It is job number one for every insurance agent and broker to ensure that the insureds they work with are covered against potential losses. At the same time, these producers would be wise to hold up a mirror and think about how they can best manage their own risks.
Sure, most insurance professionals have errors and omissions policies in place in the event of claims filed against them—if not, they should. Nonetheless, best practices dictate that producers conduct themselves in a way so as to avoid lapses that could trigger liability.
A good start is for agents and brokers to understand the scope of their duties to insurance consumers and how to mitigate E&O exposure. The following overview should help toward that end.
The Standard of Care
As a rule, whether acting as agents or brokers, producers have only a general duty to either procure coverage as requested by insureds or to inform them of an inability to do so. Indeed, in California, case law (1) confirms the “order taker” status of producers and (2) makes clear that no obligation exists for them to volunteer that any given insured should purchase additional or different insurance coverage. Likewise, brokers are not generally responsible to advise their customers on specific insurance matters.
That being said, this duty to use reasonable care, diligence and judgment in procuring coverage can be heightened under certain circumstances. To wit, “special duties” are created when producers (1) mispresent the nature, extent or scope of coverage to be provided; (2) fail to secure coverage specifically requested by an insured; or (3) hold themselves out as having particular expertise in the type of insurance that an insured is buying.
Common Areas of Broker/Agent Exposure
That plaintiff attorneys are chomping at the bit to find “deep pocket” targets to sue is no newsflash. Neither is the fact that producers and the insurance companies they work with are prime marks. Unfortunately, there are plenty of missteps agents and brokers can take that have these lawyers salivating.
The reality of the insurance business is that products are ever-changing and becoming increasingly complex. There are more coverage options than ever, and it is no easy task keeping up with new policy options, the admitted versus non-admitted marketplace, and changes in carrier relationships. Add to this difficult mix the demands of insureds seeking better pricing, carriers vigorously fighting claims, and the prospect of insurers paying claims and then subrogating against producers for indemnification, and the landscape for agents and brokers can be perilous.
With this as a backdrop, producers can subject themselves to legal peril in a variety of ways, especially when the standard of care is elevated. Here are but a few examples how agents and brokers can find themselves staring down the barrel of an E&O claim:
- Submitting policy applications that are unsigned or missing critical information
- Failing to properly review quotes
- Mishandling policy applications resulting in a failure to procure coverage
- Providing coverage different than that requested
- Communicating with insureds in a shoddy manner (e.g., little or no follow up confirming changes to policies at renewal)
- Lacking documentation in computer systems and files (this includes inconsistent tracking of client needs and inaccurate Certificates of Insurance)
- Delivering policies well after their effective dates
- Failing to check policies for accuracy
- Not thoroughly explaining policy provisions
- Recommending policies with inadequate values/limits
- Failing to recommend coverage types or to identify potential areas of exposure
- Providing inaccurate information to carriers
- Failing to provide timely notice of claims
- Making independent coverage determinations
- Not notifying customers of policy cancellations
- Failing to add Additional Insureds or Loss Payees
How to Mitigate Liability
Yes, the potential pitfalls facing producers in terms of their possible liability to insureds are many. But there is much that agents and brokers can do to minimize E&O exposure.
First and foremost, they must adhere to the following mantra: document, document, document. Producers should adequately document their files, especially when insureds decline recommended coverages. Whenever this happens, confirming emails should be sent. Also, as a matter of course, client interactions should be memorialized in writing and all correspondence should be saved too.
Agents and brokers should also make it a practice to submit only those applications that are signed by customers and confirm the accuracy of all information provided to carriers. These protocols should be mainstays of E&O mitigation procedures that include the following steps as well:
- Educate customers so they fully understand their insurance needs and potential exposures, as well as all critical policy terms and exclusions, applicable policy limits, and available optional coverage that would provide them with sufficient protection. At the same time, never exaggerate the extent of a client’s coverage.
- Carefully review insureds’ policies to verify they contain the coverage requested. Have customers confirm in writing that they have received their policies as ordered. And do not represent that coverage is bound until the insurer has received payment and the relevant policy has been issued.
- Confer with clients annually to review their insurance needs and discuss any changes in circumstances or exposures that might require coverage adjustments. When doing so, it may be helpful to use a coverage checklist that references areas of potential exposure. Meet with carriers at least once a year to stay up-to-date on products being sold, as well as insurance company procedures. It bears repeating, product training is essential.
E&O Claims: Dos and Don’ts
Hopefully, adhering to the foregoing recommendations will keep the potential for E&O claims at bay. Nonetheless, producers should immediately advise their supervisors and E&O carriers if and when any claim is filed—this so as not to jeopardize the defense and indemnity they may be entitled to. And if facing an E&O claim, it is important that producers NOT admit liability or wrongdoing. Likewise, they should NOT attempt to settle with the insured without the aid of legal counsel, as doing so could potentially void E&O coverage.
About the Author
Mark B. Robinson is founding partner of Michelman & Robinson, LLP, a national law firm headquartered in Los Angeles. He is an insurance industry specialist, who primarily represents retail brokers and agents, and a recognized authority on regulatory issues. Mark can be contacted at 310-299-5500 or email@example.com.