E&O Insights: Put the Power of the Signed Application to Work
With few exceptions, an application is a necessary document to secure a proposal or to bind coverage, and can actually possess tremendous power. When an errors and omissions (E&O) matter develops, all of the various documents, file notes, etc., are discoverable and typically admissible. Without a doubt, an application can play a huge role in the outcome of litigation. The question – will the application and documentation help or hinder your agency’s chances of prevailing in the E&O litigation? The Proper (with a capital “P”) handling of applications is a great place to start if your agency is serious about reducing its E&O exposure.
The ‘3 Cs’
Does your application meet the “3 Cs” criteria? That is, 1) complete, 2) correct and 3) current.
The first thing to consider is the completeness of the application. While most producers probably don’t enjoy completing applications, it is a critical task in the sales process.
Are applications from your agency completed fully or are some questions left blank? The answers to these blank items could significantly impact the account’s desirability or pricing. What happens if you’re unsure of some correct answers as applications are completed? Do you “presume” to know the answers or do you contact the prospect to check? In the haste to get applications submitted, a producer or account executive may answer the questions believing he or she is answering honestly and correctly. Carriers rely heavily on the application and believe the information presented to be truthful.
What happens if, after a loss, the carrier discovers the information was incorrect? The following actual claim reveals what typically will happen:
The agency had a new client who needed coverage for a home. The agent was not able to have the client sign an application in his presence. The application submitted to the carrier stated the home was occupied. After a major fire loss occurred, the carrier found out the home was vacant. The carrier rescinded the policy, stating it would not have written the property had it known the home was vacant. The carrier returned the premium, essentially stating the policy was not in effect. A key issue developed when it was discovered that although the client had eventually signed the application, the agency had only sent him the actual signature page, and thus the client was not aware of the questions/answers pertaining to occupancy. The application was 10 pages long and the client had proof he was only sent a three-page fax by the agent. The agency was found negligent in its handling of the matter.
There have been other E&O claims where the carrier decided to pay the claim, but then pursue a claim directly against the agent due to misrepresentation of the nature of the risk. With the right set of facts, carriers are winning these claims.
The Best Approach
Completing the application face-to-face with the prospect is the best approach, asking him or her the questions exactly as they appear and accurately noting the responses on the application. Don’t simply require the client to sign the application after you complete it. Require him or her to review the application in its entirety to ensure you have accurately stated the exposure. Then have the client sign it.
This is one of the most important procedures for an agency to insist upon. In virtually every state, the customer is held responsible for the contents of the application once he or she has signed it. If the prospect misled you in the completion of the application, having his or her signature on the document could play a significant role if a problem develops.
Do Not Sign It
Do not sign the client’s signature to the application. While the agency may believe the customer has authorized it to do so, after a loss the customer may disavow giving an agent this authorization. Handwriting experts have found their way into E&O claims, so extreme caution should be exercised in this area. This E&O claim, involving an unoccupied high-end home, shows what can happen:
The client was paying high premiums and wanted the carrier to lower them. The agent completed an application, which stated the home was occupied, and signed it for the client. A very large water-damage loss occurred. When the carrier found out the home was vacant, it took steps to rescind the policy, stating it would not have written a vacant home. The client pursued E&O litigation against the agent and the carrier. The client testified the agent knew the home was unoccupied. The agent disagreed. The agency was found negligent.
A Current Discussion
Another issue that occurs now and again involves agencies completing “this year’s application” using the information from “last year’s application.” Avoid this. It is extremely dangerous and fraught with potential problems. Because of the possibility that the risk has changed, it is always best – to ensure complete accuracy – that the application is completed through current discussion with the customer.
Bottom line: applications you submit to your carriers are extremely important and must be handled accordingly. Your agency’s goal should be to ensure the information in the application is complete, correct and current, with the entire application reviewed and signed by the customer. While getting the insured’s signature may be an additional step that takes time, the power of this signed application cannot be emphasized enough. By mandating and enforcing these requirements, the power of the application works for you, not against you.