Agents' Errors & Omissions Review is excerpted from "The Professional Edge" newsletter which is published by SAFECO Insurance companies in conjunction with the marketing administrators for SAFECO's agents E&O program.
Double-checking the policy when it arrives
At issue: Many courts will put the burden on the insured to review his/her own policy to be certain the requested coverages were obtained. However, failure on the part of the agent to also check the policy could lead to potential exposure. This is especially so when the agent is dealing with an "unsophisticated" insured, one who is not familiar with all the insurance terms at issue.
SAFECO's commentary: Agents must make certain that the insurance coverage obtained conforms precisely to the request that was made. There must be clear procedures in place to be certain that the carrier has provided the exact terms, conditions and exclusions as those reflected in the agent's application and representations to the customer. Failure to do so could lead to potential exposure on the part of the agent. If the job of checking the policy for accuracy is delegated to agency staff, it is critical that the staff has been adequately trained to examine the policy to be certain that it conforms to the application or other documentation supporting the initial request for coverage.
It used to be that agents could concentrate their efforts on being a good salesperson, and production was their primary concern. Although this is still where efforts are concentrated today, clients are demanding a broader range of services, which often can include management of the client's known potential risk and advice about the management of risks. In order to meet these demands, agents must have thorough knowledge of the complexity of all coverages they are selling and the insurance marketplace. They must have familiarity with their customers' needs, their leading companies and understand the financial stability of all markets used. Files must be up to date, properly organized, with full and complete documentation of all conversations and transactions. In today's insurance market, good business practices can be time-consuming and are not always easy. However, it is crucial to avoiding a lawsuit from a dissatisfied customer.
Assess customer's exposures; know the policy coverage
At issue: Although sources of E&O suits vary, the insurance industry has recently seen an increase in claims involving the following: failure to obtain proper coverage, inadequate limits, the creation of coverage gaps, the failure to notify an insurer or policyholder of a change in coverage or cancellation of a policy, and placements with insurers that have become insolvent. There have also been more aggressive stances by insurers and a reduced inclination on their part to reform policies voluntarily at the behest of an agent. Typically, the end result is that a customer is left without insurance to cover a loss. That means somebody has to pay. In a climate where the threat of litigation looms large and consumers are more sophisticated than ever, this makes the insurance agent a vulnerable target for a lawsuit.
SAFECO's commentary: Failure to procure proper coverage is a common problem with a common pattern. It goes something like this: A loss occurs exposing the fact that a policyholder is uninsured or grossly underinsured. Maybe a fire destroys a home and its contents. The insurance policy in effect provides coverage only for the dwelling or structure but not for the content. The homeowner's insurance policy in effect provides adequate coverage for the dwelling but not for all the contents because the agent failed to ask questions regarding the need to increase limitations of silver, furs and a collection of fine art. Or a natural disaster such as a flood causes a factory to shut down production for several weeks. The client had asked for core business insurance: liability, property damage and workers compensation insurance, but the insurance policies ordered contained no business interruption insurance. These missed coverages spell trouble for the insurance agent. The policyholder, whether home owner or business owner, invariably asks the same question to the agent: "Why didn't you advise me that I needed insurance to cover this loss?"
As risk assessment and insurance coverages have become more complex, the agent's role has become more difficult. For the agent who did not thoroughly assess his/her customer's exposure to loss, or fully understand the coverage he/she was selling, the exposure to an E&O claim exists and the lack of proper coverage can be costly. In fact, one of the most common reasons an agent is sued arises out of poor risk assessment of a customer's needs and/or lack of knowledge about a particular coverage that in turn leads to inadequate or lack of proper coverage.
Although some courts limit the insurance agent's obligation to faithfully carry out a policyholder's request, other courts hold insurance agents to heightened standards of care and impose greater duties, finding agents liable in contract and negligence for breaching these duties.
To avoid problems, agents should create a detailed E&O loss prevention program that is used consistently by everyone working for the agency. Under such programs, all agents in the agency use a survey to review with the client the exact risk factors. The agent must have a full understanding of the type of coverage he/she is selling and should be able to be specific about what a policy does or does not cover. The agent should discuss all risk areas and types of coverage and then provide the client with the opportunity to accept or reject such coverage options.
Don't forget to document. Complete documentation of all transactions should be made in case a dispute later arises. Agents who have written documentation in their files showing they offered a particular coverage, but a policyholder refused it or was made aware of an exclusion, will frequently be able to avoid liability altogether. Oral communication should always be confirmed in writing and the client should sign all documents such as applications, risk assessment surveys/checklists and refusal of coverage(s) offered.
Today, more and more agents are using coverage checklists and software to assist in evaluation of customers' insurance needs. An insurance coverage checklist should assist in confirming which coverages the policyholder does and does not have or want. Quoting all feasible coverages and documenting that they were offered will help agents beat and avoid errors and omissions charges. A written proposal should include quotations for all coverages the agent thinks are important. Proper documentation places the agent in a much more defensible position.
Strong ties with carrier pay off
At issue: When acting as an agent of an insurance company, not only do you have authority with that carrier, such as binding coverage, but you're protected from many errors and omissions situations because the carrier has agreed to defend and indemnify you in its agency agreement. As an independent agent who wants to provide your customers with access to diverse markets, you undoubtedly have agency agreements with every carrier from Allstate to Zenith. While you may not have strong relationships with all of your carriers, your agency agreement will protect you, right?
SAFECO's commentary: The answer is--not necessarily. In today's world, just having an agency agreement may not be enough. Building strong relationships with your insurance carriers is equally important.
Most agents carry errors and omissions coverage (in fact, many carriers now require it), and it is becoming more common for the indemnification clause in your agency agreement to protect you from claims only if your error did not cause or contribute to the loss. Plaintiffs' attorneys know this. Most will draft their complaints to include allegations of independent negligence against the agent in the hope that the carrier will decline to defend the agent under the agreement, and the agent's E&O carrier will have to step in. In the plaintiff's attorney's mind, the more carriers the merrier, and the better the potential recovery for his/her client. More carriers equal more attorneys and higher defense costs, which the plaintiff attorney hopes will equal a larger settlement. As a result, we rarely see complaints that contain no allegations of independent negligence against the agent, which makes it more difficult to convince carriers to accept the defense of their agents.
So what can you as the agent do about any of this? You have to carry E&O coverage, you have no control over what plaintiffs' attorneys are going to allege, and you have no power to change the indemnification clause in your agency agreement. But you <I>can<I> influence how the carrier chooses to interpret this clause. In most of the cases in which we have convinced the carrier to defend the agent <I>even if there are allegations of independent negligence on the part of the agent,<I> it has been because the carrier valued the agent's business so much that it was willing to overlook the allegations and defend its agent in order to preserve the relationship.
Most claims representatives are trained to consider only the language of the contract when deciding whether or not to recommend providing the agent with a defense. You need the company's marketing and underwriting departments on your side. Obviously, if the carrier is just one of 20 with which you place a handful of policies, it may not be as willing to go to bat for you against the claims department. Whereas if you are a top producer with a profitable premium volume, you have a better chance of not being left on your own.
This was true in a claim recently received in our department. A lawsuit had been filed in which it was alleged that the carrier had wrongfully denied coverage and also that the agent had misrepresented what the policy covered and failed to obtain the coverage the plaintiff requested. The agent's agreement with the carrier provided defense and indemnity only if there was no error on the part of the agent.
Ordinarily, we would have expected the carrier to decline the agent's tender, but this was an exceptional agent. He had been representing this carrier for more than 20 years, his business accounted for over $2 million in premium every year, and he had developed strong relationships with the underwriting and marketing departments. In addition, he had received special recognition as a "Preferred Agent" and had served on the company's branch producers' council for several years. The carrier accepted the tender and agreed to defend and indemnify the agents against all allegations.
The opposite was true in a claim where the agent did not have a strong relationship with the carrier. While he had an agency agreement, over the years the agent placed only one policy with the carrier. Perhaps because he was not a large producer, he often did not receive newsletters from the company or updates to its underwriting guidelines. When the notices were received, they were often just filed away. Because the agent had only one policy with the company, reviewing the notices was not a priority. However, one of these notices advised agents of significant revisions to the coverage form. In particular, an important coverage was now excluded on the main form and an endorsement had to be purchased, and additional premium paid, if the customer still needed this coverage.
When it came time for the agent to renew the policy, he was not aware of the changes and, therefore, he did not advise his customer or request the appropriate endorsement. Shortly after the policy renewed, the customer sustained a loss for which he now had no coverage. The carrier denied the claim.
The agent immediately requested that the carrier cover the claim because he had not received the policy change notice. The claims representative stubbornly refused, insisting that the notice had been sent to all agents. In this situation, the agent had no contacts in underwriting or marketing, and with only one policy he had virtually no clout with the carrier. Even though the carrier's coverage position was wrong, and this should have been a clear case for reformation of the policy, the agent had no power to convince the carrier to reform the policy voluntarily. In this case, the total claim was less than $2,500, and the cost to pursue the carrier would probably have exceeded the value of the claim. Ultimately, the agent paid the loss out of his deductible.
In both of the above examples, the agents had agency agreements with the carriers, which contained similar binding authority and similar indemnification clauses. The first agent was protected by the carrier, while the second was abandoned. Why? Because the first agent had made himself valuable to the carrier. Instead of spreading his business among multiple carriers, he had focused on building relationships with a select few.
High production is not the only measure of an agent's value. A reputation of dedication and integrity will go a long way. Foster relationships with marketing, underwriting, agency relations and claims management. They will be more willing to stand by an agent whose qualities are well known and appreciated. *