Clients' employee benefits can present potential E&O problems

Rough Notes, Jul 2002 by Utschig, LeRoy H

Losses involving retirement plans, health insurance can be avoided by careful monitoring

Although a property/casualty agency may have minimal involvement with employee benefits products, it still can face an E&O exposure involving the employee benefits needs of its clients. Well provide several examples to illustrate that point, the first of which is based on a true situation. (The other examples are fictitious ones used to illustrate additional exposures to errors and omissions losses.) Many of the details, including names, have been modified.

The retiree

In the late 1970s, a company we'll call Robotics, Inc., threw a party for a long-time employee who was retiring.

As part of the festivities, Robotics' president presented the retiring employee with a lump-sum check representing the employee's entire benefit from the company's pension plan.

After looking at the check for several minutes, the retiring employee said, "I don't know what to do with this amount of money."

Robotics' president said to him, "You might want to talk to our banker. He always gives us investment advice."

A year later, Robotics was notified that it was being sued. Because the company's president had suggested that the employee contact the banker, the president was accused of providing bad investment advice.

Robotics had all of its property/casualty coverage with one agent. Its health insurance was written through a second agent. A third agent was involved with its retirement money.

First, Robotics contacted the firm that was handling its retirement funds. This financial firm indicated that it did not have any coverage for this type of loss. The financial firm also said that it did not provide any coverage for any liability claims that one of its customers might experience due to the activities of the pension moneys.

Next Robotics contacted the firm that provided its health insurance. Again, Robotics was told that it did not have any coverage for this type of a loss.

Robotics then tried its property and casualty agent to determine if they had coverage for a claim resulting from the activity of a pension and related financial activities. The property/casualty agent told the owners of Robotics that coverage was available for a claim resulting from the activities pertaining to pension moneys. However, Robotics had not purchased this coverage.

About two weeks later, Robotics received lawsuit papers filed on behalf of the retired employee. Robotics then sued its insurance agent because it did not have proper coverage. The agent had told Robotics that the coverage was available but had not sold them the proper insurance.

When the agent received the papers from Robotics, he forwarded them to the agency's errors and omissions insurer. In addition, he also sent along a copy of Robotics' entire file. One of the items in the file was a coverage checklist completed at the time Robotics' property and casualty insurance was renewed. There was an "X" in the box indicating that Robotics had refused pension plan coverage. Robotics' president had signed and dated the form. Because of this file documentation, the errors and omissions carrier convinced Robotics' attorneys to drop their suit against the insurance agent.

Medical plan

A company we'll call First, Inc., was faced with the problem of rising health insurance costs. In an attempt to control the price of the coverage, the company changed health insurance carriers. The insurer had told First that it was getting coverage identical to the health insurance provided by the former insurer.

A short time later, one of the employees had an operation. This was a procedure identical to one that had been carried out when she was covered by the old insurer. However, the new insurer would not pay.

The employee presented a claim to First, based on the coverage reduction.

Her contention was that she had not been notified of the change in coverage.

First sued its agent, alleging that the agent had not notified them regarding the reduced coverage.

While talking to another insurance agent regarding this situation, the owners of First learned that they could have purchased employee benefit plan insurance to protect against this type of loss.

The agent did not have any file documentation verifying that the reduced coverage had been explained to First. The E&O carrier for First had a very difficult time defending the producer.

Pension plan

Small Business, Ltd., had a pension plan, and every year their accountant would tell them how much money the company needed to put into the plan. Small Business's trusted and long-time bookkeeper was in charge of this money transaction. The bookkeeper retired and moved, on a permanent basis, to one of the Caribbean Islands. A new person took over the responsibility of moving money into the pension plan.

While preparing the current pension plan check, she looked at how much money had been placed in the pension fund during the previous year. She was surprised at how much more money was being moved during the current year. Then she looked at several previous years' contributions to the pension plan. All of them were significantly smaller than the current year's contribution.