Claims, Fines, and Sanctions

Part 3: The Investment Advisors Guide to Errors & Omissons Insurance

  By Gary Sutherland, CIC, MLIS

Underwriters utilize past experiences to attempt to predict future claims. Therefore, review of your firm’s past claims, fines and regulatory sanctions is one tool that is regularly used. While this may seem inherently unfair, studies have statistically proven that past history is an indicator of things to come. Clearly, there are exceptions to the rule, but underwriters will use this information to assess risk.

Underwriters are also aware that a firm may be fined or sanctioned for minor administrative missteps, simply because the regulatory agency feels a need to find something to justify their time spent with the entity being examined. This is one unfortunate cost of an audit. These nuisance fines should not play a major role in the review compared to more serious fines and sanctions that have real consequences and can heavily influence the underwriter’s decision process.

As in all application areas, a positive message explaining the misstep – and more importantly steps taken to avoid reoccurrence of similar issues – is the productive approach. We would recommend not using any of the following claims narratives such as: we did nothing wrong, the claim is totally frivolous, and/or the attorney who represented us was incompetent. Although, any of these statements may contain some truth, acceptance of the underlying issue and proactive risk management steps will be more impressive to an underwriter.

When presenting a claims narrative stick to the basic facts:

– Who
– What
– Why
– When
– Where

Clearly state your points, the outcome, and those internal steps taken to avoid future occurrences. The facts presented in clear professional business language will go a long way toward convincing the underwriter that you are a better risk than it may have otherwise appeared. Additionally, even in the case of a frivolous claim, lessons can be learned and passed along to avoid similar claims from happening again.

Most underwriters will want to see loss runs over a five-year period. A loss run is an insurance company’s summary of claims activity for your firm. They almost always contain only dollar amounts incurred, or reserved (the amount set aside for future payments) for damages and legal expenses. They do not contain narratives or opinions on the case.

Many insurance companies only update loss runs annually. You and your agent should review these carefully for accuracy. Is the claim closed but showing open on the loss run? Did they accurately document the reserve and damage amounts paid? These additional details can be critical to getting best insurance terms, similar to reviewing your own credit report prior to applying for a mortgage.

One frequent misunderstanding in the process of renewal with your existing carrier is that your underwriter knows all the details concerning a recent claim. In reality, not only are the underwriting and claims department separate, but consider the following factors:

– Any internal changes in underwriting and/or claims personnel
– Your legal counsel is not in direct contact with underwriters.
– The level of information shared between counsel, claims, and underwriting will vary dramatically based on carrier nuances.
– The typical underwriter reviews hundreds of files annually.

The best submission for a firm with claims, fines or sanctions, is an upfront, clear, and well-delineated explanation. Simply including multiple pages from the original complaint, anticipating them to review and interpret significant legal documents, is not recommended. Instead your goal is to provide the underwriter information so that he/she may quickly and accurately understand the relevant scenario(s).

Conclusion

The best advice that we can provide to a firm that has suffered claims, fines or sanctions, is to provide accurate, well-documented summaries outlining what the issues were, what steps the firm has taken to correct and prevent reoccurrence, and what internal controls have been instituted. Understanding this process should proactively help to answer any questions or concerns the underwriter may have regarding your submission.

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Contact us for additional information:

Gary Sutherland, MLIS, CIC    Garys@mcgowanprofessional.com    508-656-1350