Agents' Errors & Omissions Review is excerpted from The Professional Edge newsletter which is published by SAFECO Insurance companies in conjunction with the marketing administrators for SAFECO's agents E&O program.
Risk and reward
At issue: Most policyholders know very little about insurance and rely upon their agents to take care of their needs. This simple truth is at the root of an agency's exposure to suits from their customers. From this reality, there arise various theories of liability that lead to the expense of defense and to liability for damages.
While agents can control their exposure by limiting services provided, most know that the customer demands professionalism and service in a competitive marketplace. However, professionalism is a double-edged sword. While it is true that greater services provide professional and personal rewards, E&O claim risk to an agency can increase because of those services.
SAFECO's commentary: An insurance agent's basic duty to the client is to deal fairly and honestly and to use reasonable care and skill in doing what has been promised. An agent can create, through the services he/she provides, special circumstances that raise that level of care due. Some examples of how this can happen are the promise of extraordinary expertise, voluntary assumption of duties beyond ordinary agency operations, offers by the agent to assess exposure, statements that coverage is complete or comprehensive, the assumption of decision making on the customer's behalf, and the billing of fees beyond standard commission arrangements.
When deciding to expand services, agents need to be aware that the bar will be raised on their own responsibilities and standard of care owed. Risk of valid E&O claims increases. The agent should undergo a frank and honest evaluation of self and the agency staff regarding knowledge, experience, and dedication to the contemplated services in order to assure competency in meeting the duties to the client. In other words, will the agency be truly qualified to provide the services?
In what other ways can customer service become a liability? Generally speaking, an agent has taken service to the customer too far when he/she takes on the client's responsibilities. The insurance buyer is responsible to sign applications, make coverage decisions, pay premiums when due, read the policy, communicate changes in exposure, and report claims. An insurance agent can provide services related to helping and guiding clients through these activities but should never take the client's duties over without careful consideration.
Careful weighing of factors in deciding what services to provide in an agency leads to the reward of long-term, mutually satisfying, and profitable customer relationships and a minimized risk of E&O claims.
All's well that ends well?
At issue: Mr. Optimo, of the We Are Here For You Agency, had been placing insurance for Mr. And Mrs. Koala for the last five years and had not only provided their personal insurance needs, but also had placed the business insurance for Mr. Koala.
In January 1993, Mr. and Mrs. Koala received a letter through the mail from their insurance company, Insure All, advising of the availability of replacement cost coverage for their home. Until this time, Insure All was unwilling to write replacement cost coverage due to the area in which the Koalas resided. In fact, Insure All was the only carrier that would write this home, given the location of the property.
Upon receipt of this mailer, Mrs. Koala called Mr. Optimo to inquire about obtaining the replacement cost coverage. Mr. Optimo advised her that there were certain criteria that must be met in order for a request for replacement cost coverage to be made. These criteria included the requirement of an appraisal, the type of construction of the home and how old the home was, to name a few. Mr. Optimo advised that he would need all of this information before he could submit the request to Insure All.
On April 2, 1993, the Koala's policy came up for renewal. Having not received the requested information from Mrs. Koala for replacement cost coverage, Mr. Optimo renewed the policy with actual cash value for the dwelling. On June 25, 1993, the home owned by the Koalas was totally destroyed in a fire. The claim was turned into Insure All and they began adjusting the claim on an actual cash value basis. Mr. and Mrs. Koala claimed that they thought they had replacement cost coverage and became upset when they learned that they would not be getting their claim adjusted on that basis.
In the months following this loss, the Koalas made a demand on Mr. Optimo and his agency that he pay the difference between the ACV and RC in the home, a difference that amounted to $400,000. The home had been insured for $150,000 and the Koalas were claiming that the replacement value was $550,000. The E&O insurer had performed an inspection and appraisal which came in at $360,000 for replacement cost. Depending on which figures were correct, the value of the claim, regardless of liability, had a range of $210,000 to $400,000.
Over the course of the next several months there was considerable conversation between the E&O carrier and the Koalas as well as with the Department of Insurance. The Koalas had filed complaints against the agent and the company for refusing to pay the replacement cost value of the home. The company had maintained that the Koalas were on notice of the new coverage and that the agent had advised the Koalas what was required in order to procure that coverage. It was the neglect of the Koalas that led to their not having obtained this coverage. Not satisfied with the response, the Koalas hired an attorney and filed suit against their carrier, Insure All, Mr. Optimo, and the We Are Here For You Agency.
Fortunately for the agent, this case did not involve a great number of people who had to be deposed. Only the agent and the Koalas were deposed in this legal action. After the depositions were taken, the E&O carrier agreed that the best strategy was to file a motion for summary judgment. The argument the defense attorney presented was that the agent had no duty to procure the replacement cost coverage for the Koalas short of instructions and additional information provided by the plaintiffs. The plaintiffs were not satisfied and immediately filed a notice of appeal, necessitating appellate briefs having to be filed. The final briefs were filed in November 1995. It was then a waiting game as the backlog in the appellate court was such that it took until November 1997 before a decision was rendered. The Appellate court affirmed the lower court's decision, finding that the agent owned no duty to the Koalas. This case was finally over after four years.
Certainly this was an excellent result for both the agent and company; but was there something that the agent could have done that would have prevented this matter from going into litigation?
SAFECO's commentary: The primary reason this matter went as far as it did is because the agent failed to document his file. He did not have a record of the conversation that he had with his client in terms of what was discussed and what he told the clients to do. The optimum would have been to write a confirming letter to Mrs. Koala indicating what information would be needed in order to request replacement cost coverage. This was not done nor was there anything in the agent's file regarding the specifics of what was discussed in the one phone conversation he had with Mrs. Koala.
Had there been documentation for the phone conversation, the plaintiffs would likely have had a difficult time finding an attorney to take on this case. Even if this would not have deterred the plaintiffs from hiring an attorney, once the attorney received copies of the documentation, it is quite possible that the suit would have been dismissed, or the attorney would have withdrawn from representing the plaintiffs. We have had a number of cases where the attorney received documentation from us and agreed to dismiss our agent once he received that information.
A handshake and a promise
At issue: Martha is a conscientious person in her personal life and business life. She is a list kind of person, jotting things down during the day to assure that she doesn't forget important details. She ends every day with making a list of what will need to be done the following day, crossing off what was accomplished for that day. She is seen in the insurance agency as meticulous, efficient and always a professional. Why then did Martha find herself involved in a lawsuit against her and her agency?
As is typical of an agent who has been in the business for a number of years, Martha has contacts at various insurance companies with whom she does business. In particular, she has had a close relationship with the underwriting, marketing and claims department of Professional Insurance Company. Martha has attended the annual Christmas party for Professional Insurance for the last 10 years and has been on the president's list of preferred agents for as many years. It is because of this long-standing relationship that Martha felt secure when the claims manager for Professional assured her that her interests would be protected in a claim that had coverage issues for which Professional was denying coverage.
Professional had received notice of a fire loss for its insured, Mr. Smith. When Professional denied coverage, Mr. Smith hired an attorney who sued Professional for bad faith and breach of contract. During the course of that litigation, Professional had called upon Martha and her agency to provide to Professional copies of all documents in the agency file. Martha and her staff had also provided recorded statements to the claims department for Professional.
From time to time, Martha would receive calls from the attorney hired to defend Professional requesting assistance on certain issues regarding coverage written through the agency for Mr. Smith. It was in one of these conversations that the attorney advised that he was in the process of settling the case with Mr. Smith and his attorney. Martha inquired at this time and in conversations in the past if Professional would be protecting the agency should Mr. Smith decide that Martha or her staff had made some error. Martha was assured by Professional and its attorney that the agency would be protected and that Professional would obtain a release for the agency and Martha in settling the case with Mr. Smith.
Approximately six months later, Martha was served with a summons and complaint by Mr. Smith alleging breach of fiduciary duty and negligence in the placement of fire insurance. Stunned by this event, Martha picked up the phone and called her claim manager friend at Professional, Tom Stone. Martha explained that she had received a complaint and was wanting to know what Stone intended to do about it. Stone advised Martha to send him a copy of the complaint and he would review it to determine what might be done.
Meanwhile, Martha put her errors and omissions carrier on notice and sent that company a copy of the complaint as well. With the help of the E&O carrier, Martha wrote a letter to Professional, tendering defense of the complaint to them and rehashing all of her conversations with the claims department and its attorney some six to eight months earlier when she had been promised that her agency would be protected. After two-and-one-half weeks of letter writing and conference calls involving herself, her E&O carrier and the claims staff and marketing department for Professional, Professional declined defense of Martha and her agency and denied that any representations had been made as to defense for the claims now being brought by Mr. Smith.
Martha had fallen victim to an ever-increasing phenomenon in the industry. She had counted on, even come to rely upon, her close working relationship with the people at Professional. In the past she could always work out any problems or situations with the staff at Professional and likewise they had found Martha and her agency cooperative when called upon by the company. But this was simply unheard of. She hadn't felt the need to get any of her conversations with Professional and its attorney in writing, as she had trusted them as she had always done. Now she had to be defended by her own carrier and at considerable time and expense to her and her staff. By the end of the litigation with Mr. Smith, Martha's carrier had spent $75,000 defending the case, $20,000 to settle with Mr. Smith on a nuisance value basis, and Martha had lost Mr. Smith's account, her E&O premium increased and she and her staff had lost valuable time from work during the litigation.
SAFECO'S commentary:What is the message this case sends? It could be that you should trust no one, or that insurance companies are sneaky and deceitful. But a more important message is to remember to document conversations you have with your clients and your carriers by putting the details in writing. Had Martha sent letters to Professional and its attorney in the earlier case, confirming the fact that Professional had promised to defend Martha and her agency, it would have been very difficult, if not impossible, for Professional to turn its back on Martha.
The days of a promise and a handshake are going by the wayside and agents need to be cognizant of this fact. Nothing can take the place of an actual written document to confirm conversations, whether that be handwritten, typed, a fax form or input in a computer.
Still another message to receive from this case is that your errors and omissions carrier should be notified if there is a potential that a claim might be made against you. If Martha had involved her carrier early on, she could have received advice on how best to handle the situation. Her carrier could have assisted in writing letters to Professional and its attorney and perhaps have avoided the subsequent litigation.
Certainly there are no guarantees, but wouldn't you rather have your E&O carrier in the ring with you fighting for you? Think long and hard the next time you consider relying on a long-standing relationship with your companies to insulate you from harm's way. *
©COPYRIGHT: The Rough Notes Magazine, 1999