Volume 26, Number 3
For many years now, we have been writing The E&O Report with two main goals in mind. The first is to keep you abreast of current developments in insurance law, the regulations that affect your business and your interactions with insureds and insurers. The second is to give you guidance and advice as to where errors and omissions claims and lawsuits might potentially arise so that you can follow good practices and procedures that will help protect your agency. As they say, “Forewarned is Forearmed.”
As your E&O counsel, we are most often there after a claim or lawsuit has been asserted, giving us the perspective of hindsight. This position enables us to see where things went wrong during the procurement of coverage, servicing of an account or the handling of a claim. We can also see what went wrong, why and what could have been done differently to possibly avoid the E&O claim or lawsuit. Additionally, we have an intimate knowledge of your business practices through our representation of your agency or brokerage in those actions, our audits of your operations and our years of practicing in this field. Thus, we are in a position to identify potential avenues for E&O problems from a singularly unique vantage point.
One of the most insidious has always been the difference between what you do in the actual day-to-day running of your business compared to practices and procedures that would create a near zero chance of possible E&O exposure. We understand all too well that the latter is unrealistic from a business perspective. However, the problem created by comparing reality to an unrealistic standard is always most often painfully apparent at a deposition where you are asked to justify and explain in detail why you did or did not do something.
Consider making a right turn on a red light, for example. While legal, it requires the driver to make a “full” stop before making the turn. But in reality, many people merely roll through and make the turn without ever coming to that full stop, traffic conditions permitting of course. Thus, in this one example, we see the reality of how many people in the world do something contrary to what might be called the “Best Practice” of making a Right-on-Red. Now picture yourself at a deposition being asked about not coming to a complete stop and having to justify the reality of what was done versus what should have been done. The same can be said of your everyday practices in selling insurance and servicing your customers as compared to the reality of how you conduct your business.
Most agencies and brokerages have an agency management system that has an “Activity Log” feature, allowing the agency or brokerage to chronologically record all events of import. Unfortunately, what is important and insignificant often become factors at a deposition even if they are irrelevant to the core issue of the lawsuit. When an activity log is used by employees of an agency or brokerage correctly it is one of the most powerful tools we can use to defend an E&O claim or lawsuit.
Generally, if one were to describe the function and use of an “Activity Log,” it would be stated that it provides for all employees (producer, underwriter, claims, CSR, etc.) the mechanism to record in chronological order each activity that takes place for a customer’s account. More importantly, if asked, most would initially say that your office uses it as intended. The reality is, however, that the recording of every single activity on an account, even a small one, would be so time-consuming as to grind your business to a halt. Rather than generate new business and service accounts, your staff would spend all their time imputing entries into the log. They would become the modern day equivalent of monks tied to their desks, copying sacred text by hand without time for anything else.
We know in actuality everything is not recorded. Moreover, given the reality of time constraints, each entry is by definition only a short summary of what transpired. The salient facts recorded are thus dependent on the person inputting the entry. The problem is that what is important to one employee may not be important to another. Thus, the subject matter of the entries and the rules for recording sometimes varies wildly. These differences and the omission of certain data can become a source of uncomfortable questions at a deposition. Here is an example.
Consider a building suffers a loss due to a peril that would have been covered under a “Special Form” but not a “Basic Form,” which is the coverage form issued. The insured, of course, claims that the agency should have procured “Special” coverage. Issues of whether or not a Specific Request was made or a Duty to Advise assumed aside, (the real legal issues of the case), this, like all other E&O claims, is based on the alleged failure of a broker/agent to meet a standard. The allegations presuppose that a broker/agent is not doing what he or she should. Any acts or failures, even if unrelated to the reason for the litigation, will support the overall view that the broker “messed up.”
During the deposition, a plaintiff’s counsel could question you about each and every entry in the log, asking why this was included and not that? Did you record each and every communication with the insured, insurer, wholesale broker or MGA? Why, if you discussed perils covered, did you now recite that in the entry with greater detail? Didn’t you think it was important? It is at this point that frustration sets in as you are being subjected to questioning as to an unrealistic standard that bears little resemblance to the realities of your business.
As you may have heard us say over the years, consistency is the key to E&O loss control. That said, an agency or brokerage should have standards as to what information must be input into the agency management system. Those procedures should be consistently followed by all employees on a regular basis. If this is done routinely by the employees of the agency or brokerage, it should then be in a good position to deal with any questions that may be posed concerning why something was, or was not, noted in the agency management system. In our experience, prudent insurance agencies and brokerages stress with their employees the importance of routinely putting information in the agency management system in order to sufficiently document what occurred.
In Sun Tzu’s historical work, “The Art of War,” he opined: “Know yourself and you will win all battles.” We take Tzu’s statement to mean: know the scrutiny that your business practices can come under, the source of the scrutiny and why you are being scrutinized. If you do so, you will be protected in a far greater manner with regards to a potential E&O claim and defending yourself in any litigation that may arise if you have the documentation to show what occurred.
Howard Kronberg, Esq. and
James C. Keidel, Esq.
Keidel, Weldon & Cunnningham, LLP