Underwriting and Binding Procedures E&O Claims can occur as the result of an insurance agent not being familiar with or overstepping an insurance company’s underwriting guidelines and/or failing to properly follow binding procedures. Losses arising from violations of underwriting/binding procedures are most prevalent when an insurance agent places a risk with a company where he/she does not place a high volume of business. Insurance agents who operate within the scope of their express authority will, in most cases, avoid liability for their errors and omissions.
Use these steps to help avoid errors and omissions arising from underwriting and binding procedures:
- It may seem obvious, but every insurance agent must KNOW their scope of authority with every company they do business with. Insurance companies do sue insurance agents when it appears that their insurance agency contract has been breached.
- When in doubt, check with the carrier regarding proper procedures.
- If an underwriter makes an exception regarding a risk, be sure to have the underwriter document his agreement in writing and maintain a copy in your file. If the underwriter does not provide you with such a letter, confirm your understanding in writing to the underwriter requesting an immediate reply if your understanding is not correct. Other simple procedures can go a long way to preventing these types of losses:
- Always fully disclose the nature of a risk to the insurance company. For instance, if an insurance company requires an inspection of a property as part of the application process, be sure to completely inspect the property to be perfectly clear about the nature of the risk. Incomplete inspections often lead insurance companies into writing risks they may not have written had all the facts been known. Sometimes it is not so much what is said about a risk but what is NOT said. While the insurance company may end up paying a claim in the event of a loss, the insurance company may turn around and sue the insurance agent later.
- If you lack binding authority for a risk, be sure your client understands that. Confirm in a letter that no coverage exists and copy the underwriter. Provide the client with a realistic expectation of how long it will take to obtain a quote or authorization to bind from the insurance company. If the client needs an immediate answer, call the underwriter and get the answer in writing.
- Bind ONLY those risks you know the insurer will accept.
- Know your state’s statutes regarding the issuance of binders. In some states, a written binder must be sent to the insured and to the insurer within three business days of the issuance of the oral binder. Reduce all oral binders to written binders and send a copy to the insurance company as well as to the customer. • When possible, use a particular insurance company’s application rather than a standard ACORD form application. The form provided by the insurer is typically tailored to capture information related to its own underwriting rules.
- For hard to place coverages or when a client delays in choosing an insurer or coverages, send the client a follow-up letter emphasizing that no coverage has been bound.
The following are examples of claims which could have been prevented if proper underwriting or binding procedures had been followed.
Description of Claim #1:
The insurance company’s underwriting guidelines required submission of a photograph of all rental properties included for coverage. The insurance agent failed to obtain a photograph of the rental property for which a customer desired coverage; a binder was provided to the customer. A fire occurred and due to the issuance of the binder, the insurance company was required to pay the claim but later sought reimbursement from the insurance agent. Had the agent visited the property to obtain a photograph, it would have been clear that the property was boarded up and vacant and therefore an unacceptable risk.
Estimated Claim Cost: $150,000.
E&O Prevention Tip: Always follow an insurance carrier’s underwriting requirements for binding coverage.
Description of Claim #2:
An agent issued an auto insurance binder to an insured who was twenty (20) years old. The insured had an accident; the agent was held liable because the underwriting guidelines of the carrier clearly stated that the minimum age requirement was twenty-five (25).
Estimated Claim Cost: $12,000
E&O Prevention Tip: Review and follow the underwriting guidelines of every company that you place business with.