Stay Vigilant To Ward Off E&O Claims

Cautionary tale has happy ending for one agent, but offerslessons for others

By David Price

and Frank A. Misuraca

In a single hectic day, insurance agents may field dozens ofphone calls–mostly from clients. Unfortunately, as we attempt tokeep everyone happy, we sometimes forget to document what wasdiscussed and what might have been agreed to in a givenconversation.

As is so often the case, it is the one conversation that we donot remember and document that can lead to so many problems.

That failure to document is exactly what happened to an agentrecently, which led to a day in court defending against thecontractual and professional malpractice claims of an unhappyclient.

The following cautionary tale is a reminder about the importanceof taking a preventive stance of our own against any possiblecommission of professional errors and omissions.

IN THE BEGINNING

An agent's client was in the enterprise of buying lower-costhomes for renovation and resell. The first time the client calledfor insurance on a property, he came into the agent's office, asinstructed, to fill out the necessary insurance application and paythe required premium.

Just above the client's signature, the application expresslyhighlights as important information: “Coverage cannot becomeeffective any earlier than 12:01 a.m. the day after our receipt ofa properly completed application and appropriate premium.” By wayof emphasis, clearly the agent in this situation did not havebinding authority with this particular carrier for the coveragediscussed.

The client purchased the insurance without incident.

A few months later, the same client called the agent to find outhow much it would cost for coverage on another “fixer-upper” he waspurchasing. Here, things get murky because neither party has aprecise recollection of this conversation, and neither partyadequately documented the conversation.

For the agent's part, it was just one of many quotes given outin the course of day. Some lead to binding of coverage, others didnot.

Sound familiar? Hopefully, what happened next does not.

Several weeks later, the client walked into the agent's officeand asked to fill out “that application” for coverage on the secondhome. The agent's assistant helped the client complete the sameapplication form with its stipulations as to when coverage becomeseffective–just as he had on the first home. But once the clientsigned the application on the second home, he informed the agentthat this house burned down the previous day.

The agent of course informed the client that the fire completelychanged the insurance equation.

The agent then heard those dreaded words, “You will be hearingfrom my lawyers.” And he did, with charges that coverage wasin-force–when it wasn't–and that the agent was guilty ofprofessional malpractice.

NOT SO FAST

This lawsuit arose out of the plaintiff's misguided attempt toplay the system and create an insurance obligation where noneexisted. Many interesting issues came out during depositions andthe hearing before the judge. They included:

o The client's assertion that, from the moment the telephoneconversation with the agent ended, he “assumed” he had coverageonce given a quote. He asserted this even though he admitted heconsidered himself free to seek out other quotes.

o No recollection by either party that insurance existed once aquote was given or as a conclusion to the conversation. No wordssuch as, “Now I have insurance, right?” were ever recollected asspoken by the client, let alone any discussion of facts such asvaluation, what was to be covered, length of terms, etc.

o The essential terms that must be stated in any insurancecontract all were lacking. These are: (1) subject matter, (2) therisk, (3) the premium, (4) duration of the risk, and (5) the amountof the insurance. The client argued, however, that because of thepre-existing relationship, these terms were known to the agent.

THE REALITY

A party relying on a contract has the burden of proving that thecontract came into existence. In this case, the judge was persuadedthat no insurance coverage or contract existed because, asindicated earlier, the client knew he could not obtain insurance onthis home without first signing an application and paying apremium.

Further, since the client admitted that he was free to seekother insurance quotes, there was no intention on his part to bebound to the insurance contract.

Finally, the judge believed that because the client did not takeany active steps, such as filling out an application or paying apremium, then there was no “meeting of the minds” to establish avalid agreement.

CONSIDER THIS

The agent's legal defense succeeded, but who wants to be putthrough the time, expense or distress of proving one's case?

We may understand that no policy ever exists without agreementas to a quote, a formal application, payment of premium andacceptance of application by the insurance company. However, do youclearly explain these facts to your clients every time you issue aquote?

Clearly, agents must know their products and their bindingauthority, if any. All insurance policies are not created equally.Some do have provisions for “automatic” startup or coverage foradditional acquisitions.

Also, be cautious if you don't have binding authority, as youcould give the impression that you do. It may be as simple asreminding a client, “This is our quote, but I don't have bindingauthority. Once your application is submitted, the effective datewill be determined by the carrier.”

Next, know your client and his or her exposures. Speak preciselyand knowledgeably–and document, document, document.

The first and most important defense against a claim of failureto act in a professional manner is proper documentation. Yourinternal system of documentation should note what is covered, thecoverage limits and what was advised, including when clients refuseto take on a recommended coverage or coverage limit.

For phone conversations, keep record by writing a short,accurate note of what was discussed. Regarding e-mailcorrespondence, keep them professional and meticulously filed andarchived, as well as easily retrievable.

Timing is also important. Make sure risks are bound at the timethat coverage should be in effect. The order to bind should be inwriting. Your records, whether we are speaking of written orelectronic filing systems, must clearly establish a “chain offacts.” They become the final arbitrator should a disputearise.

In some states, your actions as an insurance consultant oradvisor may trigger a legal duty to advise. The laws vary with eachstate as to this duty to advise. It would be wise to review withlegal counsel how your individual insurance practice, your E&Opolicy, and the laws of your state may invoke this legalprinciple.

Finally, all of us must admit, if only to ourselves, that we canhave conversations during the course of a day, especially when weare busy, tired or otherwise distracted, with the potential formisinterpretation hovering in the air. Yes, the client in the abovescenario may have seemed unreasonable, but it is precisely thatkind of interaction that can come back to haunt agents.

This is why a forthright, attentive, well-documentedcommunications habit is the best path to avoiding claims ofunprofessional conduct. Learn from the experiences of other agents,or you may be forced to relive those same unpleasantexperiences.

David J. Price serves as executive vice president, chiefunderwriting officer with Burns & Wilcox, an independentlyowned managing general insurance agent in Farmington Hills, Mich.He can be reached at [email protected]. Frank A. Misuraca isan associate with the Farmington Hills, Michigan-based law firmKaufman, Payton & Chapa, specializing professional malpracticeand litigation. He can be reached at [email protected].