Recent allegations of wrongdoing involving broker compensation have turned on an issue summed up by a question asked by a state insurance commissioner, “Which master do you serve?” In other words, do you work as an agent for the insurance company or as an agent for the insured? Some authorities and politicians weighing in on this matter believe agents working for their insureds have a responsibility to obtain quotes from all their companies and disclose to their clients the total compensation they'd receive under each quote, while an agent working on behalf of the company need not go to such lengths.

A great article (which I recommend to all insurance agents and brokers), entitled “Insurance Agent and Broker Liability,” appeared in the Fall 2004 issue of Tort Trial & Insurance Practice Law Journal. In it, author Douglas R. Richmond explained that agents have dual responsibilities, and that choosing to serve either the company or the insured is not as simple as it might seem. Agents work for both, but–and here is the key–they do not have the same responsibility to both parties at the same time. Further complicating matters is the reality that the meanings of “agent” and “broker” are not constant. As the author stated, “Whether an intermediary is an agent of the insured or the insurer depends on the facts of the case,” rather than the label attached to him or her.

Mr. Richmond's observation makes sense, given the many different ways the terms “broker” and “agent” are used in the insurance industry. Some people hide behind such generic labels without adequately understanding related laws or their implications. For example, agents may declare they have no duty to fully disclose their compensation to clients because they are not brokers. However, most agents I know go out of their way to help their clients, even more than they usually help their companies, sometimes to the extent of creating E&O exposures.

I particularly see E&O exposures arise with claims counseling. In today's underwriting environment, especially in personal lines, some companies are taking a hard view of even minor incidents. As a result, when homeowners experience such incidents and ask their agents what to do, some agents advise them to fix the problems themselves. On the surface, such advice makes sense (and not because, as some have said, it improves an agency's contingencies). An insurance company will not pay a claim that's smaller than the insured's deductible but likely will remember that claim at policy renewal, and the insured may suffer as a result. So, if the agent knows a claim is not going to be paid and the insured will gain nothing by submitting it but could be penalized, then advising the client not to turn in the claim seems logical.

However, there are two reasons why agents should think twice before offering such advice. First, agents cannot have it both ways. If they argue that they never work for the insured and therefore do not need to disclose compensation, then they obviously are working for the company and must disclose pertinent claims data to it. On the other hand, if agents argue that they are working for their customers, as well as their carriers, when they respond to the customers' inquiries, then they should reconsider whether they need to disclose compensation.

Second, an agency's company contracts may require the agency to report all claims. As the above-mentioned article points out, “There is no reason why a broker who shares a contractual relationship only with an insured should be protected from the consequences of her misrepresentations (to an insurer) by a lack of privity with the insurer harmed by those misrepresentations.” A broker not working under an agency/company contract nonetheless has a responsibility to not mislead an insurer; obviously the responsibility is even stronger when an agency contract does exist. This point is important because, increasingly, carriers are suing their agents, including for alleged misrepresentation. Consider the following scenarios:

o If an agency is placing a client with a new company, and the insured has filed two significant liability claims on which nothing has been paid, the agent might wonder if it is necessary to include such information on the application. Obviously the agent should do so, because if a new liability claim is reported and subsequently paid, and the insurer learns about the prior two, it could sue the agent for misrepresentation, arguing that it would not have written the risk if it had known about the first two claims.

o An insured's policy is automatically renewed; the agent has not reported two small property claims the insured sustained during the previous policy period, and the company later incurs a large claim involving the same insured. The company could conclude that the risk would have been nonrenewed had the agent reported these claims and hold the agent liable for taking on an underwriting role that he had no authority to assume.

o In a rare but plausible situation, an agent chooses not to turn in a small closed-no-pay claim that later evolves into a huge claim. For instance, a small nick in a boat's hull worsens and ultimately causes the boat to sink a few days later. (I doubt that an agent would take such a chance with a liability claim, but a small physical-damage claim is another story.)

Agents may become frustrated when they find themselves in seemingly no-win situations. If they turn in all claims, they will inevitably lose clients, but the alternative is to risk large E&O claims.

Agents can do several things to protect themselves and their clients. First, educate clients about the claim-filing and claim-handling processes before claims occur. Second, place clients with companies that are more reasonable about handling claims, even if they charge more. Third, work with companies to help them understand the consequences of taking a hard line on certain claims. Finally, and perhaps most important, educate everyone in your agency about the potential consequences of claims counseling, so the agency can stave off possible E&O claims of its own.

(Although this article deals with important legal issues, please note that I am not an attorney. Therefore, please consult an attorney before taking any action based upon this article.)

Chris Burand is president of Burand & Associates LLC, an agency consulting firm. Readers may contact Chris at (719) 485-3868 or by e-mail at chris@burand-associates.com.

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