E&O Claims Advisor – The Year of the Customer

5 Ways to Prevent Errors & Omissions Claims In 2023

It’s official: 2023 has been designated “the year of the customer.”

Put aside questions you may have about this column’s authority to make this grand pronouncement. Instead, focus on why this needs to be the year of the customer and what that means for you.

You and your customers have been battered these past few years by catastrophes of near-biblical proportions. We’ve seen everything but a plague of locusts—although there are still a few weeks left in 2022 at the time of writing. Your customers don’t just want a good year, free of missing coverages and underinsured losses. They need it.

Here are five ways to make that happen:

1) Show an active interest in your clients. Ask personal lines customers about new cars, new drivers, new boats, new cabins, new homes, remodeling, new hobbies and new careers. Ask commercial clients what their business does, who its customers are, who its largest customer is, what its newest piece of equipment is, what its most expensive asset is, where it’s expanding and where it’s moving. Each of these examples has been the basis of an E&O claim against one of your fellow agents, by the way. In some cases, a lot of them.

You’re not just making conversation—although customers appreciate you asking about them. The answers to these questions will prompt follow-up questions and point to new risks that require new coverages for your customers to consider. They’ll also lead to a discussion about realistic limits for liability policies based on the exposures you’ve identified.

With all of these examples, the use of a checklist is highly recommended, both to be sure you haven’t missed anything and as proof that coverage was offered and rejected.

2) Ask customers about their exposures. However, don’t just ask about new stuff. You also need to inquire about risks that are already known to you. Each renewal is an opportunity to find and correct hidden coverage problems.

For example, one agency placed coverage for a client in the pungent, low-risk business of emptying portable toilets, including some adjacent to railroad tracks. Unknown to the agent and carrier, the customer had started doing a different kind of pumping for the railroad—using its suction trucks to transfer diesel fuel from tanker cars to storage tanks.

Unfortunately, the client mistakenly unloaded a tanker full of kerosene into a diesel fuel storage tank. In addition to contaminating an entire tank of diesel, 14 locomotives suffered engine failures from the fuel mixture. The carrier rescinded coverage due to a material misrepresentation on the application regarding the work performed.

3) Offer to quote higher limits. With construction costs rising 15%-20% last year, even a property policy with limits that were perfectly adequate a year ago may now be insufficient. And let’s face it, many of your clients have not had adequate limits for some time—usually by their own choice—but now they can argue that, given the rate of inflation, you should have discussed higher limits.

For example, an agency had been writing property coverage for years on a commercial property. However, the original $54-million limits rose to $72 million thanks to a 3% inflation guard provision. Otherwise, the limits had not been changed in over nine years.

At the time of a gas leak that caused $36 million in property damage, the carrier claimed the coverage should have been $177 million, so it assessed $20 million coinsurance on the business, thereby reducing their payment to $16 million. If the agent had prompted the client to revisit the value of the property periodically, it would have mitigated and perhaps avoided the inadequate limits issue. Offer to quote higher limits before a loss happens.

4) Explore umbrella and uninsured/underinsured motorist coverages. Do not assume your customer could not or would not pay for such coverage. With 20:20 hindsight, every customer who would have benefited from an umbrella will swear under oath that they would have purchased the coverage in a heartbeat, “if you had offered it!”

If the coverage is placed, be sure it is in an amount selected by the customer—$1 million, $2 million or $3 million—and that it covers what the customer believes it includes, such as auto policies not written by your ag

5) Follow up with customers on questions raised by carriers. Yes, this is detailed, time-consuming work. Rest assured, though, that if you don’t attend to those details, when your customer has a loss, they’ll insist that they thought they had the “full coverage” you quoted. Meanwhile, the carrier will point to the unanswered question as a basis for not providing the coverage.

A case in point: An agency customer has a 100-year-old home that they want to insure for $2 million. However, absent documentation of the cost to reconstruct the home, the carrier was only willing to insure it for $950,000. After a hurricane destroys the home, it is determined that because of the original hardwood floors, 12-inch crown molding, 10-foot ceilings and a remote location, the cost to reconstruct the home was $2 million, which meant coinsurance was applied to the loss. If the carrier’s question had received a response, it is very likely that the resulting E&O claim would have been avoided altogether.

The year of the customer is shaping up to be a doozy for you and your team. Time to rev up that agency management system and start working your current customer list.

Matthew Davis and James Redeker are vice presidents and claims managers with Swiss Re Corporate Solutions working out of the Kansas City office. Insurance products underwritten by Westport Insurance Corporation, Kansas City, Missouri, a member of Swiss Re Corporate Solutions.

This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article do not necessarily represent the views of the Swiss Re Group (“Swiss Re”) and/or its subsidiaries and/or management and/or shareholders.

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