An advisor called the other day stating that many of his peers do not even bother to offer the various riders that are available when working on mid-market life sales.
He was talking about long-standing riders (or options, depending on policy design) such as waiver of premium, accidental death and dismemberment, etc. Apparently, his peers don’t want to add too much cost to the policy, thus killing the sale.
A question attorneys are often asked about this is: do people really file lawsuits accusing advisors of not mentioning certain product types and options that are available? For example, when a new type of life product option comes out, is the advisor obligated to discuss it? If not, could the advisor be sued later on for failure to mention/discuss it?
The advisor above summed it up this way: “is legal liability in this area just marketing hype, or is it an important and legitimate factor for me to consider?”
The simple answer, without being flippant, is: advisors can always be sued.
A lawyer once told me that, “if you are in business as an advisor and don’t get sued, you are not really in business.” While I understand his point, I don’t agree. People file lawsuits for all kinds of reasons, and you can’t stop that from happening. But, what an advisor can do is to take steps to minimize liability if that happens.
For example, what does the advisor’s business card say? If it intimates that the agent is the superhero of the life insurance business, who can solve all problems with a single bound, and if the customer later finds himself underinsured or uninsured, then the advisor can expect to be sued and possibly to be held liable for superhero representation, so to speak.
But what if a prospect discusses concerns with the advisor and there is a product available that could address that concern? Here, the failure to advise the client about the product could be negligent. The responsibility of the agent probably rises with the amount of information the customer has given to the advisor.
Advisors may also be held responsible for what a customer can reasonably expect the advisor to know. Insurance agents should know, for example, what the policies they sell provide. These agents should select policies that address the needs of their customers.
While no one can prevent the filing of lawsuits, whether valid or frivolous, the advisor can take common sense steps to lessen the chance of being held liable.
One good business practice that we routinely recommend is for the advisor to put recommendations in writing, especially recommendations that were not accepted.
If possible, have the customer sign off on this written statement when the policy is delivered. One way to do this is to develop a checklist type of form that recites the coverages requested by the client, as well as the ones recommended by the advisor. The form should indicate the amounts of coverage too. When the policy is delivered, the advisor reviews the checklist indicating what was recommended, and what was purchased.
A similar result may be reached by providing an engagement letter to the customer. This is something that lawyers routinely do. The engagement letter sets forth what the advisor is going to do for the customer. It also includes what the advisor is not going to do, so there is no mistake about it, especially if the advisor has already recommended that the customer explore a possible course of action. This letter is usually written after the advisor has met with the prospect.
General counsels tell me that these kinds of steps may lead a plaintiff’s lawyer to drop a claim, or a judge to dismiss one.
A well documented file is usually another method of protecting the advisor–as long as the advisor regularly and routinely maintains the file. Otherwise, the file can help a plaintiff establish as negligence case. In this regard, the advisor and the advisor’s staff should be trained on how to document a file, and what information and decisions are important to include in that documentation.
Keep in mind that there is no silver bullet here. To document a file correctly may require different steps depending on the situation. But the steps described above are a good starting point.
Nor is there one size that fits all. The laws regarding advisor liability vary from state to state. An understanding of those laws would definitely be helpful in mapping a course of action inside an agency to protect against liability. Often your errors and omissions insurer can provide guidance in this area. Sometimes continuing education classes may be helpful.
The bottom line is that the advisor must be aware that possible liability revolves around what the customer requests, what the advisor offers to do, and what the law provides. Taking common sense steps can help shield the advisor from liability, if not from the filing of the lawsuit itself.