1 © 2013 Wilson Elser. All rights reserved. Understanding the Pitfalls of Surety Bond Agent Professional Liability National Association of Surety Bond Producers Virtual Seminar Ryan M. Turner, Esq. Matthew I. Baron, Esq. Wilson Elser Moskowitz Edelman & Dicker LLP

Ryan M. Turner, Esq. A partner and a member of Wilson Elser’s Program Management team, Mr. Turner serves as claims, coverage and monitoring counsel in connection with miscellaneous professionals’ errors and omissions liability, directors’ and officers’ liability, employment practices liability, general liability, and fidelity bond insurance programs. Mr. Turner has supervised and handled complex claims and disputes involving alleged errors and omissions committed by all types of miscellaneous professionals required to carry insurance. He also has experience reviewing and drafting insurance policies and endorsements and participating in risk management and loss prevention seminars, webinars, reviews and consultations with clients and insureds. 2 © 2013 Wilson Elser. All rights reserved.

Matthew I. Baron, Esq. Of Counsel to and a member of Wilson Elser’s Program Management team, Mr. Baron serves as claims, coverage and monitoring counsel largely for errors and omissions liability insurance programs. He supervises and handles complex claims and disputes involving alleged errors and omissions committed by a broad range of insured professionals. He also has in-depth experience reviewing and drafting insurance policies and endorsements and participating in risk management and loss prevention seminars, webinars, reviews and consultations with clients, MGAs and insureds. Earlier in his career, Mr. Baron was seconded to a Lloyd’s, London insurance syndicate, where he assisted claims professionals and underwriters in handling claims, programs and policy drafting. 3 © 2013 Wilson Elser. All rights reserved.

4 Everybody Makes Mistakes…. But Mistakes Can Be Expensive if: 1.We had a professional duty; and 2. Our mistake costs others money

What is E&O? Acting Improperly (Errors) Failure to Act (Omissions) 5 © 2013 Wilson Elser. All rights reserved.

An Agency E&O Matrix Advising Processing Failing to Act Acting In Error 6 © 2013 Wilson Elser. All rights reserved.

Key E&O Triggers Management Not Involved Too Much Staff Turnover Staff Skills – Limited Training Improper Documentation No Standard Processes A Changing World – Ignorance of Issues Insolvent Carriers No Internal Reviews Lack of Management 7 © 2013 Wilson Elser. All rights reserved.

Enhancing the Prospects of Coverage Timely report Claims and “potential” Claims / incidents! Know your policy (reporting provisions, limits/deductible, exclusions/ endorsements, right to counsel, etc.) 8 © 2013 Wilson Elser. All rights reserved.

Preventing/Minimizing E&O Loss Develop and Document Workflow –Write your own manual –Know the terms of your agreements with your carrier-partners –Vendors Training – More than Continuing Education –In House –Company Workshops –CPCU/CIC –Current Events ! 9 © 2013 Wilson Elser. All rights reserved.

Preventing/Minimizing E&O Loss Keep Records – Document Transactions Keep Procedures Current Communication –Use Standard Client Letters –Keep/Save s –All Cover Cancellations/Reductions in Writing – Document!... Document! 10 © 2013 Wilson Elser. All rights reserved.

Carrier Insolvency The regulation of insurance company solvency is a function of individual states. Regulators monitor the financial health of companies utilizing a series of tests that help identify companies that are in trouble. Once identified, all states have procedures through which attempts are made to prevent carriers from going insolvent in today’s market. 11 © 2013 Wilson Elser. All rights reserved.

Carrier Insolvency - Guaranty Associations All States have procedures through which the insurance industry covers claims against insolvent insurers Guaranty Associations are created in every state by statute for the purpose of protecting policyholders in the event of the insolvency of their insurance carrier. A majority of states do not recognize surety as a line of business eligible for guaranty fund protection –Upon that occurrence, legal intervention to investigate whether or not the surety has reinsurance may prove prudent 12 © 2013 Wilson Elser. All rights reserved.

Carrier Insolvency – Frequency Since 1969, there have been approximately 550 insolvencies All of the top insolvencies have occurred since 2000: –Reliance Insurance Company - $3.043 billion –Legion Insurance Company - $1.56 billion –Fremont Indemnity Insurance Company - $1.231 billion –California Compensation Insurance Company - $1.189 billion Surety Bond Insolvencies: –First Sealord Surety Company –Western Insurance Company –Amwest Surety insurance company –The Connecticut Surety Company Since 2007, insolvency incidents have been lower than the annual average of approximately 15. Seven companies have become insolvent in the second quarter of © 2013 Wilson Elser. All rights reserved.

Carrier Insolvency – Recent Trends Enacted in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act The National Association of Insurance Commissioners has adopted guidelines to assist states in modifying their insurance liquidation acts to deal with the closure of systemically important insurance companies 14 © 2013 Wilson Elser. All rights reserved.

Illustrative Scenarios A bond producer places a contract with a surety that soon thereafter goes bankrupt. What liability does a producer have? An employee at a producer’s agency uses an unsecured power of attorney form to issue an unauthorized bond. What’s the liability for the agency? A producer refers a client to a CPA firm which covers up information about the client. The producer introduces the client to a surety which issues the bond, based on the misleading financial statements. What is the producer’s exposure to the surety? 15 © 2013 Wilson Elser. All rights reserved.

Illustrative Scenarios A producer doesn’t look carefully at a power of attorney, which has expired. A bid bond is issued to a contractor based on the expired power of attorney. It is rejected by the contracting agency. What exposure does the producer have? A producer has a subcontractor client who wants to work for a general contractor who insists on getting a bondability letter saying that the surety will provide final bonds should the contracting agency accept the bid. The general contractor accepts the bid and the surety doesn’t issue the final bonds and is sued by the general contractor. What is the producer’s liability to the surety? 16 © 2013 Wilson Elser. All rights reserved.

Illustrative Scenarios The producer makes an error and enters incorrect information in a bond form that leads to rejection of the bid. What is the producer’s liability to its client? The producer places its contractor with an unauthorized surety. The bond is accepted, but later the contract is terminated because the surety is not licensed. What is the producer’s liability? 17 © 2013 Wilson Elser. All rights reserved.

Preventing/Minimizing E&O Loss Management – Make it a Priority –Internal Operational Audits Do frequently / assign / management summary Review Judgment Work – Producers/Managers Review Procedures –Establish Daily Controls Your system will help reduce claims Expirations accounted for All diaries are up to date 18 © 2013 Wilson Elser. All rights reserved.

If you do not have the opportunity to have your question addressed during the Seminar, you may contact the presenters directly: Ryan M. Turner, Esq. Wilson Elser Moskowitz Edelman & Dicker LLP 150 E 42nd Street New York, NY (Direct) Matthew I. Baron, Esq. Wilson Elser Moskowitz Edelman & Dicker LLP 150 E 42nd Street New York, NY (Direct) 19 © 2013 Wilson Elser. All rights reserved. Questions – Discussion