Errors & Ommisions Coverage
E&O for Insurance Agents, Adjusters: Are they More Vulnerable with Coverage?
Stephanie K. Jones
July 13, 2011
Agents and adjusters have completely different roles in the insurance industry. But as intermediaries between insurance companies and their customers they have one critical thing in common: They often get called into lawsuits over claims even though they've done nothing wrong.
There are a variety of reasons for such action, according to a trio of professionals who are involved in insurance claims litigation on a regular basis.
One reason is that agents and adjusters are the embodiment of the insurance companies.
"If you're an agent or a broker you deal with that insured," said David Ward, a Houston-area attorney who specializes in insurance defense. "You're the face of that insurance company. You're the only person that insured sees before they ever acquire that policy. If you're the adjuster, you're typically the first person the insured sees after the insured has suffered a loss. So either in binding the coverage or adjusting the loss, you are the face of the carrier."
Another reason: Location, location, location – at least when it comes to whether the lawsuit is "located" in state or federal court. Plaintiff attorneys want to their cases to be tried in local, state courts.
State court jurisdiction gets a local jury, said Heather Kubiak, an attorney with Kubiak & Carter PLLC in Houston. In federal court, the case goes before a judge and there's less of a show.
"A lot of plaintiffs lawyers, or lawyers who represent policyholders, would rather get in front of the jury, especially in certain jurisdictions," she added. So, if their policyholder/plaintiff is from Texas and they get a Texas defendant, the attorney has a better chance of keeping the case in state court. And they get a local jury that, presumably, will have more empathy for the plaintiff.
Defense attorneys, on the other hand, will try their best to get the case removed to federal court, Ward said, and hopefully get a federal judge who may be open to a dismissal. "State court judges are much more hesitant to grant a summary judgment, to take away the plaintiff's rights," he said.
A third reason for bringing intermediaries into a lawsuit against an insurance company is for ease of information gathering, or discovery. When a person is a party to a lawsuit, they have to answer questions posed by the other side. "They have to produce documents. … They have to give testimony under oath," Ward said. Otherwise, that information can only be obtained by getting a subpoena.
"There's a low barrier to entry to add another party to a lawsuit," Ward said. "You basically make allegations within a petition. You file the petition. The petition doesn't cost any more to file if you have 20 companies in it versus one company."
Finally, there's errors and omissions insurance. "If you're an attorney for the insured, one of the things you're going to look at is where may you acquire potential dollars for your insured," Ward said. E&O fits that bill, and agents and adjusters often, or should, carry it.
E&O insurance comes under the category of "you're damned if you do, damned if you don't," Kubiak said. "Damned if you do, because then you become a deep pocket. One of the first things that you can discover in a lawsuit is whether there's errors and omissions coverage and how much." If agents and adjusters don't get it, they could potentially be on the hook for "some serious costs."
She said she's seen a statistic that one in seven agents/brokers will get sued sometime in his or her career, and the average settlement is $16,000. That's what lawyers consider "a nuisance value."
For many agents, the deductible on their E&O coverage may be higher than that average settlement amount. "If your deductible is $15,000, you may as well just be shouldering the entire responsibility," Kubiak said. "If it's only a couple hundred dollars more you may want to think about getting a lower deductible."
Both Kubiak and Ward recommended that agents and adjusters "take the damned if you do door."
Jay Williams, an agent errors and omissions expert with Employers Insurance, agreed. "We live in the United States of America where you can sue anybody for anything you want any time you want. … The fact of the matter is you need somebody to be on your side and that costs money," he said.
The Best Defense
"The best time to win a lawsuit is to prevent your lawsuit," Ward said. Failing that, there are ways agents and adjusters can lessen the impact.
Another very important thing, Williams said, is never to "have in your paperwork anything you wouldn't want a jury to see. It happens all the time especially if agents don't go paperless or don't have an agency management system. Somebody puts a sticky note on a file that says, 'this guy's an idiot' — that's discoverable information," Williams said.
"The time to have your file in order is before the constable hands you your citation … or before the subpoena hits your office. Because once the subpoena hits or the citation is placed in your hand, you can't go through there and take off that sticky note," Ward said.
It all comes down to workflows and procedures, Williams said, with everyone in the office "doing the same thing the same way every single time." That "invariable practice," as Williams calls it, is not only the best defense in a lawsuit situation, it's also an important tool to keep from getting sued in the first place.
"A lot of states have evidence statutes … [that say] if you show you have a procedure in place then that is admissible as evidence." It's up to the plaintiff to prove that the procedure was not followed.
"Having those workflows and procedures in place, first of all is good risk management. … Secondly it's a great way to run your business more efficiently. … Thirdly, if you have those workflows and procedures in place, it makes it a heck of a lot easier to train somebody when they come in," Williams said.
Document, Document, Document
Another absolutely essential element in presenting an effective defense, or avoiding a lawsuit altogether, is documentation. "You can't document enough," Williams said. Agency management systems and claims management systems are designed to facilitate consistent notation of what's going on with a policy or a case. "You document phone calls, you document e-mails," he said.
"Almost every single lawsuit that I'm involved in, there is somebody that says 'X' and there's somebody that says 'Y,'" Ward said. "The way that you sort through that is by looking at the course of conduct. What was happening? What emails were going back and forth?"
Ultimately, whoever has the best documentation with respect to their "X" or "Y" allegations is going to be much better off, he said.