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.”