What Happens Next? Facing an E&O Claim

By Angelo J. Gioia / Bringing The Best Together

In today’s litigious society, despite the well-meaning efforts of you and your staff, your Clients are more likely than ever before to file a lawsuit against you. Attorneys who defend E&O claims often hear statements from their Agent/Broker clients such as: “They never asked for that type of insurance" or "They never told me about that exposure.” But when the Insured/Client is faced with an uninsured exposure and has a loss, the reality is that they will bring a suit against their Agent/Broker. So the question is ‘now what?’ What do you do if you are sued? 

Long before you face that “now what,” you must be properly prepared. Your first line of defense is to make certain that you purchase the right E&O policy. Too many professionals find themselves without proper coverage because they have failed to spend the necessary time to evaluate the marketplace and as a result, had gaps in coverage, or thought they had a higher policy limit. Not all E&O policies are created equal. It is important when buying or renewing your policy that you understand what is covered, what is excluded, and that you do not use price as the only indicator of value. Buying the right policy, with the proper coverage and limits is the first step in protecting your agency and your reputation.  

If you have established a protocol for procedures in the office and have documented them in writing, then this Policy and Procedures Manual is subject to discovery by the plaintiff’s attorney and can be used against you, especially if you have it and don’t follow it! It is vital that you and your staff have been following the written, standard, practices you have established.  

While documentation will not eliminate the prospect of you being sued, it is definitely a worthwhile loss prevention procedure every agency should implement. When an E&O claim is made against you, your agency file may determine the direction and outcome of that litigation. A properly documented and maintained Client/Underwriting file should help the agency’s defense, while a poorly documented one is certainly going to make the outcome much more challenging. The file, in all its formats, is discoverable and admissible. Both the defense attorney and the plaintiff’s attorney will have the right to examine your Client/Underwriting file and all of the information that it contains. In short: your documentation will tell your story. Be sure it’s complete and accurate.

So, you’ve purchased the correct E&O policy, you’ve created and follow standard policies and procedures in the office, and you’ve maintained a thoroughly documented Client/Underwriting file, and you’re facing a lawsuit — now what?

Here Are A Few Things to Think About If You Have Just Been Sued

Contact Your E&O Carrier Immediately  

Make certain that you report the claim to your E&O carrier as soon as possible so they can begin the discovery process and get the necessary details and statements from all involved while the information and circumstances are fresh in everyone’s minds. In their discovery process, they will be determining the answers to five questions.

What is your relationship with your carrier?

There is a distinction between an insurance agent and an insurance broker. An insurance agent is different from an "agent" in general law. An insurance broker seeking the best insurance coverage for his or her customer may find an insurer for which he or she is also an agent. In this instance, a dual agency may exist where the professional owes obligations to the insured and the insurer.

What type of coverage did your Client request?  

It is common in most suits that the Clients will claim that they requested "full coverage" or that they were unsure about the type of coverage to request and, thus, relied upon their Agent/Broker to recommend the type of coverage they needed. As a rule, an insurance broker has no duty to advise the insured to purchase more than the minimum statutorily required insurance, or to advise as to any specific insurance matters. However, once the insurance Agent/Broker decides to respond to the Insured's request for information, the Agent/Broker must do so with reasonable care. If the insurance professional is an Insurance Agent, the insurer may be vicariously liable for the Agent's breach of standard of care. 

What type of coverage did you request for the Client?

Your attorney will evaluate your request to the insurer, and the differences, if any, between the request by the insured to you, and your request to the insurer. Generally, the insurance Agent/Broker provides the insurance requested by the insured. However, if the Agent/Broker recommends specific coverages or limits, and the insured requests the coverage suggested by the Agent/Broker, then the Agent/Broker must meet the standard of care in recommending the particular coverages. There is potential for liability if the Agent/Broker represents that certain coverages exist and they do not because of exclusions or endorsements.

What coverage did your Client actually get? 

Your attorney will determine whether the coverage provided by the carrier matches the insured's request. The lawsuit made against you will claim that the insurance as written differed from the insurance requested, and that the Client did not become aware of the difference until after the loss.

Can you demonstrate that you acted within the “Standard of Care”?

(This is the difference between Duty to Procure & Duty to Advise.) This question centers on the Agent/Broker’s relationship with his client and the Agent/Broker’s professional conduct.  

In a number of states, an insurance Agent/Broker owes a duty to his or her Client only to obtain the requested insurance coverage within a reasonable time or inform the Client of the inability to do so. However, the courts have also found that an insurance Agent has a duty to have the skill and knowledge requisite to his or her employment responsibilities, to exercise good faith and reasonable skill, care and diligence in the execution of his or her employment responsibilities, and to possess reasonable knowledge of available polices and terms of coverage in the area in which the insured seeks protection.

An insurance Agent may also have a fiduciary duty to the insured if there are special circumstances or there is a special relationship. Special circumstances exist when the Agent knows the insured lacks the knowledge in insurance matters and is relying on the Agent to procure the appropriate coverage.

Gather Your Documentation

Compile all of your underwriting files, along with any other documentation, correspondence and phone call records related to the Claimant. It is critical that you do not alter any records or information involving the Claim or Incident. Let the file speak for itself. It is okay to put the file in order, but nothing should be added or deleted from the file.

Maintain Control of Your Records

Don’t allow anyone to inspect, copy, or remove your records without approval from your E&O carrier. 

Make No Statements About the Case 

Do not provide any recorded or written statements regarding the alleged error or claim that involves your agency. Do not discuss the matter with anyone other than your appointed legal counsel or a representative from your E&O carrier.

Don’t Make Advance Payments

Don’t advance payments or monies without consulting the E&O carrier.

Most Importantly, DON’T ADMIT LIABILITY!

Concluding Thoughts

Remember at the end of the day, it’s your name and your reputation. The best insurance agencies are those where management clearly lays out the objectives of the company and is actively interacting with employees. They listen, motivate and lead and, when necessary, provide feedback to ensure that each employee has the opportunity to grow, because they know that when the staff grows, the agency grows.  

Gioia is an experienced insurance executive and author with 40 years expertise, with a record of providing business leadership, developing and implementing strategic service plans, increasing efficiencies, reducing costs, increasing revenue, improving customer satisfaction and building high performing teams. Gioia has a degree from The College of Insurance (now St. John's University School of Insurance and Risk Management), and is a nationally recognized Professional Liability Expert, publisher, author, and founder of PLUS & AgentsofAmerica.ORG.

Professional Liability Underwriting Society (PLUS), established in 1986, is one of the largest professional insurance organizations in the world, with a membership exceeding 7,000.  AgentsofAmerica.ORG, is an association dedicated to the personal and professional growth, stability and management of its agent members. AOA is an indispensable resource for news, products, services, education and industry information throughout America.