Agents need to review their procedures for avoiding errors and omissions claims on a regular basis. Although coverage checklists provide a great start, they don't address many potential E&O problems that stem from day-to-day agency operations. Patricia Berry presents “case stories” that can reduce the likelihood of an E&O claim and help you mount a better defense if you face an E&O suit.
All of these examples are drawn from actual E&O claims. Look upon them as “idea generators,” Some readers might adopt several of the concepts just as they're presented; other readers will modify them for individual use.
CASE # 1: OVERLY BROAD STATEMENT
In the 1970s, a Milwaukee agent insured a bad Property risk through the Wisconsin Insurance Plan (assigned risk property insurance program). After the policy had been issued, vandalism and malicious mischief coverage was added. 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 policy.
The client sued the insurance agent on the basis of the agent having said, “This will complete your coverage.” The policyholder claimed that the agent's statement led him to believe that he had broader coverage than the policy actually provided. Because the client thought that he was insured for water damage, he hadn't sought specific coverage for it. It was the agent's fault that the policyholder hadn't purchased water damage coverage. The irony of this case is that the insured's building was old and in poor repair. No normal market would have written water damage coverage for the property.
Lesson: The client could infer from the agent's statement that broad coverage was being provided. Thousands of similar statements are made every day. A simple recommendation that's very hard to put into action would be: Never say anything to a client that indicates coverage beyond what is provided by the insurance contract that you're selling.
CASE #2: CONTRACTUAL LIABILITY
The names in this case have been changed. 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 before buying the property, Developer would've either not bought it or purchased it at a reduced price.
Developer's owner “discussed” this with the owner of Property. They agreed to settle the problem by having both parties sign an agreement stating that Property would guarantee that Developer could secure a construction loan. However, when the owner of Property refused to sign the agreement, Developer sued Property for breach of contract.
While this was happening, the owner of Property asked his insurance agent if there was coverage for the money he'd have to pay if he lost the case. The agent told Property's owner that Property's General Liability policy would pay for this situation. The court required Property to sign the agreement and pay Developer $180,000 in attorney fees and court costs. Without 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 policy for any lawsuit arising from any problem resulting from sale of the property.
The court noted that Property's General Liability contract covered only contractual liability claims for “personal injury” and “property damage,” a fact that the agent did not communicate to the insured. A breach of contract suit does not qualify as either “personal injury” or “property damage.” The California state court of appeals ruled that the agent had to pay for the loss.
Lesson: Agents have no 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 this type of errors and omissions claim.
CASE #3: 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, and that without such a system, $1,000 was the maximum crime limit that she could have. The agent had not previously told the insured about this provision.
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 court costs and attorney fees.
Lesson: It's essential to be able to prove that an agent told a client about reduced coverage. If a policy isn't being issued with the requested coverages, the agent needs to communicate this in writing to the insured.
A second recommendation comes 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. These agents assume that whatever their pet insurer does, no other company would do better. In this case, there's a good probability that the agent checked with only one insurer. If he had tried several carriers, he might've found a market that was willing to write the theft coverage for a $30,000 limit. Be sure to check with more than one insurer and document the file whenever the coverages issued are less than what the insured requested.
CASE #4: CONFUSING DOCUMENTATION
File documentation can take several forms. Handwritten notes in an agent's files can be invaluable in defending an agent against an errors and omissions claim. These notes can be very brief as long as they are complete enough.
In one case, an agent had written on top of a quote: “Coverage is not bound.” If he had gotten sick, anyone could've picked up the file and acquired a key piece of information regarding the file. Although premiums had been discussed, the prospect neither stated that he wanted coverage nor paid the agent. The prospect had an accident and called to report the loss. Looking at the file and the note, the claims person denied the claim immediately and then turned the file over to the agency owner.
After reading the note, the agency owner immediately knew what had happened. Subsequently, an E&O claim was presented. Because of the note on the file, the carrier settled the loss out of court without paying anything.
Lesson: Proposals can sometimes present a problem. For example, let's say that you've presented the prospect with a written proposal for 15 different coverages and options. The prospect has bought 13 of these coverages. Either during or immediately after the sales presentation, mark the file to show the coverages the prospect did not buy. These notations can be as simple as writing “no,” with the 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've ever seen has all of this information on one page. It takes only a few seconds to make the necessary notes on this page. A typical notation might be to write this next to each coverage that the client did not buy:
No 00/00/00 RTY
(Agent's initials)
CONCLUSION
Preventing expensive E&O problems often boils down to taking some basic precautions: Be careful what you say to a client or prospect. Know your coverages. Document your files.