E&O Caveat #1: Never Assume!

Author: Bill Wilson

Having taught agent E&O seminars since 1988, one of the most common sources of E&O claims involves failure to communicate. In this article, we’ll examine a serious breakdown in communications that involves a cardinal principle of E&O loss control…never assume!

Here is a recent question submitted to our “Ask an Expert” service:

“We insured a manufacturing company with an effective date of July 1st, 2001. The applications were sent to the underwriter prior to binding/quoting and he quoted the particular line in question: “installation floater.” Nowhere on the rating work sheets did it say what the coinsurance percentage was and the ACORD application did not have a place to ask for a coinsurance limit nor did it have a place for agreed amount.

“We assumed that this was agreed amount as that is the coverage we had with the prior carrier at a $100,000 limit. We had the insurer issue the coverage at $500,000. In October, we were notified by the manufacturer that they needed quotes on $5MIL, $10MIL and $15MIL installation coverage for a job they were doing. We went to every market we could find and could not get quotes on that limit. Along comes the claim on January 10, 2002. The claim will be for a total of $900,000, part of it (probably 1/2) in the installation portion of the policy.

“The insurer invoked an 80% coinsurance clause, as that is what they had issued it at. The CSR did not check the policy when it came in; however, the underwriter never called to ask what coinsurance percentage we wanted nor did he ask if we wanted agreed amount on the policy since nothing at all was requested on the application. The same underwriter was aware of the need for higher limits as he is one that we had gone to for a price on increased limits and they had turned it down.

“Of the $450,000 installation loss, the 80% coinsurance clause has only allowed $25,000 of the claim to be paid. Our insured obviously is not happy. We have exhausted all attempts with the insurance company to get them to stand by the coverage we wanted and the coverage we bound on July 1, 2001.

“We are in the process of having the insured file a declaratory action against the insurer with a couple of affidavits from myself and the CSR as to what we had requested and bound. Any suggestions???”

I ran this by our faculty and agreement was 100% that step #1 is to get your E&O carrier involved. Although it may not look like the agency is a candidate for a lawsuit, don’t be surprised if the insured is advised by counsel to include the agency in any suit against the carrier and/or to file suit if any suit against the carrier is unsuccessful.

In addition, if you are assisting the insured in filing a declaratory action against the insurer, a suit from the carrier may not be out of the realm of possibility. Most likely your E&O insurer has extensive experience with these types of situations and might be able to head off any adverse legal proceedings. Below are some observations of our faculty. Hope this helps and best of luck.

Installation floaters are almost universally written with a 100% coinsurance clause, not on an agreed amount basis. That’s probably why the underwriter didn’t ask.

First, I think the declaratory action against the insurer may be a mistake for the agent. He should contact his E&O carrier immediately before assisting his client in any legal action against the carrier. Laws vary by state, but usually in these types of actions, for better or worse, the agent finds himself sitting on the defense side of the table. If his affidavit says he wanted one thing and got another and let that stand for nearly one year, he could be prejudicing his E&O carrier’s defense and may void coverage of this claim…just depends on his policy trigger.

The agent has a responsibility to review the policy issued compared to the application. The responsibility and liability often shifts from insurer to agent as time proceeds. Generally after 90 days of having the policy with different conditions than requested, most of the liability may be shifted to the agent, thus the need to get the expertise of his E&O carrier.

In the area of inland marine coverage, there are so many different policy forms out there, no agent should ever assume a condition or coverage exists without reading the form. I have seen installation floaters that are hard printed at 80%, 90% and 100% coinsurance clause and some that have variable coinsurance clauses. I have not seen one at agreed amount, not to say that one doesn’t exist.

Again, my biggest concern is that the agent’s involvement in the insured’s declaratory action may come back to haunt him. Time to let the E&O experts take over before he jeopardizes coverage under his policy.

The E&O carrier should be alerted primarily because most installation floaters are written at 100% coinsurance, not agreed amount. The agent indicated that he did not alert the carrier about deleting the coinsurance clause. On the surface, it appears that the agent may have a greater exposure to liability than the insurer. If the declaratory action fails, you can pretty much bank on the insured’s attorney coming after the agency or at least enjoining it in the suit until accountability can be established.