Brokers and Agents Beware - WC is the Leader in E&O Claims
It may not seem intuitive, but the Workers Compensation insurance line accounts for approximately one in ten of all errors and omissions claims filed domestically each year against agents and brokers.
WC is statutorily required in all states (except Texas, where an employer can opt out of the system and take their chances under common law when an employee is injured). So how can there be so many E&O claims arising out of a line of insurance required to cover employees? I never suspected WC was anywhere near this “exalted” position in terms of a potential “landmine” for brokers and agents, but a recent article in Insurance Journal edified me.
If any area of property/casualty insurance seems straightforward, it is WC. For those of us on the claims side of the industry, the equation looks quite simple: You have a business, that business has employees, you speak with your agent or broker to discuss the purchase the correct WC insurance cover, and voila, problem solved. Well, apparently that is overly simplistic. There is far more to it than that when it comes to the brokers and agents making sure they have left no stone unturned to provide the proper WC insurance package.
The Coverage Question
The complicating factor with WC is that it involves 50 different state laws as well as Federal law. Obviously, a multi-jurisdictional situation is not an issue if you have one business location in one state. Purchase WC insurance through a broker or agent for that one location covering all class code exposures and all is well. There is little that can go awry for the broker/agent in such a simple scenario.
What if there are multi-business locations in several states? Or what if the business involves long haul truckers that drive through all of the lower 48 states? What type of WC insurance cover is then needed? An all-states endorsement? Federal insurance, because the truckers pick up and deliver from coastal shipyards? Are risk retention pools an option? The plot obviously thickens.
There are a plethora of areas of potential E&O claims in the WC sphere. These include:
1) United States Longshoremen & Harborworkers Act (USL&H) exposure mixed with statutory state exposure.
2) Multi-state exposures.
3) Businesses involving sole proprietors.
4) Businesses with two or less employees (such as partnerships).
5) Insurer bankruptcies, with no Guarantee Fund safety net.
6) Employees working in foreign countries (e.g. Defense Base Act exposure).
7) Employees working on near shore water based oil rigs (Outer Continental Shelf Lands Act exposure).
What at first may seem to be a simple situation, can easily morph into something more complex. Obviously it is incumbent upon the agent or broker to carefully question the buyer regarding the WC exposures extant, and recommend a coverage solution that addresses all areas. Failure to do so can result in an expensive E&O action should something serious transpire involving lack of WC coverage for an injured employee.
The Capacity Issue
Not all insurance carriers write WC in every state. Additionally, others shy away from Federal comp exposure due to the high level of claimant benefits involved. A broker/agent must have access to the carriers who can provide the required comp insurance for businesses in order to cover all exposures.
If there is a nationwide exposure, regional WC carriers are not an option. If there is Federal comp exposure involved in the risk, that further narrows down a broker/agent market option in order to properly place the business and to make sure all areas have been considered. The salient issue is the placement of coverage should not ultimately be an obstacle, but the broker or agent needs to know what coverage is necessary to avoid leaving “holes” in the exposures extant.
Selecting the right carriers for the exposure is a key responsibility of the agent/broker. Large businesses usually have sophisticated Risk Management Departments and officers who will work carefully with the brokers/agents to identify all possible risks. It is not unusual then that many E&O claims materialize against agents from smaller risks where the business owner is not cognizant of the WC exposures, or elects to forego WC insurance altogether for him or her as the owner of the going concern.
The Cost of a Misstep
The cost of an E&O claim against a broker/agent can easily exceed six figures, especially if the underlying uncovered WC loss involves a serious injury or fatality. So we have a cascading exposure issue from the business to the agent/broker. The business owner needs to be properly advised by the agent/broker on the recommended proper WC insurance package to cover all contingencies, while the agent/broker requires a robust E&O policy.
The error of an agent or broker in not uncovering and delineating all of the WC exposures for their clients opens the intermediary up to E&O claims should anything “backfire” with respect to WC coverage. If there is no coverage where it is needed in terms of a WC injury, the employer will search for a “Mr. Someone,” and that entity, more often than not, will be the broker or agent who they retain to secure them the proper comp coverage.
The take away here is that WC is not as simplistic as it may appear on the surface for agents and brokers. No business wants to be faced with a gap in coverage when a WC accident occurs. Detailed discussions with the agent or broker should prevent this scenario from transpiring. But it is not something to be taken for granted either.
About the Author:
John D’Alusio has over 30 years experience in P/C insurance with executive management positions in administration, field operations, and claim technical areas. Mr. D’Alusio has had many articles published in industry periodicals, and is also a contributing author to the LexisNexis published, “Complete Guide to Medicare Secondary Payer Compliance.” He writes a monthly column for Risk & Insurance Magazine and is a quarterly columnist for AMComp Magazine.