Author: VU Faculty

An agency recently was hit by a $38,000 claim under an E&O policy with a $25,000 deductible. Now the agency owners want the deductible to be paid by the producer, CSR, office manager, and agency president. Should allegedly negligent employees be required to pay for E&O claims or policy deductibles?

"Recently we had an E&O claim that was $38,000 and our deductible is $25,000. The owners of the agency, while not active in the agency, understand money. I am president and report to them weekly and monthly at a board meeting. When this came up, they wanted the CSR of the producer who caused the loss, the office manager who the CSR reports to, and me as president to "pay" for the loss. 
 
"It was one where the producer filled out the application incorrectly (entered the square footage of a building incorrectly) and gave the app to the CSR, asking her to market it for him. She did and for FOUR renewals the incorrect information was on the renewal apps, even changing companies during that time. The producer always carried the renewal out and gave information to the CSR. She did as he said—it was not her duty to verify anything on this account. Now she is to shoulder some of the blame? 
 
"I cant get my owners to understand that I do not think its anyone's fault but the producer's—what experience have you in dealing with who is responsible for such losses, if anyone."

Based on the information provided, it does look like the CSR is the least culpable person of those mentioned...and probably the one least able to afford a chunk of the deductible. Your question raises a number of issues, some of them legal one which, of course, we can't opine on. But below are some general observations from the VU faculty.

None — the deductible is owed by the named insured — the corporate brokerage.

It would be dangerous to go after the independent contractors who caused the loss and probably impossible if they are employees. Seek good legal advice.

Also, if the employee is working in the course and scope of his/her employment, it is the employer's problem unless you have an employment contract that sets out who is responsible for errors. That is why the employer buys E&O insurance and covers his employees.

I would anticipate a suit from the employee and in some states, like California, if the employer is a corporation, the employee may be entitled to indemnity from his/her employer. Be prepared.

Show me a CSR who can pony up $25,000 and I'll buy you lunch anywhere in the country.

Unless your agency specifically has a policy that requires someone other than the agency to pay the deductible (some producer contracts do include something on this), then there is little to stand on. For the record, agency owners should understand that it is their responsibility and that it may be more important than they think to make sure that there are appropriate policies and procedures in place. I do believe that they will have a hard time making the CSR, office manager and you pay the deductible without prior written notice on the policy. You may need to seek appropriate legal advice though.

You should have a conversation with an employment attorney.  This is most likely a change in the terms of the employee's responsibilities.

While it is customary to have agreements with producers that they may be held responsible individually for deductibles on E&O claims arising from their accounts, I can't recall an agency pushing it down to the CSR level, even though I'm sure some do. I question, however, the practice if it isn't in the employment contract already. So if they balk, do you fire them? Do you sue them? If it's a producer with ownership in his or her book, are you creating another financial obligation via the termination? Have you thought this policy through? Can you afford to risk losing other employee loyalty to the agency following the inevitable firing of the CSR if you demand they pay? How will this affect morale? Will staff seek employment with an agency that does not invoke this?  
 
$25,000 is a lot of money to stick on an employee, even if just a fraction. Did they have any say-so in the amount of the deductible on the policy? There are a lot of issues here and I know that if I were in the CSR's shoes, I'd quit and find a new job. You'd never get the money out of me. I think the owners need to back up and ask some hard questions like these. If they want to institute a policy of deductible reimbursement by offending employees, fine, but they need to get it in writing, outlining the consequences.

My experience has been that very few agencies cause the CSRs to cover an E&O claim. Quite a few, though probably not a majority, cause producers to cover a portion of the claim, but rarely the entire claim. Whether it is legal to cause the producer to cover any portion is an issue to discuss with an HR attorney. Some attorneys believe it is illegal to deduct such claims from wages because that may be a violation of employment laws.

I serve on the board of directors of an agency and our procedure is that we put all E&Os to a committee, of which I am the chairman, to determine the cause. If the producer is the cause, then he/she pays the deductible. If the CSR is the cause, then the agency pays the deductible. In both instances, we strive to determine the source of the E&O so as to eliminate it in the future. Obviously, if the same CSR continues to have issues, then other action will be taken.

Unless the employees are under a contract that states that they will pay for E&O deductibles caused by their mistakes, the agency is responsible for the E&O deductible in my opinion. Do the PROFITS of the agency go to the CSR, manager and you when things go right? If not, what reason do the owners have for charging errors to the employees? In some agencies, the employer will terminate the employment of people who repetitively cause errors that expose the agency to E&O claims. Charging $25,000 to the employees you mention is tantamount to asking you all to find new jobs.

Update...apparently there is an epidemic going on because we received yet another such question in our "Ask an Expert" service from one of our state associations. Here's the question, followed by our faculty responses:

"As a result of the tight market and increasing deductibles, some agencies are trying to foist their E&O deductibles off onto their producers. Given that a deductible is designed to make the insured participate in the loss, is it right or even legal to contractually assign the risk of the deductible to individual producers? 
 
"Producers from one agency are facing as much as a $75,000 charge against their earnings. That deductible is based on the entire agency's exposure, not the exposure of just one agent. And what should we do if producers from a member agency call us for advice?"

At a minimum, the producer should be responsible for at least the split. If they get a 50-50 split, they are responsible for 50% of the deductible.

I have seen this done, but discourage my clients from even considering it. In my opinion, the deductible is part of the business risk. If you have a producer who is causing these problems on an ongoing basis, don't penalize him or her, get someone who is more cautious! After all, WHO hired this person??? The E&O deductible buck stops with the owners...they reap the profits; they bear the risks.

It actually goes on in more states that just yours. You will typically see this arrangement when the agency treats producers as independent contractors. Although that is a totally different issue, most producers are not legally independent contractors with an independent insurance agency. As far as an employee producer, rarely do I see a contract that requires them to be responsible for the deductible on the E&O insurance.

I don't know if it is common, but I've seen it a couple of times. I've not seen any agency contracts that would prohibit it.

I haven't really heard anything about this but I can guess where the issue comes from. I would imagine that the producer would be an independent contractor of the agency and covered under the agency's E&O policy. Since the producer is not an employee, the agency allows him/her to fall under their E&O policy, but only if they are responsible for paying the deductible should claim arise caused by an error or omission from their activities. I haven't seen any agency contract either way.

I know of an agency that has a "fine" cookie jar. In order to impress upon employees the need to follow E&O procedures, if someone is caught "breaking a rule," they get a fine...$100 for owners, $75 for producers, $50 for CSRs, and $25 for others. They don't hold these people accountable for the E&O deductible...their financial commitment is in prevention, not punishment after the fact. After all, some of these errors are human mistakes which will happen.

What about agencies with $10,000, $25,000, or $50,000 deductibles? That's a BIG price to pay for a mistake...I bet the owners don't carry those kinds of deductibles on their HO and PAP policies! If you're going to "fine" them, make it $250-$500 or whatever's affordable for that person. If they deserve worse or mistakes are chronic, get rid of them. The key is quality control BEFORE the loss occurs.