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AOA Tips, Views, News & More

You Don't Have to Do Anything Wrong to Get Sued! Do you Know How Your E&O Policy Will Respond?

By Curtis M. Pearsall, E&O Consultant of Pearsall Associates Inc.

While I can certainly not speak to other professional liability classes, in the world of Agents E&O, this statement is extremely accurate. Actually, there are some E&O carriers that are reporting that historically, they are closing out close to 70% of their cases for no loss payment (there is typically defense costs on the overwhelming majority). What does this mean?

The majority of the cases develop when a customer (or other party) suffers a loss only to find out that there is not sufficient coverage. In their mind, they then seek out someone that they can "blame". More often than not, the agent is one of the first "names" they think of. But when the matter is resolved, in the majority of the cases, it is proven that the agents either did not do anything wrong and / or that they had a strong wall of defense when the litigation developed. Could the agency have any financial responsibilities even though they were "not guilty"? It depends.

Take the following claim to illustrate the point:

On June 8, 2010 Mr. Curt acquired property and his agent (Jones Agency) issued a binder to the ABC bank listing the bank as a lienholder. This binder was for 60 days and thus expired by its own terms on August 8, 2010. It is important to note that at no time subsequent did the bank request any further evidence of insurance. A policy was eventually issued and when the HO policy expired on its own in June 2011, Mr. Curt moved his business to another agency. In August 2012 (over a year later), the property is destroyed by fire and apparently Mr. Curt has no insurance and thus there is no policy where the bank is named as a lienholder. The ABC Bank brought action against the Jones Agency (the 1^stagent) claiming that they should have received a notice of cancellation or nonrenewal and if it had, it would have actively sought it's own coverage to protect it as the mortgagee (this was not accurate as the policy expired on its terms, without cancellation or nonrenewal). The bank relied on a two year old expired binder as evidence of insurance at the time of the fire and proceeded with litigation against the agency. The agency had to retain defense counsel in order to establish that they were not the broker of record and hadn't been for over a year. In addition, the language contained on the binder clearly noted it was only good for 60 days. Since Mr. Curt had moved his insurance to another agency, the Jones Agency was eventually absolved of any wrongdoing. However, there were still defense costs incurred. Who paid these?

In this matter, the Jones Agency had E&O coverage with a $5,000 deductible which required them to pay defense costs as part of that deductible. As a result, the agency had to incur a $5,000 expense when they technically did not do anything wrong. While this did not sit well with them, this was the E&O coverage they had purchased.

What the above claims shows is that at the time of the claim, the party that has suffered the loss (the bank) is going to look to recoup their loss and if they can find a way to "blame" someone else, they may very well do that. In many cases, the bulls-eye will be on the agent's back.

Another potentially significant issue for agents to be aware of involves the manner in which defense costs can impact the limit of liability. Most E&O policies provide defense "in addition to the limit of liability" and thus, when E&O litigation develops, the defense costs incurred will not impact or impair the dollars available to pay any judgment against the agency. It is certainly possible for the cost of E&O litigation to be in excess of $100,000 and there have actually been some E&O claims where the defense was over a $1,000,000. With most Agents E&O policies, this expense would have been heavily (if not totally) borne by the E&O carrier and the limits of liability to pay any judgment would have not been impacted. However there are some E&O carriers (mostly those writing on a surplus lines basis) that have a different structure ("defense within the limit") to their contract.

If the E&O coverage was written with "defense costs within the limit of liability", the defense costs incurred in litigating the matter would reduce the limits ultimately available if a judgment is made against the agency. In other words, let's say the agent has an E&O policy with a $1,000,000 per claim limit. An E&O matters develops and $150,000 of defense costs is incurred. If the policy provides for defense costs as part of the limit of liability, there would then only be $850,000 left for any judgment. It is not difficult to see that based on the type of claim, this could result in "insufficient limits" left to pay any potential judgment.

Since agents can still be sued even when they technically didn't do anything wrong, the agency needs to well aware of how their E&O policy will respond. Do you know how your E&O policy reads in this regard?

Don't wait until after a claim to find out.

Curt regularly provides free E&O tips for agents on his blog www.agentseotips.com. Contact at curtis@pearsallassociates.com or 315-768-1534.

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Executive Success: Dealing with Difficult People

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Ask the Customer a Question Without an Apparent Answer to Gauge Their Involvement

By Mark Hunter the "Sales Hunter"

Too many times we find ourselves engaged in a conversation with a prospect that we think is going to lead to a profitable outcome, only to have the person be focused 110% on price.

One of the best strategies you can use to measure a customer's orientation to price is to engage them in a strategic discussion. If the customer is strategically focused, you have a much better opportunity to maximize price.

With this being the case, the sooner you can determine the level of their strategic thinking, the better off you'll be. Asking a customer a question to which neither of you has an answer is one of the best approaches I've found to determine where a customer is coming from.

A customer who is not strategically focused and is going to base their decision on price or some other non-differentiator is going to blow off a question of this type. They will view the question as being a distraction to their buying process.

On the other hand, a customer who is strategic in their thinking is going to feel engaged being asked a question like this. Although they won't know the answer to it, they will still many times provide you with a response that opens up the conversation.

Customers who are strategic look to be challenged in their thinking, and they value having discussions with people who they see as real thinkers.

Another key reason why it is so important to determine early in a sales process if the customer is strategic or tactical is it will help you to better understand the the person's timeframe. Tactical buyers view each transaction as a single event and, therefore, are very short-term oriented in their thinking.

Strategic buyers view things long-term and place value in connecting transactions together. For you this is huge, as it can help you in crafting the proposal in terms of timeframe and the long-term potential a customer might be worth.

Copyright 2012, Mark Hunter "The Sales Hunter." Sales Motivation Blog.

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