Avoiding E&O: Follow directions-avoid lawsuits by determining requirements and ensuring documentation

There are at least three separate sources of instructions to follow: the client, the insurer and the regulations in your state. I think we can all agree that the paramount duty of insurance professionals is to follow the specific instructions of their clients. However, many insurance professionals are not aware that the duty to follow the instructions of our clients is followed closely by the duty to follow the instructions of the insurance companies they represent. Be honest with yourself: When was the last time you looked at your agency manual or agency contract? Slightly more obscure is the duty to follow the statutory requirements of the regulatory agencies of your state.

Here's One We Can Agree About
The paramount duty of an insurance agent or broker is to follow the instructions of his or her client. Bottom line: A producer who does not strictly follow his customer's instructions is liable to the customer for any damages that result from noncompliance.
For the nonbelievers, here is a perfect example of what happens if you fail to follow instructions. It was undisputed that the plaintiff, a nursing home operator, was clear in explaining that he wanted his policies renewed as expiring. The agent, due to market availability and the account's poor loss record, was unable to find a facility that would renew his client's policies as expiring. The producer was diligent in his efforts to find replacement coverage, but the best program he could find was one that quintupled the self-insured retention, changed the terms and conditions of the general liability coverage and substantially increased the renewal premium.
The producer, without consulting his client, arranged to implement the revised renewal program and sent his client a bill for the deposit premium and an insurance certificate outlining the coverage to be renewed. The deposit premium made it appear that there was not a substantial increase in the renewal premium, and the preparation of the insurance certificate made it difficult to determine the changes in the retention clause and the terms and conditions of the liability coverage. To complicate matters, coverage was written with a foreign excess and surplus insurance company, resulting in approximately a 5-month delay in the insured receiving the actual insurance contracts.
Anyone familiar with underwriting nursing homes knows that this was a disaster waiting to happen. Nursing home operations are high-hazard risks and the most common type of claims arising from a nursing home operation have a very long tail–usually it is 4 to 6 months after policy inception that the first claims begin to appear. Once this happened, the insured realized the changes in his renewal insurance contracts and litigation followed in short order.
The insurance producer defended himself by claiming that all of these changes were explained to the insured, and the insured claimed he had never received explanations of any kind. This case resulted in a policy limit settlement for the insured based on a corroborating witness and the lack of any documentation in the files of the producer. Equally hurtful, the producer lost a six-figure account by not following his client's explicit instructions. A Different Twist
Here's a different twist on the issue of following instructions. The insured, an operator of a successful retail store, opened the Yellow Pages and found the advertisement and name of an insurance agent specializing in business accounts, referring to himself as an "insurance counselor" and holding the prestigious CIC designation. The prospective client called the agent and after a short discussion they agreed to meet. At the end of a short first meeting, the potential insured told the producer he would like to be "fully covered" and lower the cost of his current insurance program. The agent gathered some coverage information, requested and received copies of the current insurance contracts, then agreed to prepare and present a proposal in a week. This meeting lasted less than 10 minutes. I know we are all busy, but this sales interview belongs in the Guinness Book of Records.
The agent represented a major insurer that allowed the producer to rate and bind a business owner's policy up to a limit of $1 million. This particular contract had all of the bells and whistles and featured replacement cost coverage on building and contents. The producer reviewed his notes, studied the insurance contracts and prepared an insurance proposal featuring higher limits and lower cost, just as the insured requested.
The agent presented the proposal a week later. The prospective client was thrilled. The producer had a new client, an agreement was reached, a deposit was taken and the retailer received confirmation of coverage. Total time of both meetings was less than 30 minutes.
But once again, the insurance version of Murphy's Law rears its ugly head. Riots and civil commotion broke out in the retailer's city and his store was destroyed completely. The adjusters and accountants visited, offered a policy limit settlement and all was well except for one small matter: The building was 60 percent underinsured and the contents were about 40 percent underinsured. Everybody happy? Not quite.
The client sued the agent because he asked for full coverage, which he did not have. The defense countered that the agent followed instructions by providing more coverage at a lower cost than the retailer's previous insurance coverage. Furthermore, the client was fully aware of the insurance limits as proven by his signature on the application for insurance.
Discovery produced the underwriting manual provided by the insurance company to the agent. The instructions in the manual specifically directed the agent to fully explain the consequences of replacement cost coverage and to inspect the premises to determine proper replacement cost value on both real and business personal property prior to binding coverage. It was undisputed that neither occurred. The result was a favorable settlement for the retailer.
Statutory regulations usually are not on the minds of insurance producers, but as the axiom states, "Ignorance of the law is no excuse." For example, in many states producers are statutorily required to offer underinsured motorist coverage to their clients. The insured may decline the coverage but must sign a statement acknowledging the declination of coverage. I have been involved in several cases where the required offer of coverage has not been made or not properly made. Everything else being equal, the result quite often is a judgment for the insured.
We live in a litigious society and unfortunately, insurance professionals have the dubious distinction of being near the top of the list of industries involved in legal issues. The million-dollar question is how to stay out of trouble as a professional and make a good living. I think this concept is best expressed in "Winning by the Rules," by Ken Brownlee, CPCU: "The agent or broker should meet personally with clients and must assess the need for insurance, alternative risk financing and loss control. If a broker or agent is not familiar with the insured and the involved risks, he should determine what those needs are. Failure to do this can result in the wrong products being sold and a professional liability claim." That says it all.

Richard Mintzer's firm specializes in litigation support to the insurance industry. He has more than 40 years of industry experience including as CEO of a regional general agency. Contact him at rsm@rmaexperts.com.