E&O and Homeowners - Not as easy as you would think

By Curtis M. Pearsall, CPCU, AIAF, CPIA
Special Consultant to the Utica National E&O Program

One would think that insuring homeowners is fairly straight forward. After all, the coverages are fairly standard among the carriers; an HO 3 with company A is probably pretty close to an HO 3 with company B (assuming that they are both on the same edition date). But in the world of E&O claims, things are a bit different.

More than 15% of E&O claims in 2009 were generated by this one line of business, which certainly shows that things can go wrong. Plus, when losses happen, they have some severity potential — and can range from a couple thousand dollars, to hundreds of thousands of dollars in the event of a total loss. On average, an E&O claim involving an underlying Homeowners coverage is around $30,000.

By examining the causes of losses more closely, it appears that in many situations it is not necessarily a coverage issue that caused the loss; the cause of the E&O claim resulted from an agency procedural error. Consider the following claim and ask yourself, “Could this happen in myagency?”  

The client, Justine X., requested that the agent procure HO coverage for her. Although the agent was told by the client that she owned a German Shepherd, the agent answered “no” to the question “Do you own any dogs?” when he uploaded the application to XY Mutual. The dog subsequently bit/chased a mailman, causing the mailman to fall and severely fracture his leg. The insurance carrier denied coverage, stating it would never have written an HO risk with a dog of this type because their underwriting guidelines prohibit this exposure. It was clear there was definite liability against the agent and thus after gathering medical costs on the mailman, the case against the agency’s client was settled for $210,000, with Utica paying the entire amount.

Here are other “common mistakes” agents make. As you review these, what do you think the agent could have done differently or better?

1.    The agent determines the homeowners limit rather than asking the client for a limit.The agent needs to be careful taking this position. While most companies provide “estimators” for the agent to use to “approximate” the value, these are not 100% perfect as there may be uniqueness to the house the estimator does not factor in. When calculating the amount, it is important to advise the customer that this is not a guarantee that the home can be replaced for this amount. You might be better off recommending that the customer secures the services of a licensed appraiser.

2.    The agent fails to have the customer sign the application.There is really no excuse for this. When providing HO coverage for a customer, you should meet with them to complete the 1) application and have them sign it. If coverage is being secured online, it is still recommended that you get an application completed and signed for your file. Without a signed application, the agency will be exposed to claims by both the carrier and the client if the application contains a misrepresentation.

3.    The agent fails to advise the carrier of issues pertaining to the risk – such as dogs, prior cancellations for non-pay, type of construction or size of a dwelling, loss history, etc. This situation would certainly be avoided if you comply with the recommendations in #2 above. The carrier counts on you to provide an accurate description of HO exposures. Without asking the customer the appropriate questions, it would be rather difficult to know the correct answers. Don’t think you know the right answers, either – ask the questions and document the responses.

4.    The timing of when to switch from a Builder's Risk to an HO policy – i.e., switching to an HO when the building is still vacant and unoccupied. This is a common question. By and large, when the customers move into the house (at the time of the closing), the building is no longer considered “vacant and unoccupied.” In those situations where the homeowner is  responsible for insuring a home under construction, some companies may consider providing a homeowners policy with certain stipulations. Either way, it is strongly suggested that you contact the HO carrier for their perspective and advice.

5.    The agent fails to advise a client to increase limits to keep up with the rising cost of construction and materials.With the increasing cost of construction, copper, plywood and other building materials, it is generally recommended adopting the inflation increases of the carriers you represent.

Other recommendations:

Receipt of the policy– Advise clients, verbally andin writing, that when they receive their policy they need to review it to ensure everything is in order. The agency should also review the policy to make sure it matches what was requested.

Educating your customers– Education is an extremely effective way to reduce the potential for an E&O claim. A monthly newsletter – in printed form and on your Web site – is a great means to accomplish this. Do your customers know the limitations within a HO policy? Do they know how much coverage applies for their sons/daughters while they are away at college? Does your agency know if the customer has a business in their home and how best to insure it? Can the staff recite the differences between various HO forms?

If you or any of your staff have questions, please e-mail me at [email protected]. Good luck and good selling!