30 Jun Are Your Clients Aware of Key Policy Issues?
I trust you would agree there is often a tremendous likelihood that your clients’ policies contain some key policy issues. For commercial accounts, issues or conditions such as those noted in a Protective Safeguards Endorsement tend to be common. One of the keys to this endorsement is the condition that failure to maintain the protective safeguards in good working order, or failure to notify the insurer of even a temporary impairment in protection, suspends coverage until the protection is restored. If the client suffers an uninsured loss, there is certainly a heightened possibility that some form of litigation will be pursued against their agent.
Let’s look at the following E&O claim:
The coverage involved a warehouse with a replacement cost of around $6 million. When a fire destroyed a portion of the warehouse, the insurer denied the claim on the basis that when the fire occurred, the fire suppression system was not operational. It appeared that it had been turned off when the temperature was below freezing to prevent the pipes from freezing and bursting. The client then pursued litigation against the agency. In the subsequent testimony, there was an admission from the agency producer that the Protective Safeguards Endorsement was never specifically mentioned. However, the producer did state that there was discussion about the need to have a properly functioning sprinkler system. In fact, the discussion involved the premium reduction that the client was getting for this safeguard. The client acknowledged that they had not read the policy and thus was not aware of the specific conditions inherent in the Protective Safeguards Endorsement. The client did testify that the system had been turned off and was not operational at the time of the fire.
Here are a few suggestions on how this matter could have been avoided. While the matter of the sprinkler system was discussed at the time of the completion of the application, there was not much depth to the discussion. It would have been prudent for the producer to ask when it was installed, if it was in good working condition, or if there are any times when the system is not operational. These discussions should have been noted in the agency system along with a letter or email back to the client memorializing the discussion. This level of discussion will always play a key role when a problem occurs involving who said what.
It is suggested that when policies are received and checked (either by the agency or a third party), issues such as the Protective Safeguards Endorsement should be identified and then subsequently brought to the client’s attention. If the policies are being delivered in person, this issue should be noted. Some agencies require the client to sign or initial the form acknowledging specific key coverage issues or limitations. If the policy is mailed or emailed, the cover letter attached to the policies should stress the importance of the client reading and reviewing the policies. Mentioning endorsements such as the Protective Safeguards in the letter should be strongly considered.
Certainly, Protective Safeguards Endorsements are common and can deal with a multitude of issues such as a sprinkler system, a central station fire alarm or burglar alarm, as well as the need for a night watchman. Without question, it is evident that without some special handling, uncovered losses occur. Identifying these and bringing them to your client’s attention is a positive step in minimizing the possibility of an uncovered loss occurring – because where there are uncovered losses, there are often E&O claims.