Reasonable Expectations for Agents’ E&O
The public views insurance agents and brokers as professionals, experienced and knowledgeable in a complicated and specialized field. Negligence focuses on the principle that people who hold themselves out to the public as possessing special knowledge, skill or expertise must perform their activities according to a standard of profession. If they do not, they may be held liable for negligence for the damage they cause for their failure to adhere to such a standard.
That standard has opened the door to a growing area of potential agent malpractice involving the so-called reasonable expectation doctrine. Under this doctrine of law the terms of an unambiguous standardized insurance policy may be held unenforceable if the terms of the policy are beyond the reasonable expectations of the insured. Typically, agent negligence claims are brought by the insured. However, insurance companies typically bring negligence actions against the agent where a court has reformed the written policy to include the coverage misrepresented by the agent.
The value of the negligence claim can vary. If the misrepresented coverage is the type of coverage that the insurance company otherwise underwrites, and the insured would have qualified for the coverage, then the damages may be limited to the premium differential.
However, if the misrepresented coverage would not have otherwise been available to the insured, the potential damage value could have a dramatic range depending on what claims required coverage solely because of the policy reformation.
Reason to Believe
When the courts initially formulated the reasonable expectation doctrine, it focused on whether the insurance company had “reason to believe” that the consumer would not have agreed to the terms of the policy “as a whole” if the insured had known that it contained the particular policy clause being contested. Under those circumstances, the reasonable expectation doctrine precluded enforcement of that standardized policy clause.
Initially the reasonable expectation doctrine recognized that while insureds typically adhere to standardized contracts and are bound by them without even appearing to know the standard terms in detail, they are not bound to unknown terms which are beyond the range of reasonable expectation, generally, of the consuming public. An insured who adheres to the insurer’s standard terms does not ascent to a policy term if the insurance company has reason to believe that the insured would not have accepted the agreement if they had known that the agreement contained the particular term in question. Such a belief or assumption may be shown by the prior negotiations or inferred from the circumstances. A “reason to believe” may be inferred from the fact that the boilerplate term in the policy was bizarre or oppressive, or from the fact that it eliminates the dominant purpose of the insurance purchase.
Expanding Doctrine
As the reasonable expectation doctrine has grown in its acceptance with state courts, the focus of the doctrine has expanded. The modern iteration of the doctrine requires the unenforceability of standard boilerplate policy provisions where some activity reasonably attributable to the insurance agent has induced a particular insured to believe that they have coverage, even though such coverage is expressly and unambiguously denied by the policy.
Where the reasonable expectations of the insured have been violated because of an agent’s misrepresentation of coverage or what is otherwise excluded by the policy, then, under the reasonable expectation doctrine the insurance policy is reformed to increase the coverage scope to what was represented to the consumer. Once the policy has been reformed legally (often through litigation between the insured and the insurance company) if the insured prevails it is unlikely that the insured will sue the agent because coverage has been reformed to what had been represented. However, the insurance company will likely bring litigation against the agent for malpractice for having to provide coverage that the insurance company would not otherwise have been required to provide except for the misrepresentations made by the agent.
The elasticity of the reasonable expectation doctrine is substantial. The many permutations of how the doctrine may effect what an agent says or does not say to the customer cannot be adequately delineated in this article. A few helpful tips can be offered, however.
First, don’t make commitments of coverage regarding hypothetical claims. If a customer wants to know if a hypothetical claim is covered, agents should tell the customer that they will pose the question to the insurance company’s underwriting department and get an answer. Make sure to follow up with the underwriting department to actually get the answer promised before the policy is issued.
Second, avoid any specific representations regarding specific policy exclusions. Any discussion about specific exclusions can lead to an expectation on the part of the insured that only those exclusions discussed are applicable to the coverages provided. In this situation, the agent must be prepared to tell the insured that any discussion of a particular exclusion does not mean that the policy does not have other exclusions. The insured must read the policy so that each exclusion can be reviewed by the insured. The insured should also be told that any claim submissions depend on the specific facts of the accident or claim and that as the facts change the availability of coverage may change.
Third, document the file regarding any discussions with the insured on these particular issues. As a practical matter most insureds are not going to want to know specifics about the scope of their coverage or the potential exclusions which may be applicable to hypothetical future claims. In that regard a “don’t ask don’t tell” approach may be best, leaving the agent’s discussion of coverage focused on the basics being provided, i.e., type of coverage, policy term, deductibles, and dollar values for limits under the policy. Most customers are focused only on the basics of coverage, which typically involves how much they are going to pay for specific limits of coverage. In most jurisdictions agents are only required to use reasonable care in selecting the type of coverage to meet a particular customer’s needs with the customer selecting the limits of coverage purchased.
If the agent has a particular customer who wants to ask a lot of “what if” questions and present numerous hypotheticals regarding potential claims, the agent must think very carefully about whether to answer those questions or if they should defer those questions to the insurer’s underwriting department. In order to avoid malpractice exposure, the agent should document the file about what was asked and how they responded. If the agent is not prepared to document the communications in writing then, they should consider passing on the potential account.