E&O Insight: Attention Personal Lines Unit!

Why Homeowners is a Major Cause of E&O Claims

When reviewing errors and omissions (E&O) claims frequency by line of business, homeowners ranks third behind two commercial lines products (casualty and property). Focusing strictly on personal lines makes homeowners the No. 1 line of business for E&O claims frequency.

On the surface, this is probably somewhat of a surprise as most coverages are fairly standard among carriers. In fact, when looking at the data in more depth, E&O claims don’t seem to come from significant differences in the coverage. In the majority of the cases, the E&O claim resulted from a procedural matter – that is, agency procedures that probably need to be tightened up. One advantage to this is that these “mistakes” are easily corrected. One other comment before we look at the major causes: the average size of an E&O claim involving homeowners is around $30,000, slightly higher than the average E&O personal auto claim.

There is the potential for differences in the forms as not all homeowners products are the same. The differences are more noticeable especially between those carriers that have adopted the latest ISO form, carriers on the older ISO edition date and various companies with their own filing. So, when looking to move one of your customers from one carrier to another, perform the “Mirror Test.” This involves evaluating the differences in the forms and bringing those differences to the customer’s attention. If they are giving up some coverages in exchange for a lower premium, secure a sign off.

Common E&O Claims

Let’s take a look at some of the more common causes of E&O claims.

1) The agent determines the homeowners limit rather than asking the client for the limit. Many of you have confidence in the various “approximators” carriers provide – and if you had all the information and it was 100 percent accurate, you would have a better chance that the number will be acceptable. The issue, though, heavily centers on when you don’t have all the information or you “guess” some of it. Essentially, the quality of the input will determine the quality of the output. When calculating the amount, it is important to advise the customer this is not a guarantee the home can be replaced for this amount. You might be better off recommending that the customer secures the services of a licensed appraiser, especially if the home is unique or customized. With the current economy, be sensitive to the fact that the price the customer bought the house for is potentially significantly less, than what it would cost to replace it.

2) The agent fails to have the customer sign the application.When providing homeowners coverage for a customer, meet with them to complete the application – and have them sign it! If coverage is being secured online, many agents simply print the application after uploading it and then ask the customer to officially sign it. This is also a good time to make sure what you uploaded is correct.

3) The agent fails to advise the carrier of issues pertaining to the risk – such as a home business, dogs, prior cancellations for non-pay, loss history, etc.While you may think you know the answers to the questions, be certain to ask the prospect each question and document each response. Then follow the recommendation in No. 2 – have the insured sign the application. This could be a key element in your defense if they misrepresented the exposure to you.

4) The timing of when to switch from a builder’s risk policy to a homeowners policy – i.e., switching to a homeowners when the building is still vacant and unoccupied. This is a common question. It is strongly suggested that you check with each carrier for their position. In many situations, when the customer moves 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.

Additional Recommendations

Receipt of the policy – Since many of these policies will be on a direct-bill basis and thus may come directly from the carrier, always advise clients, verbally and in writing, that when they receive their policy they must review it to ensure everything is in order. Obviously, 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 difference between actual cash value and replacement cost? Do they know the limitations within a homeowners policy? These certainly can vary among carriers.

While homeowners is the No. 1 personal lines product generating E&O claims, the causes of claims are easily resolvable. Some greater attention to detail and enhanced documentation may just do the trick.

Topics Carriers Homeowners Professional Liability