​​

 

The risks from gaps in insurance coverage is an E&O issue that unfortunately arises all too frequently for insurance agencies and brokerages.  There are, however, some steps that insurance agencies and brokerages can do to prevent this type of problem if they follow some simple guidelines in how they deal with their customers.  In this issue of the E&O Report we will discuss some practices and procedures that you should keep in mind to help prevent potential E&O problems related to gaps in insurance coverage for your customers.

The most frequent gap in insurance coverage that we see resulting in an E&O claim or lawsuit occurs when there is an inconsistency between the underlying limits required by an umbrella insurance policy and the actual limits maintained by the insured for those primary limits of coverage.  In recent years, we have seen this occur most often when a customer who maintains their umbrella insurance policy through an insurance agency or brokerage yet obtains their automobile insurance policy through a direct writer and, unfortunately, the auto policy has  inadequate limits to comply with the requirements of the umbrella policy; this results in a gap in coverage between the two policies.  For example, an insured may maintain a primary liability insurance policy with a direct writer with limits of $100,000/$300,000 and have a $1 million umbrella policy through an insurance agency or brokerage, which requires primary limits of coverage of $100,000/$300,000.  Then, at some point, the insured may reduce the limits of the underlying coverage to less than the limits required by the umbrella policy or the umbrella insurer may increase the requirements for the primary limits.  This will cause a gap in coverage for the insured should claim occur.

To help prevent this type of gap in coverage, an insurance agency or brokerage can do several things.  First, some agencies and brokerages have a policy and procedure in effect that they will only write an umbrella policy for a customer if they handle all the customer's primary insurance.  That way the agency or brokerage is aware of the limits that the customer has for their coverages. Alternatively, many agencies or brokerages write umbrella policies for customers without handling all their coverages, but they remind the customer in writing on a regular basis of the limits for the underlying coverages that are required by the umbrella insurer.  Doing this will put the customer on notice of the limits that they need to maintain to prevent a potential gap in coverage from arising.  This will also help protect the agency or brokerage from a possible E&O claim or lawsuit arising from a gap in coverage.          

Another type of gap in coverage that frequently occurs is when an insured changes coverage from a claims-made policy to another claims-made policy with a different insurer.  Typically, coverage for the insured under the first claims-made policy is limited to claims that are first made against the insured while the policy was in effect.  If coverage is terminated under the first claims-made policy, the policy may provide an extended reporting period for claim of 60 or 90 days.  However, any claims that are reported beyond that period will not be covered by the first claims-made policy. Unfortunately, the second claims-made policy will not provide coverage to the insured for negligent acts, errors or omissions committed prior to the effective date of that second policy, or any retroactive date that may be listed in that policy.  If the retroactive date in the second claims-made policy is listed as the termination date for the first claims-made policy, and if no extended reporting period was provided for the first claims-made policy, the insured will have no coverage either under the first or second claims-made policies for a claim first made during the second policy period that occurred during the time when the first policy was in effect. 

To close any possible gaps in coverage that may exist in this situation, an insurance agent or broker that changes insurers on successive claims-made insurance policies should explore the options available to the customer for extended reporting periods from the first claims-made insurer.  In addition, the agency or brokerage should explore options for the insured to obtain prior acts coverage from the second insurer with a retroactive date that will cover claims made that may relate to negligent acts that occurred in the earlier years when the prior policy was in effect.  By proceeding in this manner, the prudent insurance agency or brokerage will help protect the customer from potential gaps in coverage that may arise and, in the process, will also help protect the agency or brokerage from potential E&O claims and lawsuits.                      

Submitted by:
James C. Keidel, Esq.
Keidel, Weldon & Cunningham, LLP         ​

​​

Keidel, Weldon & Cunningham, LLP concentrates its practice in the defense of insurance agents and broker's errors and omissions claims and litigation, errors and omissions loss control counsel and education, insurance coverage analysis and litigation and insurance regulatory matters. Please direct any comments or questions to James C. Keidel, Esq. by mail to the main office of Keidel, Weldon & Cunningham, LLP, at 925 Westchester Avenue, Suite 400, White Plains, NY 10604, telephone at (914) 948-7000 or e-mail at jkeidel@kwcllp.com. The law firm also maintains offices in Syracuse, New York; New York City, New York; Wilton, Connecticut; Fair Lawn, New Jersey; Warwick, Rhode Island, Philadelphia, Pennsylvania, Williston, Vermont and Naples, Florida.