Author: Keith Wilts

This article provides an overview of various E&O loss exposures that exist in commercial lines of insurance and reviews methods and procedures that an agency could consider to help reduce the possibility of a claim. Included is information about certificates of insurance, additional insureds, hold harmless agreements, subrogation waivers, protective safeguards warranties, leased property exposures, and more.

Agents can be subject to lawsuits by their carriers and/or clients for reasons that include violation of their agency agreement or breach of contract.

1. Certificates of Insurance

Potential problems occur when agents knowingly or unknowingly exceed their authority by doing more to the certificate than simply filling in the blanks. Any alteration of the certificate, such as modifying the phrase “will endeavor to” could have the unintended effect of broadening coverage. Points to consider:

1. All certificates must conform to the state insurance code for the state in which the subject of insurance is located. State codes frequently require a statement that a certificate neither affirmatively nor negatively amends, extends nor alters the coverage afforded by the policy. Also, prior to use, each insurer must normally file the form of certificate with the Commissioner or Department of Insurance.

2. The agency could specify an individual(s) within the agency to review all certificates before they are mailed.

3. Don’t exceed authority given to the agency by a carrier.

4. Research the insurance statutes and regulations in each state where your insured has operations to make sure that the certificates used are in compliance with state statutes.

5. Check with the carrier to see what edition dates of forms are being issued in each state to see that coverage certified is uniform and in compliance with the coverage requirements of the certificate holder.

6. Only certify coverage that exists at the time of issuance of the certificate. Never certify coverage that does not exist. Make sure the policy is endorsed or modified as required. Only after changes have been made, not simply ordered, should certificates be issued. Frequently requested certificate alterations include:

   1. Adding lessor as an additional insured to the lessee’s coverage. Adding an entity or project owner as an additional insured to contractor’s insurance.

   2. Making a contractor’s insurance coverage primary and the certificate holder’s coverage “excess” and “noncontributing”.

   3. Having the insurance cover the insured’s contractual obligations to the certificate holder, such as, waiving subrogation rights, hold-harmless and indemnity agreements, and obligations to pay damages and defend.

7. Be sure the general contractor’s file includes qualified certificates of insurance and a copy of the written contract with the subcontractor, to fully document insurance, adequacy of limits, and the relationship between the subcontractor and general contractor. This kind of documentation should help avoid large unexpected additional premiums upon audit and show that the parties were “adequately insured”.

8. To satisfy a mortgagee or lienholder, the Evidence of Property Insurance (ACCORD 27) should be used because it provides a coverage statement for mortgagees, additional insureds and loss payees.

2. Binding Authority

1. Binders are intended to provide evidence of insurance and interim protection until the actual policy is approved and issued to the insured. It is a temporary contract of insurance that provides coverage that must be underwritten and treated as an insurance policy.

2. The language in the binder must be precise. Do not use vague or all-encompassing terms that may imply coverages not intended, such as “full coverage” or “all risk”. If possible, use the same language and terminology that will appear in the policy.

3. Specify the insurance company bound. Some external act is required of the agent to bind a particular company. In the absence of a designation of company, perhaps no insurer will be on the risk and the client may have recourse against the agent for breach of contract to procure insurance.

4. Cancellation of a binder must be made in accordance with the same prescribed methods called for in the policy itself. A binder doesn’t just expire. The specific state cancellation laws apply just as if the actual policy had been issued.

5. The improper use of binders has become a major cause of E&O claims. It is imperative that only authorized individuals prepare them. Preparation must be complete and accurate. State statute and/or company underwriting instructions may govern the maximum and/or minimum term of a binder.

6. When coverage is bound in the field, telephone the office immediately or document the binder with instructions for issuance of a binder, policy or endorsement.

7. Make sure binder and final contract agree with oral agreements. In one case, a binder for business income coverage stated “all locations”, but the issued policy covered only scheduled locations, resulting in a $5 million E&O loss.

8. Surplus Lines & Specialty Markets - Generally, a broker cannot bind insurance. A broker may only exercise the authority extended by the company. Normally authorization must be secured prior to binding.
   The essence of management of the agency’s E&O risk is the management of the client’s risk. The majority of E&O claims against an agency have at their root an uncompensated or under-compensated client loss. A systematic process of loss exposure analysis, documentation, and communication, is essential.

In reviewing procedures the agency should evaluate potential exposures from the standpoint of:

What can happen? In other words, what error or omission can result from client suffering a loss that could possibly generate an E&O claim? and,

What can we do about it? What possible steps can be taken by the agency to prevent this from happening? How can we document what took place to show that the agency acted properly and fulfilled its responsibilities to the parties involved?

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