E&O:
ROAD MAP TO POLICY
ANALYSIS
Copyright © 2015 by International Risk Management Institute, Inc.®
Course Objectives
• Understand important contract features in
general, as well as those specific to
insurance policies and how they may or may
not affect coverage.
• Know the general sections of a policy their
purpose, how they can be modified, and the
importance of each.
• Understand how the sections of a policy
interact and be able to explain how they work
together to determine coverage.
Course Objectives
• Explain the importance of each area of
special interest and be able to explain how
they work together.
• Understand and explain how a program of
insurance should be coordinated and why it is
important.
• Understand how all of the above impact
errors and omissions (E&O) loss control, new
sales, and retention of existing business.
Understanding the Native Language
CHAPTER 1
Chapter Objective
Upon completion of this chapter, the
student should be able to understand
the important contract features in
general, as well as those specific to
insurance policies and how they may or
may not affect coverage.
Contract Basics
• Offer and acceptance
– Offer—willingness to enter into an agreement
with another party; clear and well
communicated
– Acceptance—the assent of the offer; must be
unconditional and clearly communicated
Contract Basics
• Offer and acceptance—insurance
transaction
– Application is completed
– Agent conveys the offer
– Insurer has three options
• Accept and issue
• Reject
• Accept with modifications (counteroffer)
Contract Basics
• Consideration
– Value that each party gives to the other when
making the contract
– Insurance contracts
• Insurer promises to pay for covered losses,
defend, or perform other services (inspections)
• Insured agrees to pay premiums, abide by the
requirements of the policy
Contract Basics
• Legal capacity
– Right to make binding agreements for oneself
(competent parties)
– Insurer has no legal capacity if it is not
licensed in a certain state
Contract Basics
• Legal purpose
– Cannot be something that is against the law
– Examples: murder, drug dealing
Other Legal Terminology
• Valid contract
• Voidable contract
• Void contract
Unique Characteristics of
Insurance Contracts
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Principle of indemnity
Insurable interest
Unilateral contract
Conditional contract
Personal contract
Doctrine of adhesion
Aleatory contract
Subrogation
Doctrine of reasonable expectation
Doctrine of good faith
Unique Characteristics of
Insurance Contracts
• Principle of indemnity
– Reimbursed for a loss subject to limits and terms
– Put the insured back in the same financial
condition as prior to the loss
– Replacement cost coverage—no deduction for
depreciation; can be overindemnified
– Valued policies—payment of full face value of the
policy in the event of a total loss
– Liability insurance—contract of indemnity against
legal liability; pays even if the insured becomes
bankrupt
Unique Characteristics of
Insurance Contracts
• Insurable interest
– Financial interest in the value of the subject of
insurance
– Must clearly prove a personal stake in the
item being insured at the time of loss
– Reasons for insurable interest
• Without insurable interest, it becomes a wager or
gambling contract; against public interest
• Increases moral hazard
• Helps measure the amount of the financial loss
Unique Characteristics of
Insurance Contracts
• Unilateral contract
– Only one party makes an enforceable promise
– Insurer makes a promise to pay a covered
loss
– Insured makes few, if any, enforceable
promises
• Insured must only fulfill certain conditions
Unique Characteristics of
Insurance Contracts
• Conditional contract
– Performance of the agreement is dependent upon
a condition (event, not certain to happen, must
occur before the performance becomes due)
– Two types of conditions
• Condition precedent—action that must be performed to
trigger the other party’s duty (i.e., insured must notify
the company of an accident)
• Condition subsequent—termination of an existing
obligation (i.e., claim denial; insured has 1 to 2 years to
file suit against the insurer)
Unique Characteristics of
Insurance Contracts
• Personal contract
– Cannot be assigned or transferred to another
party
– Insured must meet certain underwriting
standards (loss history, moral character, credit
history)
Unique Characteristics of
Insurance Contracts
• Contract of adhesion
– Insured must accept or adhere to the entire
contract
– Insurer develops the policy, and the insured
must either accept or reject
– Ambiguities are resolved in favor of the party
with lesser knowledge (insured)
Unique Characteristics of
Insurance Contracts
• Aleatory contract
– Agreement concerned with an uncertain event
that provides for unequal transfer of value
– Insured can pay premiums for many years
and never sustain a loss
– Insured can pay premiums for a short period
of time and sustain a large loss
Unique Characteristics of
Insurance Contracts
• Subrogation
– Rights to recover the amount of a loss from
the party that is legally liable
– Assigned to the insurer
– Based on the indemnity principle in the policy
Unique Characteristics of
Insurance Contracts
• Subrogation
– Elements of subrogation
• Insurer is contractually obligated to pay
• Insurer is secondarily liable for the loss
• Third party is primarily responsible for the loss
– Purposes of subrogation
• Prevents overindemnification (keeps the insured
from collecting twice)
• Holds the tortfeasor responsible for the loss
• Keeps insurance premiums reasonable
Unique Characteristics of
Insurance Contracts
• Doctrine of reasonable expectations
– Allows coverage to apply when the
reasonable expectations of the insured would
result in claim payment despite the lack of
policy provisions creating coverage or
ambiguous language
– Places the burden on insurers to
communicate coverage and exclusions clearly
and accurately
Unique Characteristics of
Insurance Contracts
• Doctrine of good faith
– Insurers make promises to cover an insured
for events that may or may not happen in the
future
– Insured is in possession of facts unknown to
the insurer at that time
– Higher standard of honesty imposed on both
parties than that of regular commercial
contracts
– Good faith on the part of the insured
Unique Characteristics of
Insurance Contracts
• Doctrine of good faith
– Warranty
• Statement of fact provided by the insured that will
void the contract if not true
• Express warranty—explicitly stated within the
policy
• Implied warranty—not stated but generally
understood and recognized by both parties
Unique Characteristics of
Insurance Contracts
• Doctrine of good faith
– Representation
• Truthful completion of an insurance application
• Answers considered representations
• If an answer is dishonest, the insurer may be able
to void the contract
– Concealment
• Willful act of holding back pertinent information
Unique Characteristics of
Insurance Contracts
• Doctrine of good faith
– Insurer’s good faith obligations—refrain from
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Refusing to pay for a covered loss
Causing an unfounded delay in making payment
Deceiving the insured
Exercising any unfair advantage to pressure an
insured into an unfavorable settlement
Landmarks in the Insurance Contract
and Their Importance
CHAPTER 2
Chapter Objective
Upon completion of this chapter, the
student should know the general
sections of a policy, their purpose, how
they can be modified, and the
importance of each.
Standard vs. Nonstandard Policies
• Insurance Services Office, Inc. (ISO): most widely
recognized provider of standard forms
• American Association of Insurance Services:
similar but less complete product offerings
• National Council on Compensation Insurance:
workers compensation policy forms
• Drafted with the needs of the average insured in
mind
• Can be used across all industries with some
modification by endorsements to meet specific
needs
Standard vs. Nonstandard Policies
• Advantages of standard policy forms
Standard vs. Nonstandard Policies
• Standard forms and language updated based
on
– Loss exposures that change
– Changing underwriting philosophies
– Case law interpreting coverage
• Nonstandard policies and endorsements
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Used where no standard form exists
Used for risks that need specialized coverage
Used where no standard market exists
Companies develop their own policy forms
Agents must read and understand the coverage
differences
Policy Format
• Declarations (workers compensation:
information page)
• Insuring agreement
• Covered property
• Covered perils (property forms)
• Exclusions
• Definitions
• Conditions
• Endorsements
Policy Format
• Declarations (workers compensation:
information page)
– Information about the insured
• Name and address
• Type of organization (corporation, partnership,
etc.)
• Policy period
• Policy limits
• Deductibles
• Premium
• Endorsements attached
Policy Format
• Declarations (workers compensation:
information page)
– Important for information to be correct
• Declarations can be binding
• Make sure policy conforms to the specifications in
the application
– Changes in locations, additional locations,
limits, etc., must be modified by endorsement
– Verify named insured, location addresses,
and other important information that can result
in uncovered claims
Policy Format
• Declarations (workers compensation:
information page)
– Take time to verify all information on the
application and/or Dec page with the insured
• Extra time shows the insured you are concerned
about proper coverage
• Shows that you value their business
• Increases sales satisfaction and retention
• Reduces the likelihood of E&O losses resulting
from uncovered claims
Policy Format
• Insuring agreement
– Grants the coverage provided by the policy
– Very broad in scope
• Liability: promises to pay for all liability arising from
bodily injury or property damage occurring during
the policy period and related defense
• Property: promises to pay for all direct damage to
insured property
– Places few restrictions
Policy Format
• Covered property (property policies)
– Varies from form to form
– Provides detailed descriptions of property
covered or not covered
– Generally three categories of covered
property
• Building
• Personal property of the insured
• Personal property of others
– May contain sublimits for covered property
Policy Format
• Covered perils (property coverage)
– Most property policies contain a covered
perils section
• Commercial property: covered perils form is used
– Named perils: names only the perils that are
covered
– Open perils; special perils; “all risks”
• Covers anything that is not specifically excluded
• Broader coverage
Policy Format
• Exclusions
– Limit coverage granted in the insuring
agreement
– Can apply to specific perils, certain types of
property, or specific types of losses
– Serve one of the following purposes
• Eliminate or reduce overlapping coverage
• Remove coverage not needed by the typical
insured
• Reduce the incentive to create losses
• Remove coverage for uninsurable risks
Policy Format
• Exclusions
– Eliminate or reduce overlapping coverage
• Arranges policies to “dovetail” instead of
overlapping
• Reduces duplicate charges and conflicts between
insurers
• Example: workers comp and employers liability
Policy Format
• Exclusions
– Remove coverage not needed by typical
insureds
• Insured may not have exposure to certain risks
• Rating structure does not always reflect actual
exposure of an insured
• Coverage may be bought back via endorsement or
separate coverage form
Policy Format
• Exclusions
– Reduce incentive to create losses
• Moral hazard: insured’s incentive to profit from
insurance by engaging in illegal activity
• Morale hazard: reduces the insured’s incentive to
diligently protect against loss because insurance
will pay
Policy Format
• Exclusions
– Removing coverage for uninsurable risks
• Reimbursing expenses incurred to develop and
market products that fail—risk of doing business
• Insurers are unwilling to write coverage
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Flood
Nuclear
War
Coastal wind exposure
Policy Format
• Definitions—the “policy dictionary”
– Words that have special meaning within the
contract must be defined
– No definition means that words take on their
traditional meaning
– Can be used to clarify coverage, restrict
coverage, or grant coverage
– Defined terms identified with quotation marks,
bold faced or italicized fonts
Policy Format
• Conditions
– Enumerates the insured’s rights and
responsibilities
– Enumerates the insurer’s rights and
responsibilities
– Other items addressed
• Subrogation
• Insured’s duties after loss
• How losses are apportioned when more than one policy
applies
– Violation of a condition can lead to coverage
denial
Policy Format
• Endorsements
– Used to tailor terms to the needs of the
individual insured’s business
– Used to
• Grant additional coverage
• Restrict or eliminate coverage
• Change coverage by changing or adding
definitions
• Modify the rights of the insurer or insured by
changing or adding conditions
• Schedule covered persons, projects, or property
Policy Format
• Endorsements
– Standard endorsements exist
– Manuscript endorsements can be drafted if
needed
– Endorsements can be brief; others can
resemble a separate policy with grants of
coverage, exclusions, and conditions
– Often added during the policy term
Package Policies
• Single policy that includes two or more
coverages that are otherwise written as
separate policies
• Two types of commercial packages
– Commercial package policy (CPP)
– Businessowers policy (BOP)
Package Policies
• CPP
– Contains two or more coverage parts
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Commercial property
Boiler and machinery
Inland marine
Commercial general liability (CGL)
Pollution liability
Commercial automobile
Package Policies
• CPP
– Several advantages
• Fewer gaps in coverage
• Business insured pays relatively lower premiums
because individual policies are not purchased
• Savings are passed on to the insured in the form of
package discounts
• Named insured has the convenience of a single
policy
Package Policies
• BOP
– Designed to provide property and general
liability coverage for eligible small businesses
– Written on a portfolio of special BOP forms
– Indivisible package that includes property,
liability, common policy conditions
– Limited underwriting eligibility
• 35,000 square footage maximum
• $6 million in annual gross sales
• Specific types of artisan contractors
Connecting the Dots
CHAPTER 3
Chapter Objective
Upon completion of this chapter, the
student should understand how the
sections of a policy interact and be able
to explain how they work together to
determine coverage.
Considerations for Coverage and
Policy Analysis
• A number of factors must be considered
– Claims personnel make the final
determination of whether or not coverage
exists
• Claim paid based on policy language
• Denial must include formal documentation citing
specific policy language
Considerations for Coverage and
Policy Analysis
• A number of factors must be considered
– Agents constantly receive hypothetical
questions
• Always use a verbal disclaimer
• Questioner must understand that the answer is
general in nature and every loss is unique
• Coverage is based on the entirety of the
circumstances
– If the question involves an actual claim,
agents should refer the question to a qualified
claims representative of the insurer
Considerations for Coverage and
Policy Analysis
• A number of factors must be considered
– Details are extremely important
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Losses may look covered on the surface
Details may uncover circumstances for denial
Losses may look uncovered on the surface
Details may uncover circumstances that actually
provide coverage
Considerations for Coverage and
Policy Analysis
• A number of factors must be considered
– Property coverage
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Type of property
Location listed on the policy
Newly acquired
Property subject to limitations
Property not covered
Insurable interest at the time of loss
Considerations for Coverage and
Policy Analysis
• A number of factors must be considered
– Liability coverage
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Circumstances surrounding the claim
Allegation made by plaintiff
Is the person or entity an insured under the policy?
Coverage that is voluntary (medical payments)
Possible negligence on the part of someone other
than an insured
Considerations for Coverage and
Policy Analysis
• A number of factors must be considered
– Other factors
• Additional insureds
• Other coverage that may apply
• Any specific endorsements that add or take away
coverage
• Proprietary forms
• Surplus lines companies and forms
Considerations for Coverage and
Policy Analysis
• A number of factors must be considered
– E&O
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Check policy for correct limits
Any endorsements added or missed
Named insured reads correctly
All location addresses correct
Coverage may still exist, but reputation damage is
hard to repair
• Insureds see agents and companies as the same
Who Is an Insured
• Insured is broken into three segments
– Named insured
– Automatic insureds
– Additional insureds
Who Is an Insured
• Named insured
– Should be accurate on both the submission
and the policy
• Be careful with multiple named insureds
• Unrelated insureds need special attention
• One entity will not be able to recover from the
other if they are both named on the same policy
– Named insureds are individuals or entities to
which the policy is issued
– They have more rights and responsibilities
and are subject to more exclusions
Who Is an Insured
• Named insured
– Expanded responsibilities and exclusions
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More stringent loss reporting requirements
Required to pay premiums
Receive any return premiums
May cancel the policy
Subject to the “business risk” exclusions
Receive cancellation notice
Who Is an Insured
• Other automatic insureds
– Personal lines
• Residents of the household related by blood,
marriage, or adoption
• Full-time students away at school under the age of
24
• Permissive users for auto policies
• Others under 21 and in the insured’s care
Who Is an Insured
• Other automatic insureds
– Commercial lines
• Permissive users of vehicles
• Spouses of sole proprietors and partners
• Members and managers of limited liability
companies
• Employees
• Volunteers
• Real estate managers
• Vicarious liability
Who Is an Insured
• Automatic insureds in the CGL
– Stockholders—while acting within the scope
of their duties as such
– Proprietorships
• Includes the spouse of the individual with respect
to the conduct of the business
• Care should be taken as proprietorships grow and
become corporations or limited liability companies
Who Is an Insured
• Automatic insureds in the CGL
– Partnerships and joint ventures
• Joint venture—two businesses joining together on
one project
• Spouses included while in the course of business
• Joint venture or partnership must be designated as
a named insured
• If dissolved, deleted from coverage
Who Is an Insured
• Automatic insureds in the CGL
– Executive officers
• Separate status from employees
• Limitation that applies to employees does not
apply to exec officers for the fellow employee
exclusion
– Employees as insureds
• Included for two basic reasons
– Perceived corporate responsibility in protecting
employees from loss arising from activities on behalf of
their employer
– Help secure cooperation in defending claims made
against the employer
Who Is an Insured
• Automatic insureds in the CGL
– Volunteer workers
• Added due to widespread use of endorsements to
add coverage
• Can be excluded
– Leased workers
• Rise in labor leasing firms and the popularity of
use
• Co-employer relationship similar to employment
Who Is an Insured
• Automatic insureds in the CGL
– Real estate managers
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In the past, often lived on premises
Not a defined term; can be broadly interpreted
Gives primary coverage to the real estate manager
Other insurance clause could give rise to coverage
issues
Who Is an Insured
• Automatic insureds in the CGL
– Professional services exclusion
• Classification and premium determination do not
contemplate this exposure
• Best treated under E&O-type policies
– Other automatic insureds
• Legal representative
• Newly acquired or formed organizations subject to
certain conditions for 90 days
Insuring Agreement
• Property coverage
– Homeowners policies
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Coverage A—dwelling
Coverage B—other structures (10 percent of A)
Coverage C—personal property (50 percent of A)
Coverage D—loss of use (30 percent of A)
Coastal regions could see some limits reduced
– Coverage B—2 percent
– Coverage C—30 percent
• Understand insurer guidelines and limitations
• Proper risk assessment should be done to discover
coverage gaps
• Reduce E&O claims
Insuring Agreement
• Property coverage
– Commercial property
• Direct physical loss or damage to
– Real property
– Business personal property
– Property of others
• List of property not covered that includes part of
real property
– Most can be added back by endorsement
• Covered perils are dealt with in separate forms
– Basic form (approximately 11 perils)
– Broad form (several additional perils added)
– Special form (risks of direct loss subject to exclusions)
Insuring Agreement
• Liability coverage
– Usually the broadest insuring agreements
– Promise to pay all sums the insured becomes
legally obligated to pay for bodily injury and
property damage
– Duty to defend if coverage exists
– Coverage territory can be limited or worldwide
Exclusions and Limitation
• Property limited
– Certain types of property may be limited
– Some limited to dollar amount
– Some limited to certain perils
– Some limited to both
Exclusions and Limitation
• Property not covered
– Personal lines
Exclusions and Limitation
• Property not covered
– Commercial lines
Exclusions and Limitation
• Perils not covered
– Basic form and broad form perils
• No coverage unless specifically named
• Still contain exclusions for clarification purposes
– Special perils
• Covered unless specifically excluded
Exclusions and Limitation
• Perils not covered
– Common exclusions
• Flood, rising water, tidal surge, water or waterborne
debris that backs up through sewers or drains
• Earth movement, earthquake, sinkhole, landslide
• Wear and tear, deterioration
• Pressure or weight of water or ice
• Vandalism or malicious mischief while vacant for more
than a certain number of days
• Ordinance or law
• Governmental action
• Nuclear
• Pollution, smoke or soot from agricultural smudging
• Others that will be discussed during coverage-specific
classes
Exclusions and Limitation
• Liability exclusions
– Common exclusions in personal lines
• Motor vehicle liability (homeowners)
• Hovercraft liability (homeowners)
• Vehicles owned and not insured by the policy
(auto)
• Vehicles furnished or available for use (auto)
• Intentional acts
Exclusions and Limitation
• Liability exclusions
– Common exclusions in commercial liability
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Contractual liability
Pollution
Damage to property of others
Impaired property
Product recall
Liquor liability
War
Nuclear
Exclusions and Limitation
• How exceptions affect coverage
– Most policies contain some exclusions that
have exceptions
– Exceptions to exclusions help shape
coverage
– Exceptions give coverage back under certain
conditions
Exclusions and Limitation
• How exceptions affect coverage
– Examples
Contractual liability is excluded in the CGL;
however, there is an exception to that exclusion for
“insured contracts.” Note that is a defined term in
the policy since it is in quotation marks.
Exclusions and Limitation
• How exceptions affect coverage
– Examples
Watercraft liability is excluded in both personal and
commercial liability. Both include exceptions to that
exclusion. Typically, the CGL policy gives back
coverage for nonowned watercraft less than 26
feet. Personal liability policies give back coverage
depending upon size, type, and horsepower of
engine and whether it is owned, rented, or used by
the insured.
Exclusions and Limitation
• How exceptions affect coverage
– Examples
Property damage exclusions contain coverage
grants for certain types of property. The
homeowners policy allows the insured to request
coverage up to a small sublimit for damage to
property of others. The CGL policy has some very
specific exceptions to the exclusion for damage to
property of others.
Exclusions and Limitation
• How exceptions affect coverage
– Examples
Liquor liability is excluded in the CGL. This
exclusion contains an exception that gives
coverage back to those who are not in the business
of manufacturing, distributing, selling, serving, or
furnishing of alcoholic beverages. This is
commonly called host liquor liability.
Exclusions and Limitation
• How exceptions affect coverage
– Examples
Damage to property exclusion contains some very
precise, sometimes complicated and confusing
language that gives back coverage under certain
conditions as illustrated in the following exhibit.
Exclusions and Limitation
• How exceptions affect coverage
– Other exclusions
• Absolute exclusions—apply regardless of
circumstances
• Anti-concurrent causation exclusions—exclude all
coverage if an excluded cause of loss causes a
covered cause of loss to be triggered
– Example: flood loss causes a short that results in a fire
that damages a building; damage caused by the flood is
excluded, thereby eliminating coverage for the fire
damage as well
Definitions
• All contracts have words or terms that
have special meaning within the scope of
the contract
• Those words or terms must be defined
within the contract
• Result: interpreted differently than
intended
Definitions
• Definition of terms may vary by policy form
• Not all policies contain the same definitions
• Definitions section (“policy dictionary”)
located differently
– Personal lines—front of policy
– Commercial lines—back of policy
• Knowing what terms are defined is
important—marked by quotation marks, boldfaced or italicized print
• Examples on following slide
Definitions
• Help shape coverage
– Example
• Contractual liability is excluded in the CGL and
business auto coverage
• Exclusion contains an exception for “insured
contracts”
• As a result, while contractual liability is excluded,
there is a coverage grant for those contracts that fit
the definition
Definitions
• Help shape coverage
– Example
• CGL policy covers “personal and advertising injury”
• Note that this is a defined term
• The definition tells us what types of personal and
advertising injury losses the policy covers
• Still subject to additional exclusions and
exceptions
Conditions
• Enumerate the insured’s and the insurer’s
rights and responsibilities
• Vary from policy to policy
• A number of conditions are common to all
policies
Conditions
• Duties in the event of occurrence, claim, or
suit
– Prompt notice
– Cooperate in investigation or defense
– Could be grounds for denial of claim
• Subrogation
– Insurer’s right to recover from a responsible
third party
– Can be waived in most policies, but conditions
for waiver vary
Conditions
• Package policies can contain conditions
specific to property, liability, and other
coverage sections
• Also contain general conditions that apply
to all sections
• Homeowners policy example on next slide
Conditions
• Section I (property)
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Insurable interest and limit of liability
Duties after loss
Loss settlement
Loss to a pair or set
Appraisal
Other insurance and service agreement
Suit against us
Our option
Loss payment
Abandonment of property
Mortgage clause
No benefit to bailee
Nuclear hazard clause
Recovered property
Volcanic eruption period
Policy period
Concealment or fraud
Loss payable clause
Conditions
• Section II (liability)
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Limit of liability
Severability of insurance
Duties after occurrence
Duties of an injured person—Coverage F—medical
payments to others
Payment of claim—Coverage F—medical payments to
others
Suit against us
Bankruptcy of an insured
Other insurance
Policy period
Concealment or fraud
Conditions
• Section I and II
– Liberalization clause
– Waiver or change of policy provisions
– Cancellation
– Nonrenewal
– Assignment
– Subrogation
– Death
Endorsements
• Policies designed to cover wide variety of
insureds and common exposures
• Endorsements need to be used to include
include coverage to meet a specific
insured’s needs
Endorsements
• Add coverage that the policy does not
automatically include
– Adding physical damage and/or liability for
watercraft to a homeowners policy
Endorsements
• Broadening coverage
– Including employees as insureds when they
drive personal vehicles on company business
in the business auto coverage
– Broadening pollution liability in the business
auto coverage to include pollution resulting
from cargo
Endorsements
• Restricting coverage
– Adding absolute pollution exclusions to the
CGL and commercial umbrellas
– Limiting employee dishonesty in a crime
policy to scheduled individuals or scheduled
positions
Endorsements
• Change or add definitions
– Adding medical payments to the business
auto coverage adds exclusions and definitions
that only apply to that coverage
– Adding an endorsement to the CGL to change
the definition of employee to no longer include
leased workers
Endorsements
• Agency benefits
– Important to understand the use of endorsements
and how they affect coverage
– Proper recommendation of endorsements to
enhance coverage adds value that can attract or
retain customers
– Spotting use or lack of use of endorsements in an
existing program can increase sales
– All staff should know about endorsements, know
how they affect coverage, and be able to spot
improper endorsements added to a policy in error
to minimize exposure to E&O losses
Importance of Punctuation
• Commas
– Most frequently used internal punctuation
– More questions arise about the use of
commas than about any other punctuation
mark
– Trend has been toward lighter punctuation,
resulting in fewer commas
– Treatment by the courts may not acknowledge
or approve of this trend
Importance of Punctuation
• Commas
– Most coverage litigation involves whether use or
nonuse of a comma has created restrictive or
nonrestrictive elements
• Coverage on properties that have a concrete roof is
subject to a $10,000 deductible.
• Interpretation: properties with a concrete roof are
subject to a $10,000 deductible
• Coverage on properties, that have a concrete roof, is
subject to a $10,000 deductible.
• Interpretation: properties are subject to a $10,000
deductible; “that have a concrete roof” is nonrestrictive
or nonessential to coverage
Importance of Punctuation
• Commas
– Real example from the 2004 hurricane
season in Florida
• Purpose: to remove coverage for wind-driven rain
without structural damage
“HURRICANE COVERGE: Coverage under this policy includes
loss or damage caused by the peril of windstorm during a
hurricane. It includes damage to a building’s interior or property
inside a building, caused directly by rain, snow, sleet, hail, sand or
dust if direct force of the windstorm first damages the building
causing an opening through which the above enters and causes
damage.
Importance of Punctuation
• Commas
– Real example from the 2004 hurricane
season in Florida
• Legal challenge resulted in claim denials being
rescinded as a result of the lack of a comma after
“sand or dust”
• Literally read, the policy covers damage to the
building’s interior or property inside the building
caused by all of the perils listed with the exception
of sand or dust unless there is direct damage to
the building first
Importance of Punctuation
• Commas
– Real example from the 2004 hurricane
season in Florida
• Adding a comma after “sand or dust” changes the
meaning
• Now the entire list of perils is limited
“HURRICANE COVERGE: Coverage under this policy includes
loss or damage caused by the peril of windstorm during a
hurricane. It includes damage to a building’s interior or property
inside a building, caused directly by rain, snow, sleet, hail, sand or
dust, if direct force of the windstorm first damages the building
causing an opening through which the above enters and causes
damage.
Importance of Punctuation
• Other punctuation marks
– Semicolon
• Separates two independent clauses
• Separates phrases in a series that contain
commas
• May be appropriate instead of a period if the
independent clauses have a close connection
– This insurance does not apply to any claim arising out of
any dishonest act by any insured; however, this
exclusion does not apply unless an adjudication adverse
to the insured establishes deliberate dishonesty.
E&O RISK MANAGEMENT: MEETING
THE CHALLENGE OF CHANGE
Agency Defenses – Documentation
Chapter 4
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
INTRODUCTION
• Documentation combined with invariable agency
procedures/practices are key defenses
• If an E&O claim occurred in your agency today, would
it be prepared to defend itself?
• Do you have the proper policies and procedures in
place to insure that your E&O carrier could mount a
compelling defense?
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
INTEGRATION OF MULTIPLE AGENCY
SYSTEMS
•
•
•
•
•
•
•
“Agency management information systems” (or “AMIS”)
Document management software
Email systems such as Outlook
Websites, social media, and instant messaging
Phone systems
Voicemail-to-text software
Carrier underwriting and policy issuance systems
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
HE SAID VS. SHE SAID
• E&O claims or potential claims can often come down to
“he said, she said” scenarios involving a lack of
coverage or insufficient limits.
• Documentation of transactions and interactions with
customers is the most important factor in defense.
• Documentation must also be tied to invariable internal
procedures and practices to bolster your claims defense
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
IMPORTANCE OF INVARIABLE
PRACTICE
• Documentation can only verify what ACTUALLY took
place.
• How do you defend against allegations of failing to follow
through on a request when you have no record of any
contact between the agency and the other party?
• When the agency needs to prove that it didn’t do
something or the request was never received, that is
when consistent business procedures provide a defense.
• “Everyone doing it the same way, all the time, for
everyone.”
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
LINES OF DEFENSE
•
•
•
•
•
Documentation
Invariable Practices
Use of Disclaimers
Written Follow-ups
E&O Coverage Checklists
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
LET THE FILE TELL THE STORY
• It is not just the quantity of the
documentation that is important, but also
its quality
• The sufficiency of documentation is
revealed at the point it is retrieved, not
when it is created.
• Documentation can represent the
difference providing a defense against the
allegation(s) and the need to settle
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
WHAT MAKES DOCUMENTATION
COMPLETE?
Who
How
What
Where
When
Why
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
CHANGING COMMUNICATIONS
METHODS
• Communication methods have changed.
• With more ways to communicate it is easy for certain
correspondence and conversations to miss finding
their way into the customer’s file.
• More relaxed correspondence with certain
communication media.
• Professionalism must be maintained with all
communication documented and clear to all parties.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
What types of communications should
be in the customer file?
• In-person Discussions
• Phone Calls (landline
and mobile)
• Emails
• Instant Messages
• Live Chats
• Faxes (traditional and
electronic)
•
•
•
•
Text Messages
Websites
Social Media
Voice Media
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
CHARACTERISTICS OF PROPER
DOCUMENTATION
• Documentation should be clear, concise, consistent;
include what was done or discussed with specific
dates and times.
• Don’t use random abbreviations or jargon that could
be misunderstood.
• Documentation should include unalterable
date/time stamp (Note: this is only possible in an
automated environment).
• Be able to recreate the transaction step-by-step.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
CHARACTERISTICS OF PROPER
DOCUMENTATION
• All staff should use the same system and procedures
in documenting customer files.
• Daily activity logs, copies of change orders, premium
adjustments, premium audits, applications, renewal
applications, declaration pages, and access to all
policy forms should be in the file or easily accessible
using a carrier website
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
THINGS TO AVOID
• Comments about a claim, its merits, or your opinion
as to whether or not there is coverage
• Resist the urge to go to bat in writing for your
customer when a claim is denied
• Just the facts - personal asides and comments should
not be included
• Do not put E&O claim information into the file of the
customer involved
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
Key Elements of the Customer File
• The ultimate goal of documentation would be to have every
point of contact with a prospect, customer, carrier or outside
third party documented
• However, it’s more important to document some things than
it is others.
– New business: coverage and exclusion discussions
– Renewals: coverage and exclusion discussions
– Limits and values
– E&O coverage checklist
– Claims
– Endorsements and Cancellations
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
CARRIER CLAIMS AGAINST AGENTS
• Keep in mind that the frequency of claims involving
carriers against agents is increasing, so it is
important to document all carrier correspondence
and conversations.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
DOCUMENTATION AND YOUR
DEDUCTIBLE
• Good documentation protects the agency and can
potentially save the agency money at the time of a
claim!
• If your agency’s E&O coverage is with Swiss Re
Corporate Solutions and the agency has implemented
sound documentation procedures for the offer and
rejection of coverage there is an opportunity to save
thousands of dollars under Swiss Re Corporation
Solutions’ “Deductible Reduction” feature.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
ELECTRONIC VS. PAPER FILES
• Use only one file storage method and all transactions
pertaining to a customer should be located in that file.
• Electronic files provide a stronger and more credible
defense than paper files since as data is created, edited
and expanded upon, the automation system records
the date and time of these changes.
• Paper files have the disadvantage, when used as a form
of defense, in potentially lacking creditable proof as to
the exact time and date that the documentation was
created
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
ELECTRONIC VS. PAPER FILES
• Documentation is only effective if the information in
the files can be considered accurate
• Any possibility that the information can be found
suspect will diminish or eliminate the protection that
documentation provides the agency
• There needs to be only one source of customer
information. Today, that information is likely more
effective when it is in electronic form.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
SCANNING
• “Scanning” is just one part of total document
management.
• Agencies may be slow to replace old procedures with
new scanning technology.
• This is a critical area and agencies struggle to
eliminate paper, even though the tools to do so have
existed for many years.
• Operations management is the key to successful
implementation and oversight.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
Admissibility of Electronic Files
• Courts have recognized the admissibility of electronic
records in court cases.
• Electronic records may be considered more credible
because of the ability to determine when information was
entered into the automation system.
• Computer generated correspondence has the date and
time produced embedded in the system; therefore,
alterations are not easily accomplished.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
Admissibility of Electronic Files
• Copies of original documents are no longer necessary
as long as the agent can produce a hard copy of
original documents
• Scanning has been become a viable method of
retaining documents in an electronic version
• Information stored electronically presents a different
set of challenges in securing personally protected
information.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
ELECTRONIC SIGNATURES
• The Electronic Signatures in Global and National
Commerce Act (ESIGN) was enacted and made
electronic contracts and signatures legal and
enforceable as paper contract with ink signatures.
• Important for agencies when it comes to signatures
on applications, proposals, quotes, and policies.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
DEFENSE METHOD - CHECKLISTS
• Roadmap of products to offer customer.
• Document coverages offered, accepted, rejected or
not applicable.
• Can help avoid claims from:
–
–
–
–
Failure to procure the coverage requested
Failing to recommend coverage
Failing to identify exposures
Not adequately explaining policy provisions
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
Customer sign-off, Acknowledgement
Forms, Written follow-up
• The defense of an E&O claims can be bolstered when
the customer file includes customer acknowledgement
that an exposure exists, coverage is offered, and the
insured makes the decision not to transfer the risk
through the purchase of an insurance product.
• Customer acknowledgement can be documented by the
agency through the use of customer sign-offs, coverage
acknowledgement waiver forms, and written follow-up
of discussions.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
CUSTOMER PROPOSALS
• Insurance proposals can provide a wealth of defense
documentation, including:
–
–
–
–
outlines coverages offered
highlights coverage limitations
any insured requirements
E&O coverage checklist
• Customer sign-offs acknowledging what was
discussed should be included
• It is also a good idea to have the customer initial each
page of the application and sign where required
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
PROPOSALS – CARRIER SYSTEMS
• Many agencies may present proposals exactly as they
are generated from carrier underwriting systems.
• These proposals may not include appropriate
disclaimer information or an area for customer signoff.
• The agency may want to consider adding a
supplemental page for both of these.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
WAIVER FORMS
• Some states require acknowledgement waivers to be
signed for various coverages (i.e. – UM/UIM,
earthquake, flood)
• ACORD also offers some template forms.
• Carriers may specifically require waivers when certain
coverages are rejected.
• Waivers are important for E&O defense; therefore,
agencies need to determine when a waiver is
required.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
SIGNED APPLICATIONS
• A carrier may not require a completed and signed
application; however, a completed and signed
application should be obtained from all insureds.
• Insurance policies are legal contracts and as such are
subject to the common law rule of “parole evidence”.
• Once the policy has been issued the agreement
between the insured and the carrier is what is in the
policy, not in any proposal or oral promise made
before the policy’s issuance.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
DISCLAIMERS
• Disclaimers aide in the defense of E&O claims and reinforce
customer communications with clear guidance.
• Nearly all of communications media can include disclaimer
language.
– Voice Mail
– Websites
– Fax, Email, and Instant Message Sample
– Claims Reporting
– Social Media
– Proposals
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
DOCUMENTATION RETENTION
CONSIDERATIONS
• The documentation contained in the customer file
that should be retained and for how long may be
dictated by your state’s law.
• The agency should be familiar with these laws and
your IIABA state association or insurance division can
likely provide direction about existing laws and how
they apply.
• Agencies should have a records retention policy.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
WHY DOCUMENTATION RETENTION?
• Customer information is the agency’s largest asset.
• Retaining policyholder records allows the agency to continue
to retain accounts and offer an increased level of service over
the customers’ life cycle
• Agencies may not want to rely solely on their carriers to retain
customer records since the record retention policies of carriers
may not be in line with the goals of the agency.
• File documentation is rule number one when it comes to
protecting against an E&O claim. When retaining files, be sure
to include any correspondence regarding coverage decisions,
waivers, signed applications, etc. Any retained dead file
should provide a story in the same manner as active files.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
DOCUMENTATION RETENTION
CONSIDERATIONS
• Different issues with paper and electronic files.
• Just because it is cheaper to keep electronic files
forever, doesn’t mean you should.
• Past files – good vs. bad documentation.
• If the agency doesn’t have personal information in
files to protect exposure to data breaches is reduced.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
KEEPING POLICY FORMS?
• Some carriers have stopped providing paper policies
or give the agency the option.
• Agencies may have to decide if they will rely on the
electronic policy view to access the
policies/endorsements from the carrier’s website or
to retain policies in their office.
• Important to have at least one master policy form
and to retain dec pages referencing coverage and
exclusions.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
DISPOSAL OF CUSTOMER FILES
• Security of private information is an on-going issue
• The privacy of confidential information is important
and security breaches may put the agency at risk of
regulatory action or civil or criminal litigation
• Disposal of private information requires handling and
agencies should have a process in place.
Agency Defenses--Documentation
Copyright © 2012, Big I Advantage®, Inc., and Swiss Re Corporate Solutions. All rights reserved. (Ed. 10/09-2)
Coordinating an Insurance Program
CHAPTER 5
Chapter Objective
Upon completion of this chapter, the
student should understand and be able
to explain how a program of insurance
should be coordinated and why it is
important.
Purpose and Importance
• Necessary and important to the agent and
the insured
• Insurance is not first and foremost in the
typical household or business
– May not understand the importance and need
– Don’t take time to do in-depth analysis of
exposures
Purpose and Importance
• Agents can fall into the order-taker role
• Using a detailed analysis approach makes
the agent more valuable
– Valuable agents rarely lose business solely on
price
– Insured is educated about the true exposures
faced; never recognized without their agent
– Being involved builds a strong relationship
that helps attract and retain customers
Purpose and Importance
• Impact on agent E&O exposure
– Helps with documentation of
• Exposures
• Recommendations
• Insured choices
– Educated consumers have greater
satisfaction at time of claim
• Claim denials can be positive experiences when
customers understand what their policies do and
do not cover
Proper Analysis Using Risk
Management Approach
• Common sense approach
• Identifies losses that could be suffered
other than those attributable to business
operations
• Attempts to effectively handle “risk” at the
lowest possible cost
• Works for both personal and commercial
customers
Proper Analysis Using Risk
Management Approach
• Risk management steps
– Identify risks
– Analyze risks
– Select the best methods for handling risks
– Implement the chosen alternatives
– Monitor the results
– Constant process
Proper Analysis Using Risk
Management Approach
• Risk identification
– Most important step
– Unidentified risks are not contemplated in a
program
– Careful review of a person or organization’s
operations and assets
– Identified risks are analyzed to determine the
magnitude of losses that may occur
– Tools such as questionnaires and checklists
are available
Proper Analysis Using Risk
Management Approach
• Risk management techniques
– Various techniques to manage risk
•
•
•
•
•
Avoidance
Loss control
Retention
Contractual risk transfer
Insurance transfer
Proper Analysis Using Risk
Management Approach
• Risk management techniques
– Risk avoidance
• Not engaging in operations or activities that may
lead to unacceptable losses
– Contractor not engaging in pollution cleanup
– Discontinue production of certain drugs because of
possible litigation from side effects
– Not renting Jet Skis on vacation
Proper Analysis Using Risk
Management Approach
• Risk management techniques
– Risk control
• Reducing potential for loss and/or the effects of
those that do occur
– Providing protective eyeglasses for manufacturing
employees
– Installing sprinkler systems in buildings
– Fortifying homes to reduce exposure to loss from wind
damage
– Adding waterproof barriers to roof to minimize water
damage
Proper Analysis Using Risk
Management Approach
• Risk management techniques
– Risk retention
• Paying for all or part of a loss from income rather
than transferring the risk
– Larger deductibles
– Retrospective rating plans
– Not buying insurance at all
• Three retention rules
– Do not risk a great deal of loss for small premium savings
– Do consider the odds of a loss occurring
– Do not risk more than your family or business can afford
to lose
Proper Analysis Using Risk
Management Approach
• Risk management techniques
– Contractual risk transfer
• Involves passing risk to others via hold harmless or
indemnity agreements
– Requires one party to hold the other party harmless for
losses to a member of the public
» Lease requires the tenant to be responsible for injury to
the public
» Requirement to be added as additional insured on the
other organization’s policy
• Contracts should be reviewed
– Determine what risks the other party is attempting to pass
on to your insured
– Determine if they can transfer some risk to the other party
Proper Analysis Using Risk
Management Approach
• Risk management techniques
– Insurance
• Insurance is the “last resort” method for risk
managers
• Insurance company finances the losses
– Erratic, unbudgetable losses are traded for budgetable
insurance premiums
– Over time, the insurer will be reimbursed for most of the
losses passed on to them
– 70 to 75 percent of insurance premiums are used to pay
losses
Proper Analysis Using Risk
Management Approach
• Risk management techniques
– Monitor the results
• Changes affect appropriateness of past decisions
– Family or organization changes
– Insurance marketplace changes
– Society changes
• Program should be fine-tuned, and the process
starts over from the beginning
Proper Analysis Using Risk
Management Approach
• Use of exposure survey questionnaires
and checklists
– Preinterview questionnaire
• Separate sections ensure more efficient and
productive interviews
• If information is already on an application, it can be
quickly filled in
• Questionnaire should be sent to the insured for
completion prior to the interview
Proper Analysis Using Risk
Management Approach
• Use of exposure survey questionnaires
and checklists
– Exposure survey questionnaire
• Divided into categories (sample individual)
–
–
–
–
–
–
–
–
Background information
Real property exposures—land and buildings
Personal property exposures
Business/professional exposures
Automobile exposures
Watercraft exposures
Aircraft exposures
Community/political activities
Proper Analysis Using Risk
Management Approach
• Use of exposure survey questionnaires and
checklists
– Exposure survey questionnaire
• Divided into categories (sample individual)
–
–
–
–
–
–
–
–
–
Other liability exposures
Overall program considerations
Workers compensation exposures
Health insurance
Medicare
Disability insurance
Long-term care
Financial/Life insurance
Estate
Proper Analysis Using Risk
Management Approach
• Use of exposure survey questionnaires
and checklists
– Exposure survey questionnaire
• Can be completed during the interview or
completed by the insured at home
• Use of segmented questions
– “No” answers eliminate remaining subparts
• Impossible to anticipate every type of exposure
• Agent must take the initiative to go beyond the
questions presented
Proper Analysis Using Risk
Management Approach
• Use of exposure survey questionnaires
and checklists
– Survey explanations/recommendations
• Provides explanations
• Provides recommended options to handle
exposures
• Format correlates with the preinterview
questionnaire and the exposure survey
Proper Analysis Using Risk
Management Approach
• Use of exposure survey questionnaires
and checklists
– Checklists
• Available for a host of personal and commercial
coverages
– Review existing coverages
– Compare renewal coverages
– Outline important features of current or proposed
programs
– Document coverage recommendations and decisions
Proper Analysis Using Risk
Management Approach
• Use of exposure survey questionnaires
and checklists
– Checklists
• Not all-inclusive
– Designed to call attention to important features and
options
– Does not address unique exposures
– Should not be solely relied on
– Thorough investigation of needs and exposures is critical
Proper Analysis Using Risk
Management Approach
• Use of exposure survey questionnaires
and checklists
– Checklists
• Keep the following in mind
– Is any form of coverage currently in effect for this
exposure?
– If this coverage is not provided, should it be?
– Was coverage previously contemplated but not
purchased? If so, why? Does that reason (e.g., not
available, too costly) still exist?
– If coverage is provided, should it be modified or
dropped?
– What loss exposures are currently uninsured or
underinsured?
Identifying and Addressing
Coverage Gaps
• Typical insured needs more than one policy
• Tips to assist in properly coordinating various
exposures and policies
– The named insured including spouse, along with any trusts
or similar interests, should be specifically and consistently
co-named in all of the personal insurance policies. The
same holds true on the commercial side, making sure all
entities that need coverage are properly named.
Consistency is necessary for all insurance policies
covering these parties. This approach helps to eliminate
coverage gaps. If a limited liability corporation owns
property for which the insured has a financial interest, the
insured should work with a skilled attorney experienced in
business organizations on this matter.
Identifying and Addressing
Coverage Gaps
• Tips to assist in properly coordinating
various exposures and policies
– Selecting the proper umbrella policy is
important since these policies may cover
important gaps in the underlying coverage. It
is highly recommended that the same insurer
provide the underlying coverage and the
excess coverage—again to reduce any gaps
and to avoid bickering between two separate
insurers in the event of a major liability loss.
Identifying and Addressing
Coverage Gaps
• Tips to assist in properly coordinating
various exposures and policies
– Insureds should retain proposals for
insurance that outline exposures and
recommended coverage. These proposals
should be kept for at least 3 years. Some
state laws or E&O insurer recommendations
may require longer periods. If changes are
made to these proposals or reviews, the
insured should receive the updates.
Identifying and Addressing
Coverage Gaps
• Tips to assist in properly coordinating
various exposures and policies
– Insureds should indefinitely keep old copies of
insurance policies, particularly those with
liability coverages. The insured should scan
these documents and retain them
electronically with backups stored at a
different location.
Identifying and Addressing
Coverage Gaps
• Tips to assist in properly coordinating
various exposures and policies
– Insurance agents should provide an annual
review of coverage afforded or areas that may
be uninsured or underinsured, particularly for
wealthier clients or more complex businesses
with myriad loss exposures. As changes are
discussed and implemented, the agent should
provide the insured a revised review.
Identifying and Addressing
Coverage Gaps
• Tips to assist in properly coordinating
various exposures and policies
– Agents should regularly provide loss control
and contractual risk transfer
recommendations to their clients. This
process should also be part of the annual
review of coverage for new exposures.
Various other risk management techniques,
as necessary, should be explained to the
insured as well.
Identifying and Addressing
Coverage Gaps
• Tips to assist in properly coordinating various
exposures and policies
– Insurance agents should explain the suability
factor to their clients. The suability of a person is
determined by the size of his or her savings
account and stock portfolio, the size of his or her
real estate holdings, the profile in the community,
current family income, and potential income in the
future. Agents and brokers should recommend a
personal umbrella policy for their clients with
moderate suability factors ($1 million limits) and
high suability factors ($2 million to $5 million
limits).
Identifying and Addressing
Coverage Gaps
• Tips to assist in properly coordinating various
exposures and policies
– Agents should advise their insureds to be wary of
purchasing some of their coverage (e.g., personal
auto policy) from the Internet and the rest through
a traditional agent. The insured may unknowingly
procure auto liability limits (or boat or motorcycle
liability limits) well below the minimum limits
required by their umbrella policy. Gaps of
$100,000 or beyond are not uncommon in these
scenarios.
Identifying and Addressing
Coverage Gaps
• Tips to assist in properly coordinating
various exposures and policies
– Forward-thinking agents need to evolve into
risk managers due to growing complexity of
loss exposures
– Value-added activities pay big dividends in the
form of client satisfaction and retention
Addressing Overlaps and Conflicts
• Use of one company to write multiple
policies for the same insured
– Avoids conflicts in coverage that can occur
• Example: auto and CGL coordination
• Example: umbrella/excess and underlying
coverage
– Use of ISO forms and proprietary forms can
create coverage gaps
• Analysis is important with proprietary forms
Addressing Overlaps and Conflicts
• Use of one company to write multiple
policies for the same insured
– Umbrella, inland marine, other coverages
have no standard forms
• Analysis is extremely important in these situations
to avoid gaps and overlaps
– Immediately begin looking for ways to
eliminate overlap or gaps
– If no coverage is available to fill the gap,
make the insured aware right away
Recommendations
• Once process is complete and ready for
meeting with customer, recommendations
should be written
• Detailed proposal to the customer that
includes the risk analysis; exposures
uncovered
• Recommendations should include options
so the customer can make a decision on
how to treat exposures
Recommendations
• Customer should be aware of insurance
and other other exposure treatment
options
– Insurance is a great risk-transfer method but
not always the best
– Deductible options in case the customer is
more risk-tolerant
• Document choices and decisions made by
the customer
Recommendations
• Document choices and decisions made by
the customer
– Document, document, document
– Choices are memorialized on a copy of the
proposal/recommendations
– Insured should initial coverage selections and
rejections and sign at the bottom
– Keep a copy in the file (folder or electronic)
– Send a follow-up letter with a copy for their
records thanking them for their business