Evaluating the Standard of Care in Today’s E&O Education

I do not know where agents are going for their errors and omissions (E&O) education, because from what they tell me about their standard of care it often has absolutely no connection to what I know their standard of care actually is. I suspect the following culprits:

Generic teaching. I am always amazed, surprised, confounded, and frustrated that so few agency owners, much less producers and staff, understand that E&O standard of care standards vary dramatically by state. Agents operating in the strictest states, those states with the highest standards, frequently tell me their E&O instructor/attorney told them they could always act as order taking peddlers with no fear of being sued. Sometimes the class they attended was in another state. The instructor did not know they had agents from other states and the agent did not think to ask if standards vary by state.

Inadequate explanation of the difference between being sued and winning.This is a point where I see attorneys constantly providing bad advice to agents. Somewhere between 90 percent and 95 percent of the advice given is, “If that occurs, case law is on our side and we’ll win!” Wouldn’t it be better if the agency was not sued in the first place? Many of the best E&O practices are designed to prevent the agency from being sued. The odds of winning a suit never filed are 100 percent. The odds of winning a suit filed are never 100 percent. There’s an old saying that even the very best cases that go to trial have a 25 percent probability of being lost. It is your choice. You now know the odds of each.

Inadequate current education. Much fault can be found with agency owners and producers who play Sudoku and read while getting their E&O continuing education. I cannot blame them too much because after the fifth time of the same E&O course, boredom is the only reasonable response. So take some E&O classes that are different, even if you do not get CE credit.

A good example of this is the statement an agency owner of a large and well-known agency recently made to an audience. He said, “Changing the language on a certificate does not make any difference.” That is outdated thinking by at least a decade.

His thinking is based on the following:

Certificates do not:

• Extend any contractual rights to the holder not provided by the policy;
• Represent compliance with any contracts entered into by the insured with others;
• Amend, extend or alter coverages or terms afforded by the policy.

But if an agency changes a certificate, all the above may become null and void because the agency just may become the insurer.

In a well-known case, Brown and Brown of Texas Inc. v. Omni Metals (Texas Appeals – Houston (1st District), Dec. 17, 2009), the question posed to the court was, “Can language on a certificate of insurance be considered a negligent misrepresentation to the certificate holder?” To briefly summarize the case, the agent issued many certificates to Omni Metals as is often the case. Omni Metals was not the policyholder. At least one of the certificates issued stated coverage was all risk. Omni Metal had a fire that burned much of their stored equipment. The certificates all stated the disclaimers listed above. However, the court ruled the certificate disclaimers did not apply. Instead, the court ruled the certificate language overrides policy language. The court ruled that a certificate holder has a right to rely on certificate language. The court ruled the agent knew the policy did not provide coverage (due to an exclusion) and therefore the certificate misled the certificate holder.

Myths. Someway, somehow, a myth has arisen the way myths normally do – with no known source. But myths are powerful in all cultures, even insurance cultures. The myth is that agents can advertise myriad great services to the entire public but they can choose to only provide those services to their larger and preferred clients. The reality is that if an agency advertises it provides services without a caveat that those services are only available to certain clients, then all clients likely have the right to expect those services. Think of it this way: If a CPA advertised he would do your taxes and review your financials monthly and advise you on managing your capital and developing the best tax strategy and assist in reducing your financial risk, and you hired him, would you expect these services?

Advertise what you will do and nothing else, then do it.

Different standards of care apply to different agencies. Many attorneys do not know, or if they know, they fail to adequately explain, that different standards of care apply to different kinds of agencies. Agency owners compound the problem this creates by advertising all their great professional services and sometime, more honestly, their professional intentions, but they think the applicable standard of care is that of an order taker.

While many factors determine whether an agency will be considered a professional agency or an order taker, a large proportion of independent agencies will often be considered professionals. That is a fact. I would really like to see more E&O attorneys accepting this fact and than explaining it. Then maybe agency owners would be less likely to compound the problem. Think of it this way: You go to an E&O seminar and the attorney discusses the standard of care specific to order takers without distinguishing the standard being discussed is only for order takers. You leave thinking you know the standard of care applicable but you advertise that you give great advice, that you search for the best combination of coverage and price, that all your employees are highly educated, etc. You think that based on the class you are meeting the required standard of care but your advertising has greatly increased the applicable standard. The gap then between what the agency actually does and the standard can be huge.

Truly knowing your applicable standard of care is so much more important than ever. Every agency owner needs this knowledge and then, every person in the agency needs to know. This is not only great E&O protection, but creates a great competitive advantage to be used in sales too.