The author
RISK PROBLEMS/SOLUTIONS
Simple steps help agents prevent, and
defend against, errors and omissions suits
By LeRoy H. Utschig, CPCU, ARM
Preventing expensive errors and omissions problems often boils down to simple elements. Be careful what you say to a client or prospect. Know your coverages. Document your files.
Agents should review regularly their procedures for avoiding errors and omissions claims. Coverage checklists are a good start, but the checklists do not address many potential E&O problems that stem from the day-to-day operations of an agency. We will present some ideas that may reduce the likelihood of an E&O claim happening. These ideas also may help you mount a better defense should you be the subject of an errors and omissions legal action.
All of the examples used in this article are drawn from actual E&O claims. Look upon the ideas presented here as "idea generators." Some of the readers might adopt several of the concepts just as they are presented. For other readers, what is presented here will serve to provide ideas that can be modified for individual use.
Broad statement
In the 1970s, a Milwaukee agent insured a bad property risk through the Wisconsin Insurance Plan (assigned risk type of property insurance program). After the policy had been issued, vandalism and malicious mischief coverage was added to it. While delivering the endorsement to the insured, the agent said something to the effect that the vandalism and malicious mischief endorsement would complete the policyholder's insurance program.
Subsequently, the client sustained a water damage claim due to a leaking roof. This damage was not covered under the insured's insurance policy.
The client sued the insurance agent on the basis of the agent's having said, "This will complete your coverage." In this situation, the policyholder claimed that the insurance agent's statement led him to believe that he had broader coverage than that actually provided by the insurance policy. Because the client thought he had coverage for water damage, he had not sought specific coverage for it. It was the agent's fault that the policyholder had not purchased water damage coverage. The irony of this case is that the insured's building was old and not in very good repair. No normal market would have written water damage coverage for the property.
From the agent's statement, the client could infer that broad coverage was being provided. Thousands of similar statements are made each day. A simple recommendation that is very hard to put into action would be: Never say anything to a client that indicates coverage beyond what is provided by the insurance contracts that you are selling.
Contractual liability
While the following is from an actual case, the names used in this scenario are not the real names. Property, Inc., sold some land to Developer, LLC. After buying the land, the owner of Developer learned of some use restrictions that prevented him from building all of the apartment units that he'd planned. Had he known about this prior to the purchase of the property, Developer would have either not purchased the property or purchased it at a reduced price.
Developer's owner "discussed" this with the owner of Property. They came to an agreement regarding how to settle the problem. Their solution was that both parties would sign an agreement. The agreement would state that Property would guarantee that Developer could secure a construction loan. Subsequently, the owner of Property refused to sign the agreement. When this happened, Developer sued Property for a breach of contract.
While this was happening, the owner of Property asked his insurance agent if there was coverage for the money he would have to pay in the event he lost the case. The agent told Property's owner that Property's general liability policy would pay for this situation.
A court required Property to sign the agreement and pay Developer $180,000 in attorney fees and court costs. Without any hesitation, the general liability insurer for Property denied coverage for the loss. Property then sued its agent to recover what it had paid out. There was no doubt that the agent had told the owner of Property that there was insurance coverage under the general liability contract. He specifically said there was coverage for any lawsuit arising out of that sale of the property problem.
The court noted that Property's general liability contract covered only contractual liability claims in regard to "personal injury" and "property damage." The agent did not communicate this to the insured. A breach of contract suit, such as was described here, does not qualify as either "personal injury" or "property damage." There had been no actual accidental damage to any property.
Per a decision by the California Court of Appeals, the agent had to pay for the loss.
Agents do not have any excuse for not knowing the products they sell. Continuing education seminars and training manuals abound. Agents who are well versed in the coverages they sell can avoid the type of errors and omissions claim described above.
Limits
Again, we have a true story with fictitious names. The owner of Store, LLC, told its property/casualty agent that she wanted theft coverage for the full value of her inventory. After a theft loss, the storeowner learned that she had a $1,000 crime limit, not the $30,000 that she thought she had.
When asked why this happened, the agent replied that Store did not have an alarm system. Without an alarm system, $1,000 was the maximum crime limit that she could have.
The agent previously had not communicated to the owner of Store anything in regard to the $1,000 crime limit or the need for an alarm system.
Store sued the agent for the amount of her uncovered loss plus court costs. The Tennessee Court of Appeals awarded Store the amount of her uncovered loss plus her court costs and attorney fees.
There are some inferences that can be drawn from this loss about what an agent should do. Obviously, if a policy is not being issued with the requested coverages, the agent needs to communicate this in writing to the insured. There is a strong need to be able to prove that an agent told a client about reduced coverage.
A second thought evolves from the fact that a $1,000 theft limit was all the insured could get due to the absence of an alarm system. Was this really true? Some agents have a "pet insurance company" that they use for virtually every piece of business. This kind of agent presumes that whatever the "pet insurance company" does, no other company would do better. There is a good probability that the agent checked with only one insurer. Had the agent tried several carriers, he might have found a market that was willing to write the theft coverage for a $30,000 limit.
An agent should check with more than one insurer and document the file whenever the coverages issued are less than what the insured requested.
Documentation
File documentation can take several forms. Handwritten notes in an agent's files can be of great value when defending an insurance agent against an errors and omissions claim. These notes can be very brief as long as they are complete enough.
In one case, I had written a statement on top of a quote: "Coverage is not bound." If I had gotten sick, anyone could have picked up the file and acquired a key piece of information regarding the file.
While premiums had been discussed, the prospect did not state that he wanted coverage. No payment was given to the insurance agent. The prospect had an accident and called in to report the loss. Looking at the file and the note, the claim person was able to deny the claim immediately. Then, the file was turned over to the agency owner.
Upon looking at the note, the agency owner immediately knew what had happened. Subsequently, an errors and omissions claim was presented. Because of the note on the file, the errors and omissions carrier settled the loss out of court without paying anything.
Proposals can sometimes present a problem. For example, say that you have presented the prospect with a written proposal for 15 different coverages and options. You have gotten the order from the prospect for 13 of the coverages. Either during or immediately after the sales presentation, mark the file to show coverages the prospect did not buy. These notations can be as simple as writing "no," date, and your initials next to the rejected coverages.
Some proposals include a summary of proposed coverages and the premium for each one. Every proposal that I have ever seen had all of this on one page. It takes no time to make the necessary notes on this page. A typical notation might be to write the following next to each coverage that the client did not buy:
No 00/00/00 RTY (agent's initials)
Preventing expensive errors and omissions problems often boils down to simple elements. Be careful what you say to a client or prospect. Know your coverages. Document your files.
The author
LeRoy H. Utschig, CPCU, ARM, is a Wisconsin-based insurance educator, consultant and expert witness.