Life Insurance Is Not Immune From E&O

LIFE INSURANCE IS NOT IMMUNE FROM E&O

by Curtis Pearsall

Over the years, E&O carriers have communicated a ton of information on how frequently E&O claims arise from the sale and service of Life insurance. You wouldn't know that at first glance from looking at our claims at Utica. Of the more than 1,200 claims the company received in 1998 (from 11,000 policies), only 15 (1%) were caused by a Life policy. From this, you may conclude that the Life insurance business is much safer from E&O claims.

To a degree, that's accurate. After all, Life policies typically don't renew as a P/C account does (except for Term coverage), and Life coverage is somewhat more standardized than P/C insurance. However, while claims may be less frequent, they're significantly more severe in terms of size.

In reviewing our Life claims over the past number of years, these scenarios have often recurred:

• An agent wanted to write a big Life policy on a man who was seriously ill. Realizing that the individual probably wouldn't pass the physical, the agent took it for him. The company issued the coverage based on its assessment that the client was healthy. When he died shortly thereafter, the company brought action against the agent for providing inaccurate underwriting information.
• A man was looking for a Life policy. When the agent visited the man's house to write the account, the client said that he had had a serious operation. This was never divulged to the company. The agent was at fault for not disclosing this information.

• A fair number of claims involved Term coverage. Often, the issue is the physical requirements of various companies. One such claim involved a woman who had Term coverage with a company. To get a better term rate, the agent switched carriers. But the new carrier had a different physical requirement that the woman did not pass, causing a coverage problem.

But even when coverage is written properly, problems can happen. Here's an example of how a simple change of address resulted in an E&O claim:

An agency had placed a Key Person Life insurance policy on one of its partners in its growing service business. At the time of the application, the business was at its original location. But the business relocated and an additional Life policy, showing the new address, was taken out by the same partner. Shortly thereafter, the partner was killed in an accident. A claim was submitted to the carrier. The beneficiaries were denied under the first policy, based on a policy cancellation for non-payment of premium. A suit was then brought against the agency and carrier, contending that notice of change of address had been given but that the notice had been sent to the old address.

Could this claim have been avoided? Probably not, due to the sizeable Life policy proceeds involved. However, the case was defensible because the agency had a well-trained staff with procedures in place to communicate and document policy changes.

Key Man insurance seems to lend itself to claims if the policies aren't structured properly. In particular, the issue of beneficiaries is crucial. Make sure that the beneficiaries are listed properly to avoid problems in case of death.

Whether the coverage involves P/C or Life insurance, the same loss-prevention techniques are appropriate: documentation, knowledge of the product, and service to your customers. They might not prevent the claim, but they should make its resolution quicker and more favorable to your agency.