Experience has demonstrated there is a lot of confusion on the part of many producers and agents concerning the operation of their Claims Made and Reported Errors and Omissions coverage. This confusion can be costly and allow the agent to become a victim of one or more potential pitfalls, which exist. We hope the following information will be helpful.
Key terms you should know:
Occurrence – An event or chain of events that ultimately causes a claim. Example: The sale of a policy
Claim – An actual demand for damages (money). Most of the time a claims is evidenced by a lawsuit, although it can be as simple as a letter from the alleged injured party or their attorney requesting reimbursement.
Incident – Any statement, action or AWARENESS of a situation that could be perceived as having a potential for an E&O claim being presented in the future. This could be in the form of a statement made by a client during a phone conversation, a client’s letter or your just feeling uncomfortable about a situation.
Prior Act – An occurrence before the effective date of the current E&O coverage.
Following is a scenario showing how the Claims Made and Reported E&O coverage works:
An agent takes an application from a perspective client today. During the course of completing the application, which is based upon information given by the client, the agent inadvertently fails to note a pre-existing condition. The client signs the application, it is submitted to the company by the agent, and a policy is issued. A year and a half later, the client has a loss, and the insurance company denies coverage because of “pre-existence”. The client then files suit against the agent, demanding payment for the uncovered loss.
The governing factor for Claims Made and Reported coverage is the date a claim is actually reported to the agent’s E&O Carrier. In this case, the claim would be presented 1 1/2 years after the occurrence. If the agent had continually maintained Claims Made E&O coverage, the insurer providing the coverage at the time the claim is presented would be the responsible carrier.
As a producer covered by a Claims Made and Reported E&O policy, you should have two major concerns:
- What about coverage for claims resulting from occurrences prior to the effective date of my Claims Made policy? (Prior Acts)
- What about claims presented after my Claims Made policy is no longer in force:
Question #1 can be answered by whether or not Prior Acts coverage is provided. Most policies provide Prior Acts coverage, but there are some reasons why a policy may not, such as: a gap in prior E&O coverage (coverage lapsed and not immediately replaced), poor claims experience, or no prior E&O coverage.
Question #2 can be resolved by the E&O carrier granting a Discovery Period or a “Tail” option and also known as an Extended Reporting Period. Tail coverage provides an extended period in which claims can be reported to the carrier for covered acts, errors or omissions that occurred while the policy was in full force. This option is usually exercised in the event of sale, merger, death, disability or retirement of the named insured.
If an agent is changing E&O carriers, the agent should notify the current carrier of any incidents prior to the change. By not notifying the current carrier of the potential for a claim, no claim is made and coverage will not be preserved for future developments from this incident. The new carrier will not cover the claim because of the agent’s prior awareness of the situation.
There is nothing wrong with changing carriers, and sometimes there is no choice. However, if you have a prior awareness situation, place your current carrier on written notice prior to making the change.
NOTE: We urge you to maintain continuous Errors and Omissions coverage without lapse. Whether a lapse in coverage is intentional or unintentional, it could be costly to you at claim time–particularly if a claim evolves out of a Prior Acts situation.
LOSS CONTROL IDEAS
In the unfortunate event you have a claim:
- Promptly report any “claim” or error of concer Your E&O carrier can decide if the matter qualifies as a claim or only an incident. Provide the necessary details (name of claimant and description of the “claim” or “incident”).
- Do not alter records involving the claim or incident.
- Do not allow the inspection, copying or removal of your records without consulting your E&O carrier.
- Do not provide recorded or written statements concerning an error or claim involving you or your agency.
- Do not discuss the matter with anyone other than your counsel or a representative from your E&O carrier.
- Do not make advance payments without consulting your E&O carrier; this is “legal liability coverage” and many “goodwill” gestures have backfired on agents and agenci
- Do not make any admissions of liability and refer any inquiries to your E&O carrier
- Stay calm. E&O claims happen and a good E&O carrier will provide the “peace of mind” that you are paying for.