. Don’t get me started. Again, in my specific case,the insured did disclose the claims via narrative, but I quail to think how many insureds don’t, when they assume that a claim settled within the deductible is no one’s concern but their own.

2. Risking declination of a claim when submitted. More importantly, the insured is taking its life into its hands if any given claim cannot be favorably resolved within the deductible. When the claim blows up, there is a late report situation (may be critical, depending on policy reporting provisions), and if the carrier’s position and ability to defend the insured have been prejudiced, such prejudice may give the carrier a reason to decline coverage.

3. Paying a deductible twice. Monies paid to its own attorney without consent of the carrier may not serve to meet the deductible in the first place. Many policies have a provision that indicates they will not consider covered any expenditures that take place without the carrier’s consent. Clearly, paying ones own counsel to manage a claim that is not submitted to the carrier would constitute an expenditure taking place without the carrier’s consent.

Why take these chances? Isn’t it better to arrange with the carrier ahead of time if one wishes to manage ones own claims within a retention? Many carriers are agreeable to this arrangement, and if a current carrier is not — find another one! Or get the desired counsel agreed by the carrier, and run the claims through the system so that expenditures within the deductible count against it, and the insured does not have to pay it twice (once to its own attorney, then again to reimburse the carrier for the next round of legal services).