8 ways to avoid E&O claims

Assisting your clients (and their advisors) monitor their life insurance portfolios will reinforce your position as a trusted advisor, increase your professionalism, reduce your exposure to errors and omissions (E&O) claims and is the way to provide the most benefit to your client.  Helping your clients is the best way to help yourself.  Advisors who strive to help are those who will enjoy the most success and will be able to sleep at night. 

Insurance companies require life insurance agents and annuity agents to carry profession liability errors & omissions insurance (E&O) for the simple reason that there is a likelihood that you will need it.  Facing an E&O claim is akin to an IRS in-depth audit and can be substantially worse, so avoiding an E&O claim is well advised. 

Here’s what you as a life insurance advisor can do to lower your E&O risk and best serve your client. Note that these tips are not guaranteed to keep you from facing an E&O claim; they can only reduce your risk.

(1) Is the amount of life insurance coverage the right amount? 

If you have not been keeping up and reviewing your clients needs and your client is dramatically under-insured or over-insured, you could find yourself dealing with some very angry heirs. 

What could make this situation worse: selling the wrong type of life insurance, causing a trade-off of less coverage for higher premiums.  Are you making sure your clients have enough coverage first or are you thinking of cash accumulation first?  Remember, life insurance is insurance first. If you’re not making sure that a risk is fully covered, you are putting yourself at risk.

(2) Can your client find a better rate for term insurance? 

Premiums, policies and underwriting standards are consistently shifting.  With term insurance this can be especially true and relatively easy to determine, you can easily survey the market by having your client complete a simplified health questionnaire using the most common underwriting issues:

• height

• weight

• c. blood pressure

• cholesterol

• family history

• smoking

• travel plans

• past diagnosis of medical condition or disease

• whether any procedures are schedules or have been completed

• list of all medications (with reason taken)

• driving records

• potentially hazardous avocations such as scuba diving, being a private pilot, sky diving, etc.)

3. Are beneficiary designations up-to-date? Is the correct beneficiary named?

Common issues are ex-spouses/life partners, ex-business partners, a deceased beneficiary, etc.; or not having beneficiaries updated to reflect a new spouse/life partner, new child, etc. 

Also to consider is whether the policy owner named a contingent beneficiary: a secondary beneficiary who receives policy proceeds in the event the primary beneficiary predeceases the insured.  If there is no contingent beneficiary and the primary beneficiary is deceased, the proceeds will be payable to the estate of the insured.

The proceeds will also be distributed according to whatever mechanism the owner has put into place for their estate by will, trust or state probate rules. Upshot: The proceeds may go to someone other than the intended beneficiary.

4. Does the insurance company have any financial issues?

Make sure that the company’s current financial strength ratings are acceptable.  If the financial strength ratings are declining, try to find out the reason. It can be minor or a clear warning of potential issues with the insurance company. Financial Strength Ratings are available at no cost from A.M. Best, Fitch, Moody’s and Standard & Poor’s.

5. On permanent, cash value policies, does the policy provide the best value?

This becomes more complex and has to take into account a thorough understanding of the client’s needs, goals and knowledge of all the product components for both the existing policy and a proposed replacement policy.