Agency E&O Lessons to Consider

I’m seeing more cases of carriers rescinding policies for application errors, fraud or outright lies (call it what you will) than I’ve ever seen, and these are situations when there is an errors and omission (E&O) claim against the agent.

The standard of care agents must meet is rising relative to their responsibility to assure the carrier the application is correct. In other words, most E&O classes focus on the standard as it applies to consumers. Pay attention to the standard as it applies to carriers. The standard is rising more in some states than others, but agents who want to avoid E&O cases, and especially avoiding losing an E&O case, are wise to take additional steps, steps which many insureds will not appreciate and steps that will potentially increase the staff’s workload.

‘Not My Problem’

A case I recently read involved what appeared to be a lie relative to who owned a vehicle. It turned out the applicant did not really own their vehicle, which may be causal to the reckless driving he exhibited resulting in a serious crash. The carrier rescinded the coverage for lying. Not only was the carrier sued for denying the claim but so was the agency. Agencies always lose time and money and incur increased stress when sued. It’s just a matter of how much.

I’ve personally seen more than one agent look the other way and purposely not ask or verify whether their insured owned the vehicles listed on the application.

As one producer told me last year, “That just takes more work and it’s not my problem!” He was correct on the first count and possibly correct on the second count assuming three points: 1) That his state’s standard of care is so poor as to be a moot legal point; 2) no one in his agency increased the applicable standard of care; and 3) he had no conscience.

No one needs an agent if that agent is not going to offer quality advice, complete applications and advise on coverage. An agent is 100% waste of money without those services.

Not an Order Taker

I recently saw another case where this point is especially pertinent. The insured clearly needed a specific coverage — business interruption. BI is a standard coverage in commercial lines and for the life of me, I cannot fathom why any agent would not automatically include, if not at least offer, this coverage to 100% of their clients. Failure to do so indicates a level of ineptness that should preclude them from having an insurance license, or they are simply trying to make a price sale by excluding key coverages hoping the insured would not notice. I suppose an innocent mistake could occur, too, but that is highly unlikely except in a horribly run agency without common checks and balances.

On the insured’s part, he was self-assured and appeared to know what coverages he had without actually reading the policies or having the insurance background to know what coverages existed or what he might need. Knowing what coverages you need goes way beyond common sense, especially in the commercial space but also on personal property relative to ordinance coverages.

The insured certainly could have done a better job, but as with so many business owners, their excessive confidence in “just knowing” and their skill set not including reading boring insurance policies points to the need for an agent to advise.

While states have generally established extremely low standards of care, no one needs an agent that does not advise on the coverages needed. This insured needed a good agent, not an order taker, to advise him on the coverages he needed. The agent really should have made sure BI was included without even advising the insured because even incompetent agents do that. And now this insured is suing the agent.

I read about another case that involved several interesting E&O points. This case was detailed in Carrier Management, Insurance Journal’s sister publication, regarding a carrier sending a nonrenewal to a homeowner for failure to make the required underwriting improvements. The underwriter was correct to be concerned because the house burned down shortly thereafter.

The insured sued the carrier and the agency because they never received their nonrenewal notice and did not know their home was not insured at the time of loss. Several courts ruled the carrier only had the responsibility to prove they sent the nonrenewal (they sent it certified, but the post office couldn’t figure out how to deliver it). The courts ruled that absent a special relationship, the agency had no duty to notify the insured of the nonrenewal.

This case has several interesting E&O prevention points to discuss and then I’ll unify the three cases for additional E&O advice. If the agency was regularly notifying its clients of nonrenewals but failed to notify this client of the nonrenewal, the agent quite possibly would not have won the case. Consistency is critical, especially now that good plaintiff attorneys can more easily identify the consistency with which agents act using what is effectively AI in their discovery process.

Second is the method of delivery of the nonrenewal notice. Many laws exist relative to the Electronic Policy Delivery Act dating back to the late 1990s. This act created different rules for notifications and policies delivered via the U.S. Postal Service versus email-like delivery.

As we all know, the postal service is perfect. Therefore, the laws were written such that if the sender can prove they sent the notification/policy, surely the insured must have received it.

However, the rules are opposite for electronic delivery. There, the sender must prove the recipient received it, not just that they had sent it.

The carrier in this case had sent the notice physically rather than electronically. Agents need to understand this law, specific to their insured’s state when forwarding policies and notices.

Two Important Points

To tie these cases together, the best E&O advice that exists are the following two points:

• Don’t write lousy clients. The commission earned on a $1,000 or $5,000 policy is not worth the headache. Just think how many of those policies you must write just to cover your E&O deductible.
• If clients have the coverage they need, the odds of an E&O claim are miniscule. Things must really, really go wrong for a strong case to be brought. When clients have the coverage they need, an agent can do almost everything else wrong and not ever be sued. And selling clients the coverage they need has absolutely NOTHING to do with traditional cross-selling. Traditional cross-selling generally means selling clients two insufficient policies instead of one.

There is the old cross-selling story that the coverage and E&O guru Mike Edwards used to tell about how cross-selling insurance is not the same thing as asking someone if they want fries with their hamburger. Cross-selling insurance is generally a red herring.

Instead, the best cross-sale possible is, “Do you want advice with that policy?”

This increases the standard of care, but my clients who do it well have lower E&O exposures and higher incomes.

Considerable work is required to take this approach and make it work, but the effort is worth it. And you’ll get better quality clients in the process, making your life less stressful, too.