DOING YOUR DUTY: PROFESSIONAL CONDUCT, E&O, AND YOU
by Roy Phillips and Rick Oldenettel
Every agent, and every agency, has specific legal duties to its insureds and insurers.
The U.S. judicial system has always shown the flexibility of a contortionist. In the 1960s and 1970s, it appeared to tolerate litigation. However, since the 1980s, the system has made a turn to the right. Because some state legislatures are frustrated by federal court interpretations contradicting the wishes of their constituents, they have been working to reverse the direction of the judicial system. Meanwhile, Congress sits on the sidelines struggling to implement its own agenda for tort reform.
But regardless of the obstacles individual jurisdictions have set to bar the recovery of damages, your agency has a duty to meet certain professional standards of care.
With this fact in mind, here are some observations about what constitutes such conduct, how failure to meet the standards can lead to errors and omissions (E&O) claims, and what you can do to prevent such claims. As you read this article, keep in mind that each jurisdiction has its own ideas about what is correct or incorrect agency conduct. Your first duty is to understand the nuances of the applicable court decisions in your state. If you think that sounds like a disclaimer, you’re right.
Duties to Insureds
In most jurisdictions, to establish a cause of action for negligence against an insurance agent, a plaintiff must show that:
- A duty was owed to the plaintiff-insured.
- The defendant-agent breached that duty.
- The breach was the proximate cause of damages.
What duties do agents owe their customers? One court defined them this way:
“An agent owes his clients the greatest possible duty. He is the one the insured looks to and relies upon. . . . The insured looks to the agent he deals with to get the coverage he seeks, with a sound company that can and will promptly pay claims when they are due. It is his duty to keep his clients fully informed so that they can remain . . . insured at all times.”
This definition calls on agents to probe for and identify their insureds’ needs and concerns. After examining many E&O actions, we’ve found that many agents have fallen on their own swords simply by superimposing their ideas, needs, and concerns upon the voiceless insured. In fulfilling their responsibility, be sure to document the results of needs-analysis conversations. A good axiom: If something is important to the insured, it deserves to be explored and documented in detail.
An agent also has a duty to use reasonable diligence in placing the requested insurance and to inform the client promptly if unable to do so. In addition, an agent has a duty to notify insureds of the expiration of their policies (except for direct-billed renewals) and to pass on any information pertaining to expiration dates that’s intended for their customers. Practically speaking, an agent has a duty to renew a customer’s policy, replace the policy with one from another company, or notify the customer of a non-renewal so the customer can obtain insurance elsewhere. It’s important to remember that each jurisdiction has time frames for giving notice of non-renewal. Many of these requirements are stated in mandatory endorsements to various policy forms used in each state.
Agents also have a duty to investigate the solvency of an insurance company with which they place a client. One legal decision held that, in the event of an insurer’s insolvency, an agent is not liable for an insured’s unpaid claim as long as the insurer was solvent when the policy was procured. However, the agent could still be held liable if, at a later time, when the insured could still be protected, the agent learned — or by exercising of reasonable diligence should have learned — of facts that would put a reasonable agent on notice that the insurer presented an unreasonable risk.
Many jurisdictions have statutes that impose a higher degree of care on the placement of an insured’s coverage with non-admitted carriers. Some statutes also place a duty upon the agent to seek admitted carriers for the placement first and, if unsuccessful, to advise the insured of placement with a non-admitted insurer.
Agents also have duties arising from state licensing requirements. The statutes explicitly state what they require of agency personnel involved in insurance acquisition. The license definition of an agent clearly states that anyone involved in acquiring insurance must be tested and then licensed. After being licensing, and in tandem with the license code, all licensed personnel must meet the state’s requirements for continuing education.
Some states have “grandfathered” agents who received their licenses before a certain date. However, in our opinion, exempting anyone from regular continuing education poses a danger to an agency. Someone in your agency, preferably a principal, should oversee the continuing education of each employee.
The moment you sign an application to become a licensed insurance agent, you assume a duty to perform services to any and all future insureds. Among other things, this means that you have an implied duty to:
- Become professionally aware of your products and make every effort to communicate that knowledge to every individual in your organization;
- Apply that knowledge to each client’s requirements, which you’ve gathered by researching the client’s business and personal activities;
- Seek the appropriate product(s) to fill those needs;
- Communicate the availability and other pertinent issues for each product presented, using written and oral communications that would be ordinarily understandable to the client;
- Insist on acknowledgment whenever the client rejects your opinions concerning exposures that you think require treatment;
- Properly apply for, receive, review, and transmit selected policies to the client, ensuring continuity through all four actions;
- Document the actions in steps one through six, and be prepared to ensure that changes are made in a timely manner on behalf of the client.; and
- Be prepared to show that you have established internal agency procedures that indicate a “reasonable intent” to control actions taken under steps one through seven.
We believe that these abbreviated steps are among the important elements that make up an agent’s “duty to perform.” We’ve arrived at this opinion after reviewing dozens of cases every year.
Duties to Insurers
Agents also have duties to their insurers. One authority defined this duty in these terms:
“An agent owes the insurance company he represents a fiduciary duty that includes loyalty and good faith, integrity of the strictest kind, fair, honest dealing, and the duty to not conceal matters which might influence his action to prejudice the company.”
In addition, the agent owes the insurance company the duty to comply with its guidelines, policies, and procedures for issuing policies. Many courts have held that any person who solicits an application for insurance shall be regarded, in any controversy between an insured and the company, as the agent of the company, not as an agent of the insured. Despite being an agent of an insurer, an agent does not have the power to waive, change or alter any of the terms or conditions of an insurer’s application or policy.
Causes of E&O Claims
Let’s consider a few examples of how breaching these duties can lead to E&O allegations. Our clients in these cases are usually the agents (defendants), although we have represented insureds and carriers in dozens of cases over the last 10 years. Our job is to wade through the volumes of pleadings, depositions, exhibits, interrogatories, and causes of action that such cases generate to find answers to four questions:
- Did the agent fail to satisfy a legally imposed duty to perform on behalf of the insured (or insurer)?
- Did the agent represent the goods and services he or she provided to have characteristics, uses, or benefits they did not have?
- Did the agent fail to disclose information about a policy to induce an insured to purchase it? Had such information been disclosed, would the insured have rejected the policy?
- Did the agent engage in any unconscionable conduct?
Here are a few cases from our files that demonstrate common breaches of agents’ duties. One of the most prevalent is failure to obtain proper coverage, as these two cases show.
Case 1: The insured had asked the agent to find appropriate coverage for his fur-cleaning firm. Unfortunately, the agent did not obtain insurance covering the bailee exposure that comes with cleaning and storing valuable fur items. Result: Finding for the plaintiff (the insured).
Case 2: The insured, a swimming pool subcontractor, required General Liability and other coverages to maintain his business relationships with his clients (general contractors). A Certificate of Insurance was issued to a general contractor indicating that the insured had all the coverages required by the general contractor’s contract. The general contractor reported a loss arising from the insured’s work. The loss resulted in discontinuation of underground utility service to a major manufacturing plant. The insured did not have appropriate coverage for the underground property damages. The general contractor’s insurance carrier responded to the loss, and then subrogated against the insured. The insured then sued the agent. Result: Finding for the plaintiff (the insured).
Failure to obtain proper coverage accounts for more than 50% of all losses reported to E&O carriers. A similar, but slightly different, error is the failure to obtain requested coverage, which accounts for 20% of such claims. Here are a couple of examples:
Case 3: The insured instructed his agent to review his insurance and determine whether he was adequately covered for the consequences of having to move his premises after a property-insurance loss. (Doesn’t this sound a bit like Time-Element coverage?) A loss occurred, but Time-Element coverage had not been purchased, so extra-expense monies were not in place to hire the mover, lease the new location, put in the phones, bring in new inventory, and notify the insured’s customers of the change. Getting back in action rapidly was crucial for the insured’s business of selling upscale formal gowns to high-school seniors who were graduating within the next few weeks. Result: Finding for the plaintiff (the insured).
Case 4: The insured asked the agent to obtain coverage that would pay first-dollar claims to his clients in the event that their property was damaged through theft or vandalism. He was willing to pay for the additional coverage since he was in the business of servicing Mercedes-Benzes, Rolls Royces, Jaguars, BMWs, and other expensive cars. Vandalism occurred one weekend, and the insured was forced to spend thousands of dollars repairing 11 vehicles left in his care. Primary Garagekeepers Liability insurance was not in place to respond to the claim, but you can guess what was: the agent’s E&O policy, of course! Result: Finding for the plaintiff (the insured).
These four cases demonstrate the need for continuing education. All of these E&O losses could have been prevented if agency personnel had been trained to recognize the sources of clients’ potential claims and know the products available to cover them. The final two causes of E&O claims addressed in this report are failure to bind coverage and failure to obtain renewal coverage. While these represent only 10% of claims reported, they demonstrate the need for establishing standard operating procedures within an agency.
A System Is the Solution
When errors or omissions occur in an agency, it’s often because employees don’t perform tasks the same way each time. To achieve uniformity, your agency must have a “system.”
Your agency management system coordinates several interrelated system components. Specifically, the system provides these service components:
- Locates potential clients (marketing component)
- Gathers data and analyzes needs (risk-management component)
- Coordinates risks with products (coverage component)
- Approaches the marketplace (placement component)
- Presents findings to the client (proposal component)
- Implements selected products (application component)
- Arranges for payment selection (accounting component)
- Maintains interim service (service component)
- Reviews changes in client profiles (renewal component)
- Maintains quality of staff training (training component)
Because these system components are interrelated, it’s vital to use procedures that preserve their integrity. First, it’s important to define “automation.” If the computer database includes only accounting information, the agency isn’t really automated. Remember that accounting is only one system component. The truly automated agency is driven by a single database that includes all client information required to perform the tasks associated with the 10 system components.
Once the agency management system is in place, everyone in the agency must observe certain rules. If Moses had been an insurance agent, there would have been three additional commandments:
- Thou shalt consistently perform all procedures the same way every time they’re carried out.
- Thou shalt document all customer transactions, identifying date, time, recommendation or action, resultant action, and follow-up; and
- Thou shalt not allow anyone to circumvent or destroy the system.
The three groups of offenders most likely to violate these commandments are the agency’s principals, producers, and long-time employees who have an “anti-system” attitude. What can be done about them?
Based on the theory that agency principals think they actually operate their agencies, we can assume that the enlightened ones will either seek training to become system-literate or depend on someone who has this training for all transactions.
Outside producers gather data out of necessity, but the integrity of this data isn’t always reliable. The solution: Equip producers with appropriate forms that reflect the requirements of the system – and let them know that using other “forms,” such as cocktail napkins, is as breach of the system.
As for system-loathing employees who have been with the agency since the original tablets came down from the mountain, give them a clear message: Adapt or leave!
To find out if your system is working, audit the flow of transactions through the 10 agency service components. Have this audit done by an objective observer. In other words, don’t let folks audit their own trails, so that they can learn the strengths and weaknesses of their subordinates and identify training needs.
The audit format should reflect your agency’s procedures and objectives. For example, if your policy is to offer umbrellas to each Commercial account, the audit should determine whether this policy is being implemented. Essentially, the audit checklist should mirror the task list constituting each system component.
Your agency’s system can be as simple as a notebook containing standard operating procedures or as extensive as your needs dictate. The key is to have a system. Innovation, spontaneity, and creativity have their place in agency management, but not in the arena of daily insurance transactions. With so much at stake, variation is no virtue — which is why parachutes are packed the same way each time!
Roy L. Phillips, CIC, CPIA, can be reached at Dan R. King & Associates in Houston, (713) 667-0333, ext. 227, e-mail [email protected], or visit www.kingphillips.com. Rick L. Oldenettel is a partner at Oldenettel & McCabe, Attorneys at Law, in Houston. Adapted, with permission, from American Agent & Broker magazine.