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The Rough Notes Company Inc.



June 30
10:57 2022


Avoiding common blunders that insurance agents too often make

By Jason Rogers

Earning potential, flexibility and the satisfaction of helping clients make insurance sales an attractive career for many. But with these positives come legal risks. As an agent, when you make a mistake or fail to do something important, clients might respond with legal action. Even if you do nothing wrong, customers can bring litigation against you for complaints more imagined than real.

Managing your legal risks starts with knowing your sources of liability. They often result from the mistakes you make while carrying out your professional duties.

Typical agent mistakes

Not every error or omission an insurance agent makes will result in a lawsuit, which means it’s impossible to say which ones lead to litigation. However, there are blunders that agents often make that can be easily avoided and could ultimately save you from a messy lawsuit. Here are seven common insurance agent mistakes you should try to avoid:

  1. Claiming an insurance policy has a feature it lacks
  2. Not disclosing material information about a product to a prospect or client (for example, failing to mention life insurance or annuity surrender penalties)
  3. Not securing the coverage a client explicitly requested
  4. Holding yourself out as an agent with special expertise in a product or client-risk type, becoming, in effect, a fiduciary agent
  5. Reducing a policy’s limits of liability without a client’s permission
  6. Not sending a client’s premium payment to the insurer, resulting in a policy lapse
  7. Selling an insurance policy that doesn’t fully indemnify a client’s loss

By taking preventative measures to elude these common mistakes, you should be more comfortable when working withyour clients. You’ll also avoid the resulting domino effect from these common gaffes—one mistake often leads to another and makes the chance of litigation much more significant.

Sadly, lawsuits from clients don’t always result from your errors or omissions. Sometimes producers or insurers do some-thing that angers a customer. Even if an incident was out of your control, your clients might still hold you responsible.

Insurer claim denials are a common example. Believing that their policy should have fully protected them, customers often sue their insurer and their agent or broker to get their claim fully paid. If you become entangled in such a lawsuit, you will need robust errors and omissions insurance to protect your assets.

Differences in liability for brokers and agents

How much legal liability will you face after making a mistake? The answer depends on whether you’re an insurance agent or broker. Agents act on behalf of the insurers they represent. They collect information about client risk exposures and then match clients with appropriate insurance from one of their carriers. Since they legally represent the insurer, they have the authority to bind coverage to a client.

Unlike agents, brokers represent their clients in their search for appropriate insurance. They may work with multiple insurers. But they sit on the same side of the table as their clients during the purchase process. Since brokers don’t work for insurers, they lack the authority to bind coverage.

A key difference between agents and brokers involves legal exposure. Since agents represent insurers, their legal liabilities tend to flow upward to the insurer. In other words, their actions are often imputed to the insurer they represent. Also, they aren’t typically held accountable for failing to recommend the right type or amount of insurance. As long as they act with reasonable care and diligence, they are legally considered to be an order taker (i.e., just executing a client’s wishes).

If they establish a special relationship with customers based on their unique expertise, a court may find they have a heightened duty to advise, guide or direct a customer to buy a certain type or amount of insurance. Avoiding this special status is essential to limit your legal exposure.

Brokers aren’t liable for recommending appropriate insurance or limits, either. That’s because courts assume clients have a deeper understanding of their insurance needs than their brokers do. Also, brokers aren’t customarily held liable for notifying their clients when their policies are about to terminate.

However, unlike agents, brokers, by their legal separation from insurers, can’t blame their mistakes upstream. They shoulder the full legal weight of their actions.

A key difference between agents and brokers involves legal exposure.
Since agents represent insurers, their legal liabilities tend to flow upward to the insurer.

How to avoid making mistakes as an insurance agent

To stay out of court, make sure your business is legally compliant and ethically sound. By consistently striving to do the right thing for your clients, you will largely inoculate yourself against expensive litigation. Here are some pointers that will get you started down the right path:

  • Always serve your clients’ best interests, even if it doesn’t make you more money
  • Strive to be transparent in how you explain your credentials, business model and compensation
  • Always disclose the key features of your products and services, including the risks that affect future performance
  • Be realistic about the future returns or policy values clients can expect
  • Thoroughly probe your clients’ current and future needs so you can make suitable product recommendations
  • Respect client confidentiality even when third parties seek information
  • Always use advertising and presentation materials that are 100% accurate and legally compliant
  • Provide clients with copies of required documents relating to their purchased product or service
  • When you encounter a client need outside your skillset or license authority, refer the person to a third party who can respond effectively
  • Stay up to date on industry best practices and regulatory constraints
  • Always document your client inter-actions, especially the critical decisions about what insurance to buy or not to buy

Insurance agent errors and omissions(E&O) insurance

Even though courts consider insurance agents and brokers to be order takers, it’s common for their behavior to move them to a higher standard of care. In such cases, if their mistake hurts a client, resulting in a lawsuit, it will be crucial to have E&O insurance handle their legal exposures.

What is E&O insurance? It’s a contract between you (the agent or broker) and an insurance company in which the insurer agrees to pay for your professional liability claim costs in return for you paying a premium. If you harm a client and get sued for damages, the insurer will cover your attorney fees and legal judgments or settlements, shielding your business and personal assets.

How does E&O insurance work? It will cover you if you make a mistake or forget to do something important that financially harms a client. Based on the policy’s insuring clause, the insurer will:

  • Provide you with an approved defense attorney at no cost to you
  • Assign a claims adjuster to investigate your case and manage the process of resolving the claim
  • Pay for your legal fees and court expenses related to your case
  • Provide an expert witness to bolster your legal defense
  • Cover arbitration, mediation or other alternative dispute resolution services

In conclusion, it’s uncommon for insurance agents or brokers to lose an E&O lawsuit. But getting sued is not uncommon. And defending against that suit is expensive. To protect yourself, maintain strong E&O insurance from a provider you can trust. Because now more than ever, peace of mind is priceless.

Note: This story first appeared in the special, limited distribution “Florida” supplement to the June 2022 Rough Notes magazine.

The author

Jason Rogers, senior vice president, has been with NAPA since 2014. He is responsible for the business development team and new program development for the firm. His current scope of responsibilities includes Professional Liability, Cyber Liability, Association Benefits and Affinity Programs. Jason began his career with Hartford Financial Products underwriting public company D&O liability risks. He then went on to Zurich Insurance Group where he had management responsibility for a diverse portfolio of financial institution risks. Jason holds a Bachelor’s Degree in Business Administration from Villanova University, and also a Master’s degree in Real Estate Development from Columbia University. Established in 1989, NAPA, the National Association of Professional Agents, is trusted by insurance agents and agencies to provide comprehensive E&O coverage and membership benefits, including access to a free continuing education (CE) voucher, savings and discounts, health and wellness benefits and more. Learn more at

About Author

Rough Notes Editor

Rough Notes Editor

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