New pressures on Errors & Omissions could mean you wind up in court
Adam Mitchell has been busy making changes that befit his brokerage’s “rapid” growth. There’s more efficient workflow to consider and updated processes to match the new volume at Mitchell & Whale Insurance Brokers in Whitby, Ont.
He has his eye on other changes, too; after all, customers expect more. They’re quick to make Google reviews. And, even a few years ago, “we didn’t have billboards by the side of the highway for bodily injury lawyers or have a lawyer’s face on the back of every bus,” Mitchell notes. “There’s certainly a change of temperament.”
Take one unhappy client, add a litigious attitude and a lawyer or two. That combination is enough to give any broker pause, and it’s putting pressure on their E&O exposures and even on policy limits.
In a way, the shift in client mindset strikes at the traditional insurance dynamic. The business is built on relationships, and “a lot of brokers who’ve been in this industry a long time think, ‘Joe will never sue me.’ But Joe will sue you in this day and age,” says Peter Greene, senior partner at Affleck Greene McMurtry LLP in Toronto.
Litigation involving insurance brokers “is becoming more and more active,” he says. At issue: alleged negligence, usually stemming from underinsurance, lapsed coverage, cancellation or coverage recommendations. And one in eight brokers can expect to face an E&O claim involving their business, according to Steve Ritter, senior vice-president and head agent, Canada, at at Swiss Re Corporate Solutions.
Several factors put pressure on those odds. For instance, customers after a claim want things to snap back to their precise pre-loss state. “There is a client expectation that they will be made ‘whole’ following a loss,” he says. “When this doesn’t happen, they look for a means to recover the shortfall, which oftentimes involves alleging negligence by the broker.”
The court’s perception of brokers is another. Brokers—once seen as neighbourly sales representatives— are now held to the same standard as lawyers, chartered accountants or engineers, says Peter Matson, professional liability specialist and executive managing director at Pro-Form Sinclair Professional. “The courts tend to look at insurance brokers and the standard of care in a broader, more punitive sense.”
Add a new breed of lawyers to the mix, and Greene is blunt about the result. “Everybody’s a target, even your best friend, because [the lawsuit] is sold by these young hungry lawyers [who say] ‘don’t worry about it, it’s not about [your friend] the broker, the insurance company’s going to cover the E&O.”
In the majority of cases, the insurer or its policy does just that. Many independent brokers have a minimum of $2 million in E&O coverage, notes Matson. Notable lawsuits, like Bronfman v. BFL Canada in 2013—often used in legal presentations to brokers— have nudged past that line. After the Toronto couple lost valuable jewelry in a robbery, they sued their broker over inadequate coverage. Their actual limit for jewelry topped out at $20,000, but they sued (and won) $2.3 million.
That case might be an outlier, but on the whole, E&O claims aren’t that far off. “A big claim [for an average broker, not a bigger player] five or ten years ago used to be between $100,000 and $500,000,” says Matson. Today, the average range is $1 million, he says. Greene agrees; recent cases he’s defended on behalf of an insurer or broker have ranged from just below $1 million to almost $2 million. “These are not small cases anymore,” he stresses.
And Steve Ritter notes that it doesn’t take much for an E&O claim to soar into multi-million-dollar territory. “A serious residential fire or automobile injury damages can quite easily exceed $2 million. How about the medium-sized commercial client or the product manufacturer exporting to the U.S.?” Catastrophic events, whether they’re natural or caused by human error, like the train derailment at Lac-MÃ©gantic, “can increase a broker’s exposure to E&O loss.”
Greene acknowledges that some claims surpass policy limits, but points out that “when you look at the damages claimed, it’s more of a skyhook by a lawyer throwing numbers in the air. Sure, there are policies where the excess had to be put on notice, [but] there’s usually sufficient coverage.”
But some still gamble with lower limits, says Samantha Ip, a partner at Clark Wilson LLP in Vancouver. She’s seen “the gamut” of claims involving brokers, and while most of her clients are larger brokers with higher limits, “I’ve been involved in cases that involved a mom and pop business, and they generally have lower limits than the Aons and Marshes of the world.” She’s also had discussions with smaller brokers in the course of Insurance Council complaints and was surprised at how low the limits were.
“It doesn’t take much,” she says. “If you’re dealing with mom and pop brokers, you’re probably dealing with home insurance, and on those, you can have high-end things that are underinsured and gaps in coverage, and it could be more than the limits of a mom and pop broker.”
Ritter has a simple rule for them: follow your own advice on limits. “Why should the broker view their own E&O limit purchase decision any differently? Brokers who are purchasing limits of $2 million or less in E&O insurance are not keeping pace with current day norms.”
Are brokers heeding that advice? It’s definitely on their radar, says Peter Matson, who is hearing from more brokers concerned about increasing exposures. “Either they’ve had a lawsuit that’s shaken them or they’ve heard about lawsuits that are larger and coming from areas that historically they haven’t come from.”
Take divorce. It’s not new, but more couples are divvying up multiple properties and high-end assets during a split, making it easy for coverage to get lost in the shuffle. “Marriage disputes and break-ups are contributing to gaps. If the wife gets custody of the children and a $2 million house, the husband gets a condo, and the insurance on the house lapses, [and sometimes] the wife has never had to deal with that before.”
Products can represent another minefield. Adam Mitchell points to the arrival of a new product—like overland flood coverage. Every client must be contacted, so they have the option to move their coverage, he notes. “Every time the market moves or shifts, [with] product [or] pricing, it all opens up a gap for potential E&O.”
Some exposures can be easily avoided; for instance, when some brokers flirt with disaster by selling products outside their wheelhouse. “If you have knowledge and expertise in personal lines, you shouldn’t be selling an aircraft policy for a Cessna 182,” says Matson. “They’re driven to try to manage it because the premiums tend to be higher and the commissions tend to be higher.”
Both brokers and lawyers agree that technology has contributed to the current wave of litigation. Automated billing and renewals make it easy for brokers to tend to “hide” behind technology, says Matson.
That’s a process issue, says Samantha Ip. “Like every profession, there are the good ones, the bad ones and the ugly ones,” she says, noting that high-volume brokers dealing with “commodity” business can skirt the extra steps at renewal. “The positive obligation is on brokers to advise and alert insureds. This also stands at renewal—there’s the assumption that their needs remain the same. Your coverage is like this, is this still what you need? At renewal, this is often missed.”
One possible point of contention: the provision in most home insurance that determines contents value with a percentage of the home’s replacement value, says Peter Greene. “I’ll bet you that’s something that’s rarely discussed with the insured. The percentage basis works, but sometimes it doesn’t.”
Greene urges brokers to get back to basics. “Most insureds do not read their policy of insurance. Take the time to review some of the salient points within the policy.” The stakes are too high for anything else. “If the broker represents certain things, our courts are going to bend over backwards if those misrepresentations were the cause for the insured’s suffering and loss and set aside the agreement.”
Even before things get to a courtroom, brokers should share problems that look like they might escalate with either their own broker or a lawyer, Matson stresses. Too often, brokers try to handle serious complaints on their own— “they think it might affect their rates and settlement,” he says—but the opposite is true. “We want people giving us as much information as soon as they possibly can to help us mitigate the claim or at least manage it.”
Greene also handles securities litigation, and he points out the standard practice there is for “memos to file,” which document discussions and attempts to contact clients. He notes the need for all types of advisors to keep detailed records.
Mitchell’s brokerage takes pre-emptive action by recording all calls and logging all web activity. “As we increase the traffic and business and speed, your backstop for that is also in process and consistency and training.” It can be a significant investment, but it pays off: “When the broker is wrong, we pay the bill and make it right. When the client is wrong, there’s no pushback, it’s a transparent discussion when I send the whole MP3 discussion of what we talked about, and they say, ‘Oh, I forgot about that.’”
In a world where a misunderstanding or a missed message can be expensive, “you’ve never had cheaper [tech] options to stop fights,” he says. “There’s never been a greater opportunity for curbing E&O.”
Copyright © 2016 Transcontinental Media G.P. This article first appeared in the April 2016 edition of Canadian Insurance Top Broker magazine