Perform the “Mirror Test” to Help Reduce Your E&O Exposure

A substantial number of E&O claims continue to involve failure to identify customers’ exposures and subsequently offer insurance proposals to address these exposures.

Make Sure the Customer Knows

With hard market conditions and the economy, many agencies have remarketed their personal and commercial accounts to additional carriers in the hope of getting a degree of premium relief. As a result, the potential exists for differences between the current carrier’s policy and these additional markets. What if the coverage with the new carrier is deficient in some areas compared to the incumbent carrier? Are the sub-limits less in some areas? Is the definition of “who is an insured” more limited? What is excluded on one policy compared to another? What about the carrier’s rating?

Performing the “Mirror Test” can help. Compare the current policy with the proposed policy and highlight any differences with your customer.

  • Place all carriers you are considering and the details onto a spreadsheet, noting all pertinent issues. Share this spreadsheet with the customer and bring to their attention the detail they need to be aware of. This enables your client to make an educated decision – the customer sees the differences and decides. At minimum, highlight the differences between the expiring policy and the other carriers you are considering.
  • Get the customer’s written approval regardless of the final decision. This is crucial if an underlying claim occurs later and the customer then learns they didn’t have the coverage they thought. If your client chooses the lower price with the lesser coverage, get it in writing that they understand they have given up some coverage.
  • This issue may still be a concern if you keep the account with the same carrier. This is more common with Excess & Surplus Lines business because E&S carriers are not required to provide a conditional renewal notice if they want to add an exclusion on the renewal. Again, identify the differences on the renewal policy, bring them to the customer’s attention, and get the customer’s sign-off. Due to the nature of E&S, conduct this review with the client before binding the coverage, in case the customer later decides they don’t want the coverage.

An E&O claim developed in recent years where the agent moved the account from a carrier where the premium was handled via an account-current bill to one where the premium was paid on a direct-bill basis. The agent was unaware of the change and, thus, the customer was unaware. The account was cancelled for non-pay, a loss occurred, and the carrier denied coverage because the policy had been cancelled. Guess who paid?

  • While this detailed comparison is important on all coverages, there are probably more things to consider if you write professional liability and/or D&O. Because no two policies are the same, an issue as subtle as an exclusion on one policy that was not on the other (the expiring) has resulted in a claim being denied, subsequently triggering an E&O claim – all because the customer alleged they were unaware of the difference.
Workers’ Compensation Claim Example:

The agency failed to properly replace Workers’ Compensation (WC) coverage for a trucking firm that had “all states” coverage on a previous policy. The new policy only covered losses in the state in which the client was domiciled.

The client had an employee injured in another state and, because they had no coverage for losses occurring in that state, the client was obligated to reimburse that state’s uninsured WC fund for WC benefits paid to the employee. In this case, the Workers’ Compensation Board ruled the carrier did not owe any coverage. The case was settled by reimbursing the client the monies it had to pay the state plus attorneys’ fees.

The case settled for $317,000.

LESSON: When replacing one policy with another, extra attention is needed to ensure the coverage available in the new policy is at least equal to the coverage available in the old policy.

TAKEAWAYS – Perform the “Mirror Test.” Communicating this analysis and comparison of the differences to the customer and getting their sign-off are vital if your agency wants to truly minimize its potential for an E&O claim.

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