Claims trends in broker Errors and Omissions
Over the last five years, broker E&O claim frequency has increased by 35% while claim severity has increased by over 30%, according to statistics from E&O coverage provider Swiss Re. However, the reasons behind this state of affairs have existed for several years now. A review of some of these claims statistics and trends suggests several areas for brokers to focus on in developing their office practice.
Like much else, the climate in insurance brokerage work has become more litigious over time. It has become standard to include everyone in a statement of claim and it is far more difficult to have a broker removed from an action than it was years ago. There are more $1,000,000 claims against brokers than ever before. In Ontario, the largest broker E&O claim in history was paid in 2009 at almost $2.9 million as a 72% share of the total settlement.
Keeping statistics on this issue is always a little tricky. There is always flexibility in deciding exactly what the cause of a claim is and subjectivity in coding those decisions. Other sources of variance include provincial differences in available products such as government automobile insurance. With that said, we will look at the following information on a general national approach.
Classes and Transactions
Roughly half the claims against brokers come from commercial lines business. Within commercial lines, the claims from business written on Claims Made forms produces 22% of the claims based on a much smaller book of business than that written on Occurrence forms. Personal fines follows commercial closely at three or four points short of 50%. The remainder of insurance classes produces numbers too small to really make a category of their own.
Among the transactions that are involved when a claim is alleged, the broad categories of mid-term changes, customer inquiries and cancellations all come in under the 10% figure. Of concern for sure, but minor compared to renewals at just over 15% and new business (for new and existing clients) at almost 50%. The renewal category seems to be growing, perhaps in relation to the amount—or should I say lack—of client contact. In Ontario, the Auto Reform of 2010 clearly pointed out the need to contact and advise clients at renewal time.
In the new business section, about 40% of the claims are with existing clients—those with whom we should already have a strong relationship and knowledge of their needs! The remainder is with completely new clients where we are supposed to do our initial investigation to determine client needs and requests. These figures should make brokers question if we are indeed doing the necessary work with new clients or are perhaps in too big a hurry to “put it on the books.”
If we look at the actual process involved in the claim allegations, we again see some interesting situations. Many process categories are each responsible for less than 10% of claims such as; application error, cancellation error, binder error and more. Mid-term changes come in around the 10% mark and policy issuance errors slightly more than that. In fact, there have been surges in policy issuance errors to approaching 20% over time. It is very important that brokers understand the responsibility to deliver correct policy documents, especially at a time when brokers issue more ourselves and have many policies delivered without any review by the broker.
The process steps that are of real concern relate directly to risk assessment error and recommendation error. Almost 40% of claims are alleged to source from errors in assessing the client’s risk (identify exposures) and making recommendations on coverage and limit (match to appropriate insurance). Combine that with the numbers we see from the new business opportunity piece and we can easily see the need to focus attention here in every brokerage.
Lastly we need to review some of the actual allegations of error that appear most often. Error categories such as a failure to adequately explain policy items and the delivery of incomplete or inaccurate information to the insurance company are each nearing 10% along with many others that are minor in number. However, other categories of alleged errors stand out prominently. The failure to recommend adequate limits and/or coverage is just over the 10% mark, followed closely by the failure to properly identify exposures. But the leader of late is the failure to procure coverage, responsible for over a quarter of the claims. Not getting coverage or the right coverage for clients has become a consistent leader in broker E&O claims. Part of this stems from our failure to make sure clients realize where they don’t have any coverage to address an exposure.
The above data suggest that gathering the necessary information about the clients and applying the correct insurance to client needs would seem to be our biggest area of difficulty. In addition to that is the ever-present need to document the process. I spoke to a lawyer recently who makes his living defending brokers and asked him what is the biggest issue he encounters. His answer was that it hasn’t changed in decades: a lack of, or poor documentation makes his job that much harder. I believe brokers most often do the job, but when push comes to shove they can’t prove it.
Some recent stats from an isolated quarterly review of CG&B’s E&O book provide further support to this argument. Almost one claim for every 10 policyholders was reported. New business opportunities represented 33% of those and 38% of allegations concerned failing to procure coverage. The failure to recommend coverage made up 13% of claims and automobile policies represented 36% of those claims. On a positive note 21% of those closed quickly, a benefit of early reporting. Also of note, with claims involving homeowner policies, there is a definite trend in claims against brokers as a result of water damage issues not being addressed to client satisfaction by their policy.
One thing is certain. Clients expect more from their professional adviser and we need be sure we are meeting our duty to the client.
Hugh Fardy is senior vice president of the CG&B Group Inc., with several years of experience as a provider of professional liability products including broker E&O coverage.
E&O Safety Check
1) Understand the client’s request and respond appropriately. Use tools like questionnaires and check lists to gather information. Be clear on client’s needs.
2) Make sure you are current on products available to address client exposures. Hold occasional meetings to exchange information among staff.
3) Be clear and definite in your communication to clients and markets. Get client and underwriter decisions and instructions in writing as often as possible.
4) Automatically document your files and system in an accurate and adequate form for every action and interaction.
Copyright 2011 Rogers Publishing Ltd. This article first appeared in the May 2011 edition of Canadian Insurance Top Broker magazine.