A term life insurance policy was written on a healthy, young male who, several years after purchasing the initial policy, wanted to increase the death benefit from $250,000 to $500,000. The window of time granted by the carrier to increase the death benefit had passed. In accordance with the company underwriting guidelines, the requested limits increase would mean a new policy with re-underwriting and a new two-year contestability period.
Shortly after increasing the death benefit on the policy, the policyholder committed suicide. In accordance with the contestability period, the insurance carrier rescinded the policy and returned all premiums paid.
The wife and beneficiary on the policy alleged that their life agent failed to advise them that a new 2-year contestability period would apply when the new policy with higher limit was written. She further alleged that had they been notified of this, they would have kept the original $250,000 policy in force. Damages were set at $250,000.
Although liability on behalf of the agent may have been questionable, this was a sympathetic case involving a young widow with children as the plaintiff. The agent was found liable, and his E&O carrier paid a total of $287,655 ($250,000 in damages plus expenses of $37,655). The agent was responsible for his deductible of $2,500.
How it could have been avoided
When explaining the requirements of the rewrite of the policy, the agent should have had the insured sign and acknowledge the reinstatement of the two-year contestability period. As was found by the court, the agent has a professional duty to inform his client this limitation would be reinstated. Although the agent claims to have verbally reviewed the terms of the new contract with the client, the agent has the burden of proof. Having a signed acknowledgement would have made all the difference.
Author’s note: For several months now we have been posting articles in Life Insurance Selling QuickTips intended to provide tips to life insurance advisors on how to avoid professional liability claims. Following each article we have received comments from the readership sometimes disagreeing with the likelihood of the claim’s outcome based on the facts presented. We want to clarify that these articles are not based on opinion; we are providing facts of actual claims and their outcomes! Cita Insurance Services, a division of Brown & Brown of California, Inc., is an underwriting facility specializing in professional liability. Along with our claims administrator, Pro Plus Claims Services, we have handled thousands of these claims for life and health insurance agents.
Lisa Rush is AVP and Program Leader for Cita Insurance Services (www.broprog.com), which specializes in E&O insurance for insurance agents. Lisa has been in the insurance industry for more than 28 years. Her experience with Professional Liability includes well over a decade of sales, servicing and underwriting programs including insurance agents, accountants, dentists, lawyers, architects and engineers, real estate as well as many miscellaneous professional liability programs. Lisa can be contacted via email at [email protected], or by phone at 800-280-7250 ext. 440.