Litigation & The Insurance Agent E&O Case - How to manage Discovery when paper files don't exist!

By: Lee Hoffman CIC, LIC, CPIA
© All Rights Reserved



Whether defending or litigating, success with Insurance Agent E&O cases can hinge on the discovery process and avoiding the paper blizzard that often comes with generic production requests. Produce too many documents and it is a waste of your valuable time. Produce too little and you might not find what you need. Since most insurance agents no longer utilize paper files, knowing exactly what to extract out of a computer system could make or break your case.    


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Litigation & the Insurance Agent E&O Case – How to manage Discovery when paper files don’t exist!

By: Lee M. Hoffman CIC LIC CPIA

Rev. 2/7/16

In an article titled “Swiss Re Corporate Solutions: Attorney Survey of Agent’s E&O Solutions” written by Swiss Re Corporate Solutions in conjunction with and published by the Independent Insurance Agents and Brokers of America, approximately 1 in every 15 agents will have an E&O claim that requires their E&O insurance carrier to either defend or post a reserve [1]. The article states that some of the leading allegations include failure to procure adequate coverage or limits, failure to advise of policy exclusions or limitations and failure to advise about co insurance penalty. There are many conditions that can lead to an E&O claim.  

When a suit is filed and the discovery process begins, how well an attorney orchestrates the process can make the difference between successful ADR and going to trial. With ADR as the preferred forum in most jurisdictions it’s important to build a solid foundation early in the discovery process.    

Insurance Companies who write E&O insurance usually rely on panel counsel to defend their insured’s. While these attorneys may be skilled at defense, not all of them understand the nuances of the insurance agency system or agency management systems. Since E&O claims can arise out of a single event or a chain of events, understanding the insurance sales process from solicitation and data storage to online quotes, policy delivery and client service is crucial.

It is also important to understand the differences between the direct writing method of selling and the independent agency system. To complicate matters, these systems have become somewhat intermingled. 

In the past, there were clearly defined channels of direct distribution and independent agency. With direct distribution the insurance agents were either employees of the insurance company or independent contractors limited to representing just one company. Independent agents were independent contractors free to represent any number of insurance companies.

Times have changed. Companies who only embraced the independent agency system are acquiring or developing insurance companies to utilize the direct sales model while insurance companies who only sold through direct channels are appointing independent agents. In addition, several whole new distribution systems are taking hold like direct internet sales without agent assistance and sales by large retail stores like Wal-Mart.

For E&O attorneys, understanding how the sale originates and flows through the distribution system is a key factor in identifying culpability. Another factor emerging out of E&O case law is the different treatment in some jurisdictions of independent agent vs direct/captive agent, especially as it relates to an agents duties. One jurisdiction in particular, Michigan, has made this distinction, but case law is still emerging on the subject.

Even with all the changes, a captive or direct agent is still defined as an employee or independent contractor who has an exclusive agreement with one insurance company. Their computer system is typically owned and managed by their company. The company also owns the data in the system and policy expirations. On the other hand, the independent insurance agent/agency is independent contractor who is free to contract with any number of insurance companies. They own their agency management system as well as the data and policy expirations.

While the terms insurance agent and insurance broker are often interchanged, in some jurisdictions the role of a broker is entirely different from that of an agent. In those jurisdictions, a broker is a licensed insurance professional who only represents the interests of the insured, not the insurance company. Their duty and fiduciary responsibility is to their insured. This is an important distinction in errors and omission claims.

In many jurisdictions the independent agent can take on a dual role, typically during the procurement process, where they are agents of both the insurance company and the insured.

Attorneys not familiar with the nuances of the insurance industry are well advised to retain the assistance of a consulting expert at the beginning of discovery to assist with interrogatories, document production and depositions. Doing so will result in an enhanced, directed, productive and focused process. It’s like having an assistant with an insurance roadmap. Their counsel and advice can be extremely valuable and reduce both the expense and the time spent identifying possible types, sources and locations of critical evidence.

Yes, there is a cost associated with this practice, but what is your time worth? The difference between an experts time spent and your time saved could substantial.

When it comes to production of documents from an insurance agent or agency, most documents don’t even exist until a computer software program is directed to generate them. Knowing how the agent’s agency management system works and what type of information or documents can be generated can make the difference between evidence gained or time wasted.     

Document production is one of the most important steps in the discovery process. As previously stated, early consultation from an expert can help refine the process so that meaningful information and documents are produced. All too often mounds of documents are generated that may have no bearing on a case. When insurance agencies used manila folders to file and store all their client information, discovery was a much easier process and produced useful material. Either the paper document was in a file or a storage box – or it didn’t exist at all.

Computers are now the storage files - but not all documents are images residing in computerized folders that can be called up in an instant. In fact many documents don’t even exist because they reside as suspended bits of information until they are compiled into documents. Using generic or outdated terminology in production requests will just yield a high volume of meaningless printouts. Information critical to a case may be lost to discovery because the data was never compiled into a useful document or report.      

The insurance industry uses proprietary automation systems. This makes it difficult for someone not familiar with the industry to know the terminology, including the type of documents to request. There are literally hundreds that an agency management system can generate.  Some are merely reproductions of emails, letters, applications, policies and endorsements. Others, however, are reports that the system can generate and range from accounting information to a salesperson’s daily activity log.   

Take for example an E&O case where timeline is a factor. All the documents related to the case have been produced but the importance of several documents rely on when they were created. In addition, there were duplicates of numerous documents. Is it significant?

It is possible for these issues to be cleared up with the production of one or more report(s). Agency management systems are capable of producing logs and reports from stored data. Knowing which to request may help defense counsel support their position that an error did not occur or plaintiff counsel prove that it did.

The most revealing of these documents is the customer activity report, sometimes called a log. It lists customer related activities and can be run in several different formats. One of those formats is chronological order - a timeline of account activity. Since all agency management systems come standard with report generating capability, requesting these documents should not be considered “unreasonable”. 

Depending on how the agency management system was setup, activity reports that can list activities like emails sent/received, insurance policies received or mailed, documents or files stored or attached, customer and customer related phone calls or visits made and by whom. The report can be generated by type of activity, by the person who entered the activity, (service rep., agent, etc.) or other criteria. Attachments to activities can also be printed. 

The two most popular vendors of agency management systems are Applied Systems and Vertafore (formerly AMS). Both offer multiple products from agency housed systems to hosted and cloud systems. It should be noted that all agency management systems are not the same and are subject to change at any time.

Most independent insurance agencies own an agency management system. The degree to which agencies utilize these systems and the consistency of the data input varies widely from agency to agency. An agency management system is a software program designed specifically for managing the daily operations of an insurance agency. Functions include accounting, marketing, policy applications, upload and download of insurance related data, scanning, email, letter and fax generation, report generators and much more.

When activities, like requesting a policy endorsement or change of vehicle, are generated the software is designed to apply a date and time stamp making it a permanent record that cannot be erased or altered. Because of this intentionally designed function, the credibility of activity reports in court should be very difficult to challenge. This assumes that the management system was set up properly and is functioning as designed.

However, the systems can be set up to perform processes without creating an activity like accounting and email functions.

Attaching items to activities is a common practice. Attachments usually consist of applications, policy worksheets, policies, endorsements, scanned documents and agency generated communications like emails or form letters. When an attachment is paired with an activity it too becomes a permanent record. Some systems do allow attachments to be moved or altered, but the original entry is still traceable.

Most agency management systems utilize Acord Electronic Standards in the design of their insurance data management.[2] This standardization allows an agent to send the same application to multiple insurance companies for quotes and policy issuance without having to re-enter all the data. Each time a customer service representative sends an application to a different company, that company’s name is digitally “stamped” on the application and stored in the system.

With insurance companies continually finding new ways to receive, manipulate and transfer data in order to underwrite and sell insurance products, insurance agencies have become the repository of paper documents – or at least the images of the paper. In fact, contracts between insurance companies and their agents usually require the agents to keep and safely store all paper documents (or their images) and to be able to produce or reproduce them upon request. This includes insurance applications, supporting documents and pictures

While some small agencies still store paper, most have converted their filing systems over to data. With the cost of a commercial grade scanner less than $1,000, agents have all but eliminated paper in the process of insurance and insurance related documents.

For management systems to function properly, a large amount of customer data must be entered about each client or prospect. Agents and customer service representatives, gather the information and enter it manually into the system. There are other methods of entering data, but manual input is still the most popular. This is the point where the insurance production data stream begins.

While agency management systems typically reside in-house or hosted online, data can be stored just about anywhere including an offsite vault, computer center or cloud. Third party software like Microsoft Office may or may not be integrated with the agency management system.

Since computers and data storage devices come in all shapes and sizes, client data can exist just about anywhere including an employee’s personal cloud, desktop “C” drive, laptop, I-pad, cell phone, and the newest entry, a compute stick. This is a device that looks like a flash drive but also contains software programs to carry on computing functions.

Paper files? There are a few, but as previously stated, most agencies store information electronically – including the scanning of incoming mail, policy documents, client and company correspondence and signed applications. The paper files are then destroyed.

With the use of predictive modeling on the rise, capture and transformation of data input directly into company computer systems by agents to automatically underwrite and issue insurance policies without any human intervention is increasing in popularity[3]. The challenge for discovery is that the process developed by some insurance companies bypass the agency management system. The data used to complete applications that was previously stored in an agent’s computer may now reside only with an insurance company. This complicates the discovery process.     

There are two primary ways to provide customer data to an insurance company for online quoting purposes. One is by logging onto an insurance company’s web site and inputting the data manually thru their proprietary portal; the other is by directly uploading the information from an agency management system into the company’s system. While uploading from an agency management system is most desirable and gaining popularity, manual entry is the still most widely used because it allows insurance companies to customize and change their application and underwriting questions at will without having to worry about data incompatibility or upload interface issues.  

It should be noted that with little or no human intervention on the part of the insurance company, incorrect or fraudulent answers provided by insurance agents to prequalification and underwriting related questions can result in an insurance policy “automatically” being issued that otherwise would not meet the company’s risk profile or appetite.

To complicate matters, insurance companies that provide downloading of insurance policies and related application data into an agency management system do not allow downloading of their agent underwriting guidelines or unique prequalification and application questions. Some companies consider underwriting or coverage pre-qualification questions proprietary information and gaining access to them is difficult for opposing counsel. However, the underwriting guidelines the agent is supposed to follow along with the answers to the unique prequalification and application questions can be material to a case. Knowing exactly what to request (or subpoena) is critical.  

The same holds true for most direct writing insurance companies who own and manage the computer systems used by their agents. The insurance application, policy information and all communications reside in the company’s computer.   


Confusing? Yes, even for insurance experts not familiar with agency management systems and agency operations.  

In the world of electronic data storage, what are documents? Are documents limited to the printing of stored images, preprinted forms and emails? What about raw data stored in an agency management system or company computer system. If so, how is it accessed? 

Agency management systems and insurance company computers can generate just about any type of document, report or log. But which one of the thousands of documents should be requested? What are the names of these computer generated documents. After all, just one of them may contain needed evidence.

What about insurance company data? Even though an insurance company may not by culpable, they may have information critical to your case. But how do you know it exists or is even material?   

Discovery in the world of insurance related cases is all a matter of semantics. When it comes to assembling data into useable documents, attorneys need to be specific with their requests for production. If a law firm does not have a resident insurance expert familiar with the nuances of the insurance industry, insurance automation systems and related terminology, they should consider enlisting such an expert at the beginning of the discovery process, rather than the end.


[1] ©2012 Swiss Re Corporate Solutions and IIAA Agency Administrative Services, Inc.; See:

[2] See:

[3] See: http:// /en-US/Insights/Newsletters/Americas/americas-insights/2014/predictive-modeling-usage-for-property-casualty-insurers-grows