When discussing the most important E&O loss control practices that an insurance agency or brokerage can follow, documentation is at the top of the list.   Unfortunately, even if everything is handled correctly for a customer, a situation may arise where there is no coverage for a particular loss.  When this occurs, despite doing everything right, an agency or brokerage may find itself defending an E&O claim or lawsuit.  In those situations, documentation is the key to the successful defense of the claim or lawsuit brought against the agency or brokerage.  In this issue of The E&O Report, we will review some of the documentation practices that every agency or brokerage should follow.  

There are usually several key documents that we rely upon in defending agents and brokers in E&O claims and lawsuits.  These documents include signed applications, detailed notes, comprehensive activity logs, policy transmittal letters and confirmatory letters or emails with insureds and insurers.  When an agency or brokerage has this documentation in its files, the chances of successfully defending an E&O claim or lawsuit are greatly increased.

Signed Applications

Signed applications are a very powerful tool when defending an E&O claim or lawsuit.  When an agency or brokerage submits an application on behalf of an insured, it should always make sure that the insured signs the application and a copy of the signed application is retained in the customer's file.  In our experience, the agencies and brokerages that are committed to following good E&O loss control practices regularly obtain a signed application even when they are not required to do so by the insurer.  In many instances, an application signed by the insured is all that 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 try 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 that 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 that the insured was aware of, and actually signed off on, the information contained in the application.  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, as to what actually took place.

The same is often true in cases where insureds complain that 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 that he or she asked for something different from the agency or brokerage.

Activity Logs

We recommend that all agents and brokers maintain a system for logging their activities and interactions with their insureds and insurers.  Most agencies and brokerages have agency management systems which provide an easy and uniform way to keep track of these interactions.  One of the benefits of using an agency management system is that it creates 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 a lawsuit to be 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 for employees with knowledge of the relevant facts to have left the agency or brokerage before an insured makes an E&O claim or commences an E&O lawsuit.  Having an activity log can help refresh faded memories and it can even stand in for an employee who is no longer available 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 version offered by the agent or broker,  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 when the events in question occurred.

Unfortunately, while we find that most agencies and brokerages use some type of agency management system, we often find that some employees may be inconsistent is their use of the system to keep track of activities.  This inconsistency may present problems in preparing a defense to an E&O claim or lawsuit.  After all, it is difficult to know ahead of time which event or activity an agency or brokerage may ultimately need to defend against in an E&O claim or lawsuit.  Consistent use by employees of an agency or brokerage in recording customer activities in the system should help prevent this potential problem.

Policy Transmittal Letters

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 that 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.^[1]  Doing so also provides an opportunity to remind insureds to review their policies and that they should let the agency or brokerage know if there are any problems with the coverage, or if any changes need to be made to the policies.   A policy transmittal letter will also help defend against a claim that an insured made a specific request for additional coverage beyond what their policy provides or against allegations that the agent or broker represented that the policy provided coverage that it did not.  An insured who receives a copy of his or her policy will have a much more difficult time proving that they requested different coverage or that the agent or broker told the customer the policy provided coverage it did not in fact provide.  

Confirmatory Letters or Emails

Finally, any time an insured asks the agency or brokerage to do something in connection with their policy, we recommend that the agency or brokerage memorialize the request in writing.   This writing can be in the traditional form of a written letter or in the form of an email.   Not only does this written confirmation help ensure that 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 the agency or brokerage prove that it was following the insured's instructions.  For example, a confirmatory letter or email would be appropriate when an insured asks the agency or brokerage to increase its deductible, or requests that the agency or brokerage procure less or different coverage than you would normally obtain under the circumstances.  In such situations, the confirmation sent would be helpful to demonstrate that the agency or brokerage was simply following the instructions of its customer in making the change that it did.

Conclusion

As we have said many times over the years, documentation is the key to E&O loss control.  The prudent insurance agency or brokerage should make certain that each of the forms of documentation discussed above are consistently used by all employees on a regular basis.  By doing so, the agency or brokerage will not only help protect against a potential E&O claim or lawsuit, but it will also help protect the customer and provide better customer service in the process.

Submitted by:

James C. Keidel, Esq.
Keidel, Weldon & Cunningham, LLP

[1] The Big Book of Form Letters and Other E&O Tools published by Big I NY is a valuable resource that contains checklists, disclaimers and over a hundred sample form letters, including policy transmittal letters for the following situations: mailing a policy by US Mail, emailing a policy, hand delivery of a policy, delivery of an auditable policy, and receipt of a direct billed policy.  If you are interested in purchasing the Big Book of Form Letters and Other E&O Tools, please contact the association at 800-851-8853.       

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.