Understanding Underwriting & Binding Procedures
No agency wants to face an E&O claim. With our Fireman's Fund Errors and Omissions insurance for insurance agents, claims, when they do come, do not have to be a huge hurdle. Yet, with right procedures in place, your insurance agency can reduce the risk of facing a claim in the first place. Often, these claims occur when agents do not understand the binding authority, work with insurers they do not often work with or provide a binder before following the full underwriting process. Many of these are avoidable mistakes.
To avoid losses from insurance agents errors and omissions, you need to operate within the scope of your express authority. Unfortunately, this authority is not always obvious. In order to avoid errors and omissions in the underwriting and binding procedures, you need to be certain that you understand your underwriting and binding procedures.
How can you do this? First, attain full knowledge of your authority with every company you do business with. Insurance carriers will sue if their contract with the agency appears to be breached.
Next, if you are not certain about underwriting and binding procedures, contact the carrier to ensure proper procedures are followed.
Make sure any exceptions made by underwriters are fully documented and put that documentation in your file. If the underwriter does not provide this information, you should write to the underwriter explaining your understanding of the exception and asking for the document.
Often, insurance agency E&O claims come when the carrier is not fully aware of the risk. This can be limited by fully disclosing the risk and the full nature of the risk to the insurance carrier. For example, if the carrier expects an inspection as part of the underwriting process, you need to not only provide the inspection but also ensure that the full nature of any risk provided by the property is documented and explained. Incomplete inspections can lead to claims the insurance company was not prepared to pay, and this, in turn, leads to an E&O lawsuit.
You must not offer coverage where your lack binding authority to do so, but beyond this, you need to ensure that the customer understands that coverage has not been offered. A letter documenting the excluded risks should be provided to the underwriter and the customer. If the customer wishes to seek coverage, you must provide a realistic expectation of the time frame necessary to seek binding from the carrier. All answers from the underwriter must be made in writing.
No matter what the circumstances, you must only bind risks you are certain the insurer will accept.
Often insurance companies will offer their own applications for agents to use. Using this rather than a standard ACORD form application ensures that the information captured is tailored to the insurer's specific needs.
Sometimes customer delays or coverage types that are hard to place can create problems for agents. When this happens, you can protect yourself by sending a letter reminding the customer that they are not yet insured.
Finally, you can prevent E&O claims by having a thorough understanding of the state's statutes & regulation regarding issuing binders. Many states require a written binder to be delivered to both the insured and the insurer in a set period of time after issuing the oral binder. By sending this written binder immediately, you lessen your risk of facing an E&O claim.
Sometimes, a practical example means more than a list of what to do and not do. Consider this scenario:
An insurer requires a photograph of any rental properties it insures. The agent provided a binder for a property without gathering the required photographs. When a fire occurred, the insurance company had to pay the claim. Because of the lack of a photograph, the insurer then requested reimbursement from the agent. The cost for that claim was $150,000. The property was vacant and boarded up, and the photograph would have shown it was an unacceptable risk.
How could you avoid this type of claim?Always follow the underwriting procedures outlined by the insurance carrier.
Here's another scenario:
An agent issues a binder for auto insurance to a 20-year-old driver. After the driver has an accident, the insurance provider holds the agent liable because their guidelines clearly state that the minimum age for coverage is 25. The claim cost $12,000.
How can you avoid this type of claim? Know the underwriting guidelines of every company you work with, and follow them explicitly.
Avoiding these risks should be your primary defense against E&O claims. Yet no matter how careful you are, mistakes will be made. That's why you need E&O insurance for insurance agents. This coverage will ensure that mistakes do not end up costing you your career.