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 [email protected].