ELEVATED STATUS, ELEVATED EXPECTATION
How agents can meet standard of care and avoid “failure to procure” actions
By Frank Huver
Let’s kick this article off with a short and, I hope, easy quiz: Which of the following events will most likely happen to you?
A. Get struck by lightning
B. Be audited by the Internal Revenue Service (IRS)
C. Receive a traffic ticket
D. Be the subject of an insurance agent errors and omissions (E&O) suit
Let’s see how well you did.
If you guessed A, you really missed the mark. There is a one-in-3,000 chance that an individual will be struck by lightning over the course of their lifetime. Did you go with B? Wrong again. The average American has a one-in-160 chance of being selected for an audit by the IRS, although these odds unsurprisingly increase as annual income rises. If you opted for C, you were close: One out of every five drivers will receive some sort of traffic citation during the year. But that’s not the most likely occurrence.
Unfortunately, as you’ve figured out by now, the correct answer is D. Studies indicate that one insurance agent out of three will face an E&O claim in any given year. Over time, the numbers are even worse: It is estimated that three out of four insurance agents will have an action filed against them within a five-year period. Remember, agents have to worry about more than legitimate actions; even unfounded or frivolous allegations need to be defended against. And the cost of the average E&O claim is $60,000.
Environment for claims
Agents increasingly are becoming the subject of legal actions. This can be at least partially attributable to the litigious society in which we live. Now more than ever, people are inclined to turn to the courts to seek remedies on disputes.
Of course, agents are partly to blame—albeit unwittingly—for the current state of affairs. It wasn’t all that long ago when parents wished their children would grow up to be doctors, lawyers, and architects (for all you Seinfeld fans), or wind up holding some other prestigious job. Relatively speaking, few parents would have added “insurance agent” to that list. Well, that’s changing. Thanks to the educational efforts of our business community, the public perception of an insurance profession is rapidly improving. An agent’s expertise in such areas as evaluating risk, explaining coverage terms, recommending loss control techniques, and so on is becoming increasingly recognized and sought after.
While this recognition is well-earned and has helped boost our collective image, there is a downside to be considered: This elevated status in the public eye also increases the standard of care that agents are expected to deliver to their clients. This has been clearly articulated as part of a finding handed down by an Idaho court case, McAlvin v. General Insurance Co. of America:
A person in the business of sellinginsurance holds himself out to the public as being experienced and knowledge-able in this complicated and specialized field. In the interest of the state, the competent persons who become insurance agents are demonstrated by the requirements that they be licensed by the state, pass an examination and meet certain requirements. When an insurance agent performs his service negligently to theinsured’s injury, the agent should be heldliable for the negligence just as an attorney,architect, physician, or any other profes-sional who negligently performs personal services.
So, what are the most frequent causes of E&O claims for Property/Casualty agents? Research conducted on members of the Independent Insurance Agents & Brokers of America (IIABA) identifies “failure to procure” coverage as the number one underlying issue. Roughly one-fourth of all losses evaluated during the course of this study were found to be due to this particular error. Here are the rest of the top five claim reasons:
• Failure to carefully explain policy provisions (7% of claims)
• Failure to adequately identifyexposures (6%)
• Failure to recommend coverage (5%)
• Sending incomplete/inaccurate client information to the insurer (5%)
An entire column could easily be dedicated to each one of the top claim reasons listed above. For the remainder of this article, we’ll focus our attentionon some common-sense measures agents can take to help mitigate the likelihood of a “failure to procure” claim.
Recognize the level of duty agents have to their clients. Under a normal business relationship, agents need to use reasonable diligence to secure the coverage requested by their client. It is typically incumbent on the prospective insured to articulate the type of insurance being sought. The agent is required to promptly inform the client if the requested coverage cannot be secured. The agent is not expected to review every potential claim scenario with the client nor is he or she required to discuss whether or not those situations would be covered under the policy. This rule of thumb does not apply if the client specifically inquires about how coverage would respond to a particular risk or loss situation.
Expect the level of duty you have toward your client to be expanded if you a.) promote yourself as a specialist and b.) require additional compensation in return for consultation and insurance advice. Under this scenario, the agent may be held accountable if the client relies on their expertise and suffers a loss as a result.
Document files. Nearly everyone knows that the three most important things about real estate are location, location, location. In our industry, that list changes to documentation, documentation, documentation. Every communication between the agent and the insured must be noted in the client’s file. This rule of thumb applies to all types of conversations—telephone, digital and face-to-face meetings.
The consequences of failing to maintain records can be severe. Otherwise-healthy individuals have been known to contract a sudden case of amnesia after a loss occurs. Your insured can contend that they do not recall any conversations about coverage adequacy or uninsured exposures ever taking place–unless there is supporting documentation available to “jog” their memory.
Internal workflows and procedures. A fair number of “failure to procure” E&O losses can be attributed to administrative error. Consider this scenario: The agent goes through all the proper steps of finding the appropriate coverage for the client. A binder is ultimately secured from the carrier … but the confirmation order is never placed. The implementation of some fairly straight-forward internal workflow procedures can help reduce the chances of this type of oversight. A periodic audit of client files is another tool to consider.
Duties after the sale. An agent’s responsibilities do not end after the policy has been delivered to the client. You have a continuing duty to notify your customers of any potential early coverage cancellations (due to non-payment of premium, for example). You should also closely monitor the companies through which you place business. Be sure to immediately notify your clients of any change in the financial condition of these insurers. This includes situations of possible insolvency, placement of the company in rehabilitation, or other questionable financial situations.
Unfortunately, there hasn’t been a risk mitigation strategy devised that can completely protect an agent from an E&O loss. With that said, the implementation of some sound business practices can help significantly reduce the potential for a claim.
Francis J. “Frank” Huver is senior vice president and chief financial officer at Claymont, Delaware-based Rockwood Programs, a full-service MGA offering several national programs, including Life Agents E&O, P-C Agents E&O, Managing General Agency E&O and Employment Practices Liability Insurance (EPLI).