Agents: Guess the Real E&O Claim

Insurance agents today must understand the reality of being sued. In the past, it was unusual that an agent was subjected to an E&O claim. We are in a new era in which an agent who has not been sued is the exception. It's like termites in Arizona: If you haven't had them, you will. Commercial insurance agents are becoming more susceptible to this disturbing trend.  

Which of the following are real cases brought against a commercial insurance agent?

• An insured suffers an uncovered loss and later sues the agent, stating he had wanted a certain coverage he did not have, claiming he told the agent he wanted that coverage during a meeting that never occurred.
• The employee of a client business is severely injured on the job. The insurance carrier sues the agent, claiming there was insufficient information on the application, causing the carrier to pay a large claim due to an unexpected exposure, even though the carrier was in the second year of coverage.
• A contractor who was not a client, but his client's client, sues an agent for an inappropriate additional insured endorsement, even though the agent had sent his client a copy of the endorsement.
• A client sustains a loss which could have been covered by either the CGL or auto policy, but each had exclusionary wording such that the main exposure of the insured was not covered.
• An agent sold a policy with inadequate limits to cover a loss; another agent who had sold other lines of coverage was sued for not recommending higher limits on that policy, even though he was unaware it existed.

Although one or two situations may appear to be obvious failures on the part of the agent, sadly these are all real. And these cases don't just apply to young, inexperienced agents. Most agents had a decade or more in insurance and many had a professional designation.  Small firms are sued as often as large ones. 

Courts across the country are interpreting the concepts of “duty,” “standard of care” and “fiduciary” in more and more cases, such that the responsibility on the agent is truly onerous.

Unfortunately, this is just a small sampling. Whether or not the agent was found to have upheld the “standard of care” required of him, each case cost thousands of dollars to defend—not just by the E&O carrier, but by the agency. Hours spent searching for and producing required documents, legal conferences and sessions with attorneys, and in depositions and testifying can be very costly, not to mention the disruption to the agent and his business. These cases also take a toll on the agent's emotional well being, whose reputation is potentially at stake.

The agent's E&O is the new “deep pocket” for losses. The latest trend is that of third parties pursuing claims against the agent's E&O. Courts are finding that agents have duties not just to their direct insureds, but to third parties as well.  Even those with claims that may be covered by some other form of insurance are now seeking reimbursement or additional limits from the agent's E&O.

So is the point of all this meant to scare insurance agents? Indeed it is! With the advent of advanced technology, the mechanical processes of writing insurance policies may have become more streamlined, but the duties and responsibilities owed to a client are no less.  Following are top ten suggested “musts” for commercial insurance agents:

1. Understand your clients' business and their potential exposures to loss.
2. Understand the coverages needed to best protect the client.
3. Obtain all pertinent information and forward to the underwriter.
4. Search for insurance policies that will provide the best protection.
5. Present to the client in a format that is understandable.
6. Present various options and different levels of limits.
7. Make recommendations whenever feasible.
8. Have the client review and sign all applications.
9. Make sure the client signs off on recommendations not taken.
10. Retain hard or electronic copies for 10 years.

Document, document, document! It cannot be said enough. Does 10 years seem like too long to retain documents? Many states have requirements of 3, 5, even 7 years. Ten is suggested as complex cases in litigation often extend into the 7- to 10-year time frame. If good documentation can help exonerate an agent, having discarded it because the regulatory requirements did not require it is of no benefit. 

There is no solution to keeping an agent from getting sued. But the more difficult the agents can make it for those that sue to be successful, the less perhaps we will see of these suits.