The Importance of Following Good E&O Practices with Regard to Documentation
When discussing various types of errors and omissions loss control practices, documentation is still most important. Unfortunately, even if you do everything right with a customer, you still occasionally have insureds who find themselves without coverage for a particular loss. If one of those insureds has a faulty memory or questionable ethics, then, despite doing everything right, you may find yourself defending an E&O claim or lawsuit. In those situations, documentation is often critical to the defense of the agency or brokerage. Accordingly, in this issue of The E&O Report we will review some of the best practices related to documentation that every agency or brokerage should follow.
Generally, there are several key documents we look for when defending agents and brokers. These documents include signed applications, detailed notes and comprehensive activity logs, as well as policy transmittal and confirmatory letters to insureds. When an agency or brokerage has these documents in its files, the chances of successfully defending a claim or lawsuit greatly increases.
Signed applications are a very powerful tool when defending an E&O claim or lawsuit. When submitting an application on behalf of an insured, you should always make sure the insured signs the application and you keep a copy of the signed application in the customer’s file. We suggest you obtain a signed application even if the insurer does not require one. In many cases, an application signed by the insured is all it takes to defeat an E&O claim or lawsuit.
Many of the cases we handle involve situations where insurance companies seek to rescind a policy based upon an alleged misrepresentation in the insured’s application. Often, the insured will then seek to cast blame upon the agent or broker for that misrepresentation. Usually, the insured will claim either that the agent or broker failed to actually ask the question on the application, or the agent or broker made a mistake in completing the application. In such cases, an application signed by the insured will often provide a basis for an early motion for summary judgment as it demonstrates the insured was aware of the information provided on the application and literally signed off. On the other hand, if there is no signed application, the case will likely come down to a swearing contest between the insured and the agent or broker, a situation that is, needless to say, best to avoid.
The same is often true in cases where insureds complain they requested different or additional coverage beyond what their policies actually provide. While an application cannot always establish the type of coverage the insured requested, if an insured has signed an application that requests a certain limit of coverage or lists them as performing certain types of operations, the insured will have a difficult time proving he or she asked the agency or brokerage for different coverage.
We also strongly recommend against an agent or broker signing an insured’s name to an application – a common but unfortunate practice. Even if the insured consents to this practice, doing so may create a situation where, when coverage is contested, the insured changes his story and then accuses the agent or broker of committing forgery. If an insured is not available to sign the application and you feel that you must sign his or her name, we suggest that, at the very least, you have your customer send you something in writing, expressly authorizing you to do so.
We recommend all agents and brokers maintain a system for logging their activities and interactions with insureds and insurers. Most agencies and brokerages have agency management systems that provide an easy and uniform way to track these interactions. One of the benefits of using an agency management system is that it inserts a timestamp showing the date and time when each entry was made.
It is not unusual for an E&O claim to be made or lawsuit brought many years after the insurance transaction took place. The statute of limitations for claims against an agent or broker may be as long as six years. As a result, it is not uncommon for memories to fade or employees with knowledge of the relevant facts to have left the agency or brokerage before an insured opts to pursue a claim or commence a lawsuit. Having an activity log can help refresh faded memories and, in the right circumstances, even stand in for an employee who cannot be located to testify.
An activity log can also help bolster disputed testimony. While a jury may believe a sympathetic insured’s version of events over the agent’s or broker version, this becomes much less likely if the agent or broker is able to back up his or her testimony with an activity log made at the time the events actually occurred.
Unfortunately, while we find most agencies and brokerages use some type of agency management system, we often find some employees are inconsistent is their use of the system to keep track of activities. This inconsistency may present problems in preparing a defense to a claim or lawsuit. After all, it is difficult to know ahead of time the event or activity an agency or brokerage may ultimately need to defend against in an E&O claim or lawsuit. Consistent use by agency or brokerage employees in recording customer activities in an agency management systeme system should alleviate this potential problem.
Another important document often used in the defense of an E&O claim or lawsuit is a policy transmittal letter. One of the best ways to demonstrate the insured received a copy of the policy is to send the policy with a transmittal letter and then to retain a copy of that letter in the customer’s file. Doing so also provides an opportunity to remind insureds to review their policies and let the agency or brokerage know if there are any problems with the coverage or if any changes to the policy are needed. A policy transmittal letter will also help defend against a claim that the insured specifically requested additional coverage beyond what his or her policy provides or that the agent or broker represented the policy provided coverage that it did not.
Until recently, some New York courts held that an insured’s receipt of a policy would provide an absolute defense to a “failure to procure” claim against the agent or broker. While an insured’s receipt of a policy is no longer an absolute defense and, instead, will be considered on a comparative basis with any fault of the agency or brokerage, insureds receiving a copy of their policy will have a much more difficult time proving they requested different coverage or that the agent or broker told the customer the policy provided coverage it did not in fact provide.
Finally, any time an insured asks the agency or brokerage to do something in connection with a policy, we recommend the agency or brokerage memorializes the request in writing. Not only does this help establish the agency or brokerage understood the insured’s request, but, if the request ultimately results in the insured being left without coverage for a loss, it can help prove the agency or brokerage was merely following the insured’s instructions. For example, a confirmatory letter would be appropriate when an insured asks the agency or brokerage to increase its deductible or requests the agency or brokerage procure less or different coverage than you would normally obtain under the circumstances. In such situations, a confirmatory letter would be helpful to demonstrate the agency or brokerage was merely following the instructions of its customer.
As we have said many times over the years, documentation is clearly the key to E&O loss control. The prudent insurance agency or brokerage should make certain each form of documentation discussed above is consistently used by all employees on a regular basis. By doing so, the agency or brokerage will not only help protect itself from potential E&O claims or lawsuits, but it will also help protect the customer and provide better customer service.
Robert Walker Lewis, Esq. and
Keidel, Weldon & Cunnningham, LLP