I began working with some of my long-term clients, agencies with whom I've been working with for decades, when I was hired to conduct voluntary E&O audits. The proactive leadership exhibited by these agency owners to take definitive steps to protect their agencies and to make them better is the foundation of these long and wonderful relationships.
Many, probably most, agency owners look at the cost of an E&O audit and decide they will take their chances. It is hard to believe these same agencies sell insurance, especially if they preach risk management to their own clients. Looking only at the cost is, to put it bluntly, shortsighted at best.
A thorough E&O audit, not a cursory one, improves an agency in multiple ways. The first is by helping management see the agency's exposures, which provides an obvious opportunity for them to take actions that decrease the agency's weak spots. What this really means is that the agency will decrease the probability it will be sued, and if it is sued, the odds the agency will win increase.
Next, the cost of a lawsuit is always underestimated. For starters, agency owners are fond of saying, "If that happens, I'll win in court!" As some incredibly good trial attorneys have intoned many times, the very best case only has an 80% chance of being won, at the top end. Some of the owners' confidence in winning is excessive.
Also, every suit most likely invokes the agency's E&O policy’s deductible. They may win but they still pay $10,000 in defense fees. Then when you add in all the time involved in depositions, document discovery, the great joyous meetings with your attorneys and the lost time spent actually selling -- the price increases significantly.
Depending on the situation, I have calculated all of these soft costs at anywhere from $25,000 to $100,000 for the simpler lawsuits. It is kind of like that old Shel Silverstein song "The Winner" made famous by Bobby Bare. The song tells the story of a young guy seeking out a bar fight with a famous older tough guy. The older guy describes his litany of injuries but how the other guy's injuries were always worse, so "I guess that makes me the winner." You may win the case, but you will still lose a fair chunk of change. An E&O audit, if the recommendations are acted upon, can make you the real winner by avoiding these situations entirely.
Additionally, at least with the way I do audits, an agency can increase sales. In fact, my clients that have most closely followed my advice have increased sales because good E&O practices result in better relationships with clients. Many producers will greatly disagree with this point but I have never had a producer who truly knew their coverages disagree. I have known plenty of producers who were not all that well educated, and did not want to become educated, fight with all their might against following good procedures because they did not know how to sell without cutting corners (cutting corners is often correlated to E&O suits).
Furthermore, good E&O operational procedures often decrease processing costs because the agency becomes more efficient. The consistency of adhering to good procedures materially increases productivity. Quite often agencies have existing procedures that are entirely unnecessary to sustain the agency and simultaneously increase its E&O exposure. An example of this is accepting premium payments in cash.
As insurance carriers' claims services fail to improve and the insureds' needs change faster than insurance forms will adjust, along with carriers pushing so many more responsibilities onto agencies, E&O exposures are increasing. The need to hire new people in this market and train them is definitely increasing the probability of mistakes. Good procedures not only reduce E&O exposures, but the learning curve is cut too.
Every agency should get an E&O audit. At the very least, it is best if your own auditor discovers a weakness rather than having a plaintiff attorney present the weakness to you in front of a judge. Good E&O audits decrease your E&O exposure (if you comply with the recommendations), increase your productivity, and increase sales. Every agency should get an E&O audit!
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.