Stay Vigilant To Ward Off E&O Claims

Cautionary tale has happy ending for one agent, but offers lessons for others

By David Price

and Frank A. Misuraca

In a single hectic day, insurance agents may field dozens of phone calls–mostly from clients. Unfortunately, as we attempt to keep everyone happy, we sometimes forget to document what was discussed and what might have been agreed to in a given conversation.

As is so often the case, it is the one conversation that we do not remember and document that can lead to so many problems.

That failure to document is exactly what happened to an agent recently, which led to a day in court defending against the contractual and professional malpractice claims of an unhappy client.

The following cautionary tale is a reminder about the importance of taking a preventive stance of our own against any possible commission of professional errors and omissions.

IN THE BEGINNING

An agent's client was in the enterprise of buying lower-cost homes for renovation and resell. The first time the client called for insurance on a property, he came into the agent's office, as instructed, to fill out the necessary insurance application and pay the required premium.

Just above the client's signature, the application expressly highlights as important information: “Coverage cannot become effective any earlier than 12:01 a.m. the day after our receipt of a properly completed application and appropriate premium.” By way of emphasis, clearly the agent in this situation did not have binding authority with this particular carrier for the coverage discussed.

The client purchased the insurance without incident.

A few months later, the same client called the agent to find out how much it would cost for coverage on another “fixer-upper” he was purchasing. Here, things get murky because neither party has a precise recollection of this conversation, and neither party adequately documented the conversation.

For the agent's part, it was just one of many quotes given out in the course of day. Some lead to binding of coverage, others did not.

Sound familiar? Hopefully, what happened next does not.

Several weeks later, the client walked into the agent's office and asked to fill out “that application” for coverage on the second home. The agent's assistant helped the client complete the same application form with its stipulations as to when coverage becomes effective–just as he had on the first home. But once the client signed the application on the second home, he informed the agent that this house burned down the previous day.

The agent of course informed the client that the fire completely changed the insurance equation.

The agent then heard those dreaded words, “You will be hearing from my lawyers.” And he did, with charges that coverage was in-force–when it wasn't–and that the agent was guilty of professional malpractice.

NOT SO FAST

This lawsuit arose out of the plaintiff's misguided attempt to play the system and create an insurance obligation where none existed. Many interesting issues came out during depositions and the hearing before the judge. They included:

o The client's assertion that, from the moment the telephone conversation with the agent ended, he “assumed” he had coverage once given a quote. He asserted this even though he admitted he considered himself free to seek out other quotes.

o No recollection by either party that insurance existed once a quote was given or as a conclusion to the conversation. No words such as, “Now I have insurance, right?” were ever recollected as spoken by the client, let alone any discussion of facts such as valuation, what was to be covered, length of terms, etc.

o The essential terms that must be stated in any insurance contract all were lacking. These are: (1) subject matter, (2) the risk, (3) the premium, (4) duration of the risk, and (5) the amount of the insurance. The client argued, however, that because of the pre-existing relationship, these terms were known to the agent.

THE REALITY

A party relying on a contract has the burden of proving that the contract came into existence. In this case, the judge was persuaded that no insurance coverage or contract existed because, as indicated earlier, the client knew he could not obtain insurance on this home without first signing an application and paying a premium.

Further, since the client admitted that he was free to seek other insurance quotes, there was no intention on his part to be bound to the insurance contract.

Finally, the judge believed that because the client did not take any active steps, such as filling out an application or paying a premium, then there was no “meeting of the minds” to establish a valid agreement.

CONSIDER THIS

The agent's legal defense succeeded, but who wants to be put through the time, expense or distress of proving one's case?

We may understand that no policy ever exists without agreement as to a quote, a formal application, payment of premium and acceptance of application by the insurance company. However, do you clearly explain these facts to your clients every time you issue a quote?

Clearly, agents must know their products and their binding authority, if any. All insurance policies are not created equally. Some do have provisions for “automatic” startup or coverage for additional acquisitions.

Also, be cautious if you don't have binding authority, as you could give the impression that you do. It may be as simple as reminding a client, “This is our quote, but I don't have binding authority. Once your application is submitted, the effective date will be determined by the carrier.”

Next, know your client and his or her exposures. Speak precisely and knowledgeably–and document, document, document.

The first and most important defense against a claim of failure to act in a professional manner is proper documentation. Your internal system of documentation should note what is covered, the coverage limits and what was advised, including when clients refuse to take on a recommended coverage or coverage limit.

For phone conversations, keep record by writing a short, accurate note of what was discussed. Regarding e-mail correspondence, keep them professional and meticulously filed and archived, as well as easily retrievable.

Timing is also important. Make sure risks are bound at the time that coverage should be in effect. The order to bind should be in writing. Your records, whether we are speaking of written or electronic filing systems, must clearly establish a “chain of facts.” They become the final arbitrator should a dispute arise.

In some states, your actions as an insurance consultant or advisor may trigger a legal duty to advise. The laws vary with each state as to this duty to advise. It would be wise to review with legal counsel how your individual insurance practice, your E&O policy, and the laws of your state may invoke this legal principle.

Finally, all of us must admit, if only to ourselves, that we can have conversations during the course of a day, especially when we are busy, tired or otherwise distracted, with the potential for misinterpretation hovering in the air. Yes, the client in the above scenario may have seemed unreasonable, but it is precisely that kind of interaction that can come back to haunt agents.

This is why a forthright, attentive, well-documented communications habit is the best path to avoiding claims of unprofessional conduct. Learn from the experiences of other agents, or you may be forced to relive those same unpleasant experiences.

David J. Price serves as executive vice president, chief underwriting officer with Burns & Wilcox, an independently owned managing general insurance agent in Farmington Hills, Mich. He can be reached at [email protected]. Frank A. Misuraca is an associate with the Farmington Hills, Michigan-based law firm Kaufman, Payton & Chapa, specializing professional malpractice and litigation. He can be reached at [email protected].