This week’s inquiry comes from Norman Lieberman (comment on the Fee Collection and Client Bankruptcy post from last week):
As a successful 29-year veteran independent recruiter, I have been following and buying your sage advise for decades. Your articles, books and materials have helped, and saved me, too many times to remember over the years. One thing is for sure, you saved me a fortune in attorney bills. So a big Thank You is due.
I recently read an article that said E&O Insurance, specific to our industry, may not protect recruiters as once thought. Apparently some E&O policies have exclusions that are broad and hurtful to recruiters. Also, the article warns not to compare premiums, but instead compare the Insurance companies’ reputation for denying coverage. Even better is to have an attorney compare the policies for us.
The article scared me because I may be falsely sleeping well thinking that I am fully covered. But, in fact, my E&O insurance may not be covering me as I thought.
So Jeff, is it caveat emptor or how do we best protect ourselves? Where does one find out an insurance company’s reputation? How can we best protect ourselves and be confidant that our E&O is doing what we need and had intended?
I’m honored to hear from one of our most beloved recruiters, and appreciate your comments about my assistance through the years. Expressions like that from a 29-year success story like you make it all worthwhile.
Great questions too! I only wish I could give you the peace of mind E&O premiums promise. But I can’t.
Yes – you need to be concerned about who’s carrying your coverage. But you need to be concerned with much more than the A.M. Best rating for solvency and happy claims payment. It’s more a marketing tool than any indication of whether the carrier has a double hernia or how your single claim will be handled.
So let’s use this JOC to expose the little dirty secrets of E&O insurance to help fellow Fordycers for the first time anywhere.
Before we begin — since we’re beaming out into cyberspace about insurance — I’d like everyone on the placement planet to say out loud: “INSURANCE COMPANY AGENT!” Now, once again louder: “INSURANCE COMPANY AGENT!”
Good job! Now you’re qualified to read on. Slowly, though. There’s a lot to know here and it’s been purposely complicated by the insurers.
Going forward, whenever you hear or see the words “insurance agent,” just mentally insert the word “company” in-between. This will help you to remember two things:
1. Insurance [company] agents get paid by insurance companies for writing policies.
2. Submitting claims costs insurance [company] agents time, money, and perks with the companies.
This is just the way the insurance industry works. So don’t expect objective advice from an insurance [company] agent (or broker – agents sell, brokers usually own the agency and sell). They’ll tell you the differences between policies, but not the differences between commissions. The end game is to get you to buy. They’re not fee-for-service advisors, they’re com-mis-sioned salespeople. Many of them don’t publicize their “million dollar roundtable” awards, touting instead their titles as “consultants”, “specialists”, or “certified whatevers.”
I’ve lived inside the wacky world of E&O insurance as its creatures have evolved over four decades. Originally, I was a cheerleader for the big carriers. It seemed so sensible. Just tell everyone to buy the policies because they’d be covered. Besides, the insurance [company] agents bought booths at our association trade shows and advertised in our newsletters. Many also gave away excellent ballpoint pens.
I referred a ton of business to insurance [company] agents, and they reciprocated. However, we ended that practice quickly because I was uncomfortable with referrals from some insurance [company] agent who was reciprocating. I wanted referrals because we’re the best.
After a decade or so of carriers learning how to exploit the placement E&O market, coverage gaps expanded as the carriers went from taking claims seriously to looking for ways to deny coverage. These days, the first move doesn’t even start with the carrier! It starts with the insurance [company] agent by discouraging you from submitting the claim altogether. Claims to insurance [company] agents are like falloffs to recruiters. They’re real time-wasters and cause you to hassle with the paymaster.
Usually the insurance [company] agent states that the carrier is going to raise your premiums or that it’ll cancel your coverage entirely just because you submitted the paperwork. But press on. You must insist on the claim being submitted immediately and forcefully by the insurance [company] agent, and on you receiving a copy of the transmittal to the carrier
The failure to tender (submit) the claim properly in a timely manner will waive (forfeit) your right to assert (state) it later. The conditions precedent (requirements) are usually in the awareness provision buried somewhere in the “Notice of Claim” area of the policy (insuring agreement). You should also insist that your insurance [company] agent tell the company why the claim should be honored (you’re a valued client, the claim has merit because…, etc.)
The carrier will probably send you back a declination letter and force you to go to someone like me (well, not really – but some lawyer) to threaten it with bad faith litigation if it fails to pay. The carrier will then respond by sending the file to outside coverage counsel for an “independent analysis.” When that letter declines your claim – this time much more technically – we swing into action. What do we do? What else? Have our coverage counsel write an “independent analysis” to the carrier’s coverage counsel.
Not much peace of mind here, right Norm? A lot of fancy words our readers should read again. Then get ready for more.
The carrier will usually respond with a reservation of rights letter. This little legalistic gem will quote chapter and verse from the policy to tell you that the carrier is convinced it’s not on the hook for anything you’d like. However, it will magnanimously tender a defense (provide you with a very little lawyer in a very big firm).
The carrier is reserving its right to charge all of the defense fees and costs back to you at any time. (There will technically be one or two senior lawyers on your case too, but you’ll never see them and they’ll never see the file. It’s a political thing for insurance carrier billing purposes. At the paralegal billing rates the carrier is paying the very big firm, for you it’s definitely very little lawyer, very big firm.)
I just had an obvious one where we finally got the insurance [company] agent to submit the claim. Then the carrier wouldn’t even tell us whether it would cover a loss until the employer filed a lawsuit. It was actually a condition (requirement) in the policy. So the recruiter had to infuriate the employer enough to file and serve this massive lawsuit against it just to find out if the carrier would even tender a defense! And you thought insurance companies didn’t like their insureds being sued.
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In the majority of duty to defend cases we see, you (1) are covered for defense only, of (2) only possibly covered claims, but (3) can’t use a lawyer of your own choosing, and (4) are represented by a paralegal-rate very little lawyer, yet (5) may end up reimbursing the carrier for the legal fees and (6) costs of defending your (potentially-devastating-but-always expensive and worrisome) lawsuit. So you have some kind of prepaid legal coverage, only it might be postpaid!
It’s not really the carriers’ fault – the system can’t handle the number of claims that are technically not “errors” or “omissions.” The explosion in professional liability (malpractice) insurance claims is largely because plaintiff’s lawyers don’t care about errors and omissions (negligence). There’s usually no money in it beyond a percentage of the actual losses proven. Plaintiff’s lawyers care about intentional wrongdoing: the intentional torts (non-contractual civil wrongs). There’s big money in that!
For every negligent act pleaded (alleged) in a well-drafted complaint (initial pleading in a lawsuit), there is a correlative intentional one pleaded. The only two ways humans do anything is negligently (inadvertently) or intentionally (consciously). So any competent attorney pleads in the alternative (negligent and intentional wrongdoing). No insurance carrier anywhere covers claims for intentional torts. Those are the ones that invoke (cause) liability (blame) for punitive damages (money in an unlimited amount to punish) and exemplary damages (money in an unlimited amount to set an example).
These lawsuits are usually about either a reference check or a background check on a candidate that some employer alleges the recruiter should have done. Or should have done better.
Generally the employer is seeking to shift the risk of loss to you for its own negligence in not checking its employees out properly. (But they sue in the alternative for fraud, unfair business practices, conspiracy with the candidate, etc.) The other way lawsuits arise is when you sue for a fee, and the employer counterclaims (counter-sues within the same lawsuit) for your failure to check out the candidate properly. (This latter move is called a psychological counterclaim in litigation circles – it’s designed to make you nervous and to stop pursuing your well-earned fee.)
So let’s knock the “E” and “O” out of these claims right now. Save a lot of money and grief by just stating something in your signed (by the client) fee schedule like:
We do not check candidate references or backgrounds for clients. By interviewing our candidates, you agree to check their references and backgrounds independently before engaging their services. Further, you agree not to rely on our referral as an indication that we have verified references or backgrounds prior to referring candidates.
That’s about the extent of the “errors” and “omissions” you need to cover.
The other red-hot area of exposure is corporate raids. But how do you “err” or “omit” there? E&O insurance isn’t designed to scratch that itch, since raiding accusations always allege intentional acts.
Still, I heartily recommend E&O insurance in the lowest deductible, highest coverage limits and cheapest rates (regardless of the carrier – they’re heavily regulated by the states and there’s no way to really know about adequate reserves to pay claims). As I mentioned at the top of the hour, the A.M. Best rating (for solvency, claims payment, etc.) is more of a marketing tool than a protection.
Note the italicized Legalese in this reply. I’ve done that so you can learn the lingo when you jive with the ‘juster (“claims adjuster,” “claim service representative,” “professional liability specialist,” whatever).
Thanks so much for asking, Norm. As usual, you’ve helped our industry greatly by asking this question!
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