Being sued in an E&O claim is unfortunate, but that is why you purchase professional liability insurance. You worked hard to build your practice, and adequate E&O insurance is a prudent and imperative way to protect that practice.
Knowing what puts agents most at risk of an E&O claim is a vital way to help ensure you take steps to prevent it from happening to you.
According to the Swiss Re Corporate Solutions Attorney Survey of Agents E&O Litigation, the root causes of claims tend to fall into the same categories over and over. And most, 40 percent, arise from the process of generating new business.
According to the National Ethics Association, the most common reason life and health agents face claims from new business is for allegations of misrepresenting the scope of coverage procured.
“Most fundamentally, claims arise when customers don’t receive the insurance coverage they thought they purchased, either through the agent’s processing error or failure to properly explain policy provisions or deliberate misrepresentation,” said Harry J. Lew, chief content officer at the National Ethics Association. “In other words, any time there’s a gap between the customer’s expectations and the insurance company’s delivery of benefits, you have a potential E&O claim at hand.”
Other reasons, according to the NEA, include:
- Administrative errors that generate financial losses for the client
- Mistakes in premium calculations
- Selling unsuitable products
- Mishandling or miscommunicating policy changes
- Causing adverse tax consequences for a client
- Recommending products or strategies without proper due diligence
Lew said the “new business” stage is especially fraught with E&O risk for a variety of reasons.
“An agent might skimp on thorough fact-finding, thereby failing to notice the prospect has a big uninsured risk,” Lew said. “Maybe he’s a small-business owner, but doesn’t have disability insurance protection, either for his income or business overhead. The agent sells the person life insurance, but the following year, the client develops a serious illness and is forced to go on permanent disability. The obvious question the insured and his spouse ask is why didn’t the agent bring up the need for disability insurance? Based on their discussion, the couple might decide to bring suit against the agent for failing to adequately assess all their relevant insurance risks.”
Another possibility in the sales process is when an agent does recommend a coverage, but the prospect turns it down, Lew said. “Assume the agent doesn’t have the prospect sign a waiver to this effect. Later on the person suffers a loss that the coverage would have paid out on. Again, the person asks, ‘Why didn’t you…?’ If the agent doesn’t document the refusal, it will be a he said/she said scenario and an E&O claim waiting to happen.”
Yet another possibility is what insurers call “failure to explain.” Here, the agent uncovers the correct need, provides the right insurance solution, but doesn’t explain its provisions correctly or at all. “Then when the insured needs to file a claim, he’s surprised there’s no benefit or that it’s smaller than anticipated,” Lew said. “For example, assume a client decides to add a disability rider on his new UL life policy. Problem is, the following year he dies and the wife is surprised to learn that electing the rider ended up reducing her death benefit. She believes that her husband might not have gone for the rider had he known it would hurt her financially if he died. E&O claim in the offing? Perhaps.”
Finally, in the new-business process, underwriting always poses a lot of E&O risk. Unfortunately, many agents fail to explain the importance for prospects to answer ALL questions truthfully. So prospects omit key data or flat-out lie. “The agent doesn’t press the prospect because he wants to make the sale and get paid,” Lew said. “If the underwriter fails to uncover the unreported condition(s), the policy will get issued. Now let’s assume the insured dies the following year. Since the policy is still within the two-year contestability period, the insurer can take another look at the insured’s medical records to see if the person misrepresented their health history. If it discovers a material and substantial omission, it might elect to not pay any benefit whatsoever. Guess who might be filling an E&O claim?”
So-called post-claim underwriting is a special situation, Lew adds. Here, an insurer for financial or other reasons might elect to issue policies to most prospects without significant underwriting review. But when the person or survivor files a claim, they initiate comprehensive underwriting in the hopes of denying the claim. “An agent who isn’t totally above board in the initial underwriting stage with the prospect might suffer blowback in post-underwriting if benefits are denied,” Lew said.
“If we could leave one message with agents on preventing E&O claims, it would be this: Avoid misrepresenting your products at all cost,” he said.
According to one E&O carrier’s claims data, Lew says misrepresentation is the single largest cause of E&O claims.
“How to prevent this? Study all your policy contracts; know what they deliver, what they exclude, all relevant riders, fees, etc. If you don’t know exactly what a policy covers, don’t guess. Tell the prospect you’ll find out and get back to him,” Lew said. “Build extra time into the sales process to educate the prospects about what they’re buying. Don’t withhold or slant product information to encourage a prospect to buy. You might get the sale now, but have an E&O claim later.”