My E&O classes include discussion on claims frequency by line of business. When I bring up the issue of life insurance, many folks have trouble identifying potential scenarios that could lead to E&O claims. After all, life policies usually don’t renew the way a P/C account does (except for term insurance) and coverages are far more standardized compared with the P/C industry.
In reality, approximately 5% of E&O claims involve the sale or service of life insurance. What’s more, some of these claims can be significant.
One major issue involves the physical that the individual might need to take based on the face amount of the policy. In one claim a number of years ago, the agent wanted to write a life policy on a man who was seriously ill. Realizing that the man probably wouldn’t pass the physical, the agent actually took the exam for the individual. The company issued the policy, believing that the applicant was healthy. When the man died a short time later, the carrier sued the agent for not providing accurate underwriting information.
Other situations involved the agent failing to note certain illnesses of the applicant on the application. In this situation, the best approach is to ask the applicant the questions and write down their responses completely and accurately. At the conclusion of the completion of the app, require the applicant to review and sign it.
Other areas in which life insurance has resulted in E&O claims include:
- Incorrect beneficiary changes
- Erroneous handling of address changes that resulted in the cancellation of coverage fully
- Cancellation of a policy and replacing it with another carrier without explaining the ramifications
One other problem area involves specific types of life insurance (universal life comes to mind). If the premium is too low to cover the life insurance costs, the policy will borrow from the cash value to pay the life component. Over time, this might lead to depletion of the policy’s cash value, causing cancellation of the coverage. Unfortunately, this could happen at the time that the customer needs the coverage the most.
Conclusion
Although selling and life insurance doesn’t result in a huge number of E&O claims, they do occur -- and you need to exercise the proper care and attention to detail. Keep on the lookout for potential problems and discuss them with the client!