After the Storm: Agents’ E&O Lessons Learned

More often than not, a second wave of claims against insurance agents by their clients follows a natural disaster.

For the most part, the types of allegations and claims that surface after a catastrophe are the same as those made when there is an individual loss (such as a house fire), just on a greater scale because of the number of people affected–failure to procure a certain coverage, failure to place coverage at all, failure to obtain adequate limits, or failure to advise certain coverage was necessary.

Following certain “best practices” can help to eliminate some of the problems that lead to claims in the first place, enhance the prospect of a successful defense, and reduce the impact of the claims that are made.

Wind and Flood Coverage

It can’t come as any shock that following a hurricane, most E&O claims arise from problems with wind or flood coverage, especially coverage obtained through special markets, wind pools, FAIR Plans and the National Flood Insurance Program (NFIP). Here are some specific issues:

• No coverage in place at the time of the storm-delayed submission or failure to submit paperwork.Coverage is not effective in wind pools, the FAIR Plan, or the NFIP until the application AND premium payment are received by the Plan. Many of the claims we have seen involved instances in which the agent took an application and premium payment from a client, and then for some reason delayed sending it in, or simply failed to do so at all.

Beyond making sure that clients understand exactly when their coverage is to become effective (such as when the carrier receives and accepts the risk, when premium is paid, after any applicable waiting period, etc.), having clearly written (and enforced) procedures in place for processing, placing and tracking business is essential for any agency.

It sounds simple, but breakdowns in communication and process are a frequent cause of E&O claims. What procedure is to be followed once a producer takes an application? Is it immediately entered into a tracking system? Is it clear who is responsible for taking the next steps to get the application (and premium) to the appropriate carrier or plan?

What process is in place to follow up if the policy is not received in a timely fashion from the carrier, and transmitted to the client? Are efforts to follow up documented? Do you maintain proof of mailing when critical time-sensitive documents are transmitted? Who checks the coverage to make sure it matches what was requested, and follows up to seek corrections if there are errors?

If you do not have written office procedures in place, there are vendors that provide off-the-shelf templates that provide an excellent foundation which can be customized to fit an agency’s unique requirements.

Once the procedures are established, it is important that all employees within an agency clearly understand them and that full compliance is required.

• Evidence of Insurance provided at close of escrow before premium paid and submitted. Banks or other lenders typically require that insurance is procured to protect their collateral, and want assurance that required coverage is or will be placed before they will proceed with closing on real estate transactions.

Further, the agent has no authority to bind the Plan to coverage. Thus, when the storm(s) struck just a short while later, there was no coverage in effect and the Plan(s) would not honor the unauthorized binder. The banks and property owners claimed that the binders led them to believe that coverage was actually in place, and that they did not understand that coverage was contingent on premium payment. Had they understood this, they claimed, they would have immediately tendered payment so coverage became effective.

The error is understandable, and also preventable. The agent can provide the coverage quote and other evidence of coverage that will be in place once the premium is paid, with clear notice that the coverage will not, in fact, become effective until that happens and the application and payment are received by the plan.

If there is a waiting period that may apply, this should also be noted. Of course, when the agent receives the premium, they should promptly submit it with the request for coverage to the plan, keep a record of the transmittal, and track on diary until policies have been issued and received.

• No contents coverage on wind or flood policy. In some instances, the agent simply misunderstood that when a carrier moved to exclude wind coverage from the homeowners’ policies it wrote in hurricane-prone zones, the restriction also applied to contents coverage.

When clients found themselves without contents coverage after the hurricane(s), they looked to their agents, raising a variety of allegations: that a specific request was not acted on; that the agent should have pointed out the need for the coverage; that the agent should have understood the client wanted/needed the same coverage they had on their homeowners policy, etc.

These claims are difficult. While the reality may be that the clients only procured the insurance their lender required (the dwelling coverage), they rarely will admit that is the case. Likewise, the nature of the relationship an agent has with a client may not mean the agent has any duty to advise the client of the coverage they should have.

However, having no documentation at all to counter the claims by the client can impair the agent’s defense, especially given the propensity of juries to side with the “victim” when there is an uncovered loss.

Legal duty questions aside, wise agents document offers of coverage, automatically provide quotes for contents coverage when dwelling coverage is requested, quote wind and flood coverage, and then maintain documentation when the client declines the coverage offered.

• No flood coverage at all.This is very similar to the situation involving the lack of contents coverage. As has been highly publicized, many parties have claimed that they did not have flood coverage because their agent allegedly told them “they did not need it,” either because the homeowner’s coverage they had in place covered “hurricane damage,” or because it was not “required.” (Lenders require flood coverage to be in place typically only when property is in Flood Zone A.)

• No coverage for other structures or pool cages. Citizens (in Florida), state wind pools, FAIR Plans and the NFIP have specific rules regarding how coverage applies to separate structures, docks, or as most commonly seen, pool enclosures.

Inadequate Limits

Insurance limits that are insufficient to cover the clients’ damage has long been one of the top causes of E & O claims, whether following on the heels of a catastrophe or not. These can become magnified following a disaster because of the spike in construction costs that typically follows an event involving damage to many parties. There are a number of problems that commonly arise.

• Inadequate dwelling or contents limits overall. For the most part, it is the client’s obligation to assure that the coverage they purchase is adequate to meet their needs. When the client specifies the limits to be obtained, there is generally no responsibility on the part of the agent to confirm that the amount procured is inadequate.

• Agents estimate the square footage used to calculate replacement cost without verifying the correct amount.
• Agents calculate replacement cost using a replacement cost estimating system, and do not adequately account for upgrades in the property, or use the short form calculator instead of the more detailed format.
• Some clients say they asked for higher limits and instead of turning the request into the carrier, the agent told them that the amount generated by the “cost estimating” system is the maximum the carrier in question would offer, without referring the request to the carrier.
• Agents set limits based on purchase price, or ask for a real estate appraisal. The problem with this approach is that the cost to rebuild is not the same as appraised value, and the purchase price can be higher or lower than that cost. (This could also lead to limits that are too high, in that appraisals typically include the value of the land on which the property sits.)
• Owners advise the agent that they have engaged in property renovations, but this information is not forwarded to the carrier, and the limits are not adjusted because of upgrades.
• In other instances, the agent maintains higher limits were suggested, but were declined by the customer, yet there is no written documentation in the agent’s file of either the offer or the rejection.
• The limits on the wind or flood policy are lower than those on the Homeowners policy. The limits obtained are often the amounts the client requests, or are the minimum amount the client is required to carry by their lender. Also, while the limits may be automatically increased by the carrier over time, this is not the case with the wind or flood policy. There is not necessarily a legal duty on the part of the agent to assure the limits are consistent, but a “prevention” best practice would be to have clear documentation regarding how the limits were established, sending a letter to the client that they should let you know if they desire higher limits at any time, asking whether an adjustment is desired on the wind or flood policy when adjustments are made to the HO limit, and documenting the response.

The main point to keep in mind when it comes to assisting a client with the establishment of limits is that if they end up being inadequate, the agency will be the first party they turn to for recovery of the difference. Attention to detail, accuracy and documentation are all critical, as is employing the assistance of the carrier.

Coverage Bound Outside Guidelines

Because carriers tend to limit their exposure in catastrophe prone areas, it is very important that agents with binding authority be very familiar with their carriers’ guidelines and appetite to assure there is no violation of requirements.

A fair number of the claims are those by the carriers seeking recovery from the agent for the losses they sustained when the agent bound them to a risk that was ineligible for coverage and they were consequently required to respond to a claim.

Commercial Claims

The vast majority of claims after a catastrophe are generated by personal lines accounts. However, there is also some activity in the commercial arena. The more common problems leading to claims:

• No business interruption coverage
• No coverage for off premises power failure
• Lack of flood coverage at a location
• Application of a coinsurance penalty because limits were inadequate
• Inadequate limits because a policy has been changed from a blanket limit to a specified location limit, and the specific location limit is inadequate.