Novel ways of delivering insurance to the public are sometimes termed “disruptors,” though “game changers” might be more apt. What happens when something goes wrong? It's a premise all insurance is based upon, but when the consumer is in the pilot's seat, who takes the blame for the crash?
Duty? What duty?
Each new insurance delivery method puts its own twist on the eternal question facing insurance brokers: When do I cross the line from being an order-taker, meeting the customers’ stated needs, and become an advisor, bearing a responsibility to recommend coverages that the customer needs, but hasn't requested?
In traditional brokerage settings, courts generally imply a duty to advise if the broker has worked with the customer for several years and the customer has always accepted the broker's recommendations, sometimes termed a “special relationship.”
In the online shopping models can the consumer ever have a “special” relationship with the broker or the direct-writing insurer?
In the P2P scenario, may the second “peer,” who has followed the first peer's advice to pool their insurance purchase, sue the first peer, who is not a licensed insurance professional, for malpractice? Can both peers sue the broker through whom they jointly bought coverage, although the broker's role was only to fill their order?
Innovative delivery systems may place too much trust in policyholders’ ability to assess their insurance needs. Experienced insurance professionals often disagree about a customer's insurance requirements; how is a novice to know that an exclusion in the umbrella policy creates a gap in coverage?
Things that go bump in the night
The mismatch between a primary liability policy and an umbrella policy is just one example of things that can go wrong. Here are some others, but there are more:
Property coverage: inadequate replacement limits. The replacement cost limit stated in a homeowner's policy for the past five years may be grossly inadequate to rebuild following a total loss. Entire California subdivisions were lost in a series of wildfires in 2007, and according to one study done after the tragedy, 75 percent of the homeowners were underinsured for replacement costs by an average of $240,000.
Scope of “insureds” under liability insurance. Many commercial general liability (CGL) policies covering small businesses automatically cover the business owner's spouse, but don't do so if the business incorporates as a limited liability corporation, or LLC. Will the typical CGL policyholders anticipate this change when they incorporate the business?
Professionally speaking. Businesses that sell products don't usually think of themselves as “professions” like doctors and accountants, but if part of their work is giving advice to customers, and that advice leads to a loss that doesn't fit within the scope of a CGL policy, a gap results. The “miscellaneous professional liability” policies can fill the gap, but who will suggest such a policy to a business owner who thinks a CGL policy covers everything?
Today's consumers are cyber-savvy, accustomed to instant responses and adventurous. But they also demand value. The traditional insurance broker is far from going the way of the pterodactyl, but how can the broker compete with these seductive delivery systems?
Brokers will survive and flourish by differentiating their insurance services from the commoditized sales of products. But it won't be a linear progression. Evolution never is.
Louie Castoria (firstname.lastname@example.org) is a partner in the national law firm of Kaufman Dolowich & Voluck LLP, and directs the firm’s West Coast Professional Liability Practice Group.