Policy Audit Case Study #1

The Scenario

The insured alleged that the agent failed to advise him of the audit provisions of a workers compensation policy. A premium audit, conducted following cancellation of the insured’s policy due to excessive claims activity, resulted in a substantial additional premium. The insured sued the agent.

The Issues

  • Failure to advise insured of policy provision concerning audit
  • Failure to properly advise the insured of record keeping requirements

The Outcome

The E&O carrier defended the agent and was able to settle the case for the amount of the insured’s retention.
$5,000 paid by the agent to the insured
$17,166.90 in defense costs

Prevention Tips

This is a rather common type of error.

  • Advise all customers in writing when a policy is subject to audit
  • Advise policyholders of the method to be used by the carrier to determine premiums
  • If there are special record keeping techniques that should be used by the insured, assist the client in setting up a procedure to follow the carrier’s guidelines (e.g. employees versus independent contractors, employee job descriptions, separation of payroll, etc.)

Policy Audit Case Study #2

The Scenario

The insurance company wrote workers compensation and auto coverage on a retrospective rating basis. The final premium was adjusted based upon losses paid on behalf of the insured and resulted in a substantial additional premium. The insurance company notified the agent that the premium was being disputed by the insured. The carrier sued the agent after settling a claim brought by the insured against them for overcharging. The agent was accused of negligence in determining the amount that might be payable by the insured under the policy.

The Issues

  • Failure to disclose to the insured the exact nature of how final policy premiums will be determined.
  • Failure to explain policy provisions to an insured.
  • Negligence is not providing the insured with sufficient information regarding the calculation of adjusted premiums.

The Outcome

The insurance company paid the insured $775,000 to settle the claim of overcharging premiums. The company then filed suit against the agent for negligence in not explaining the policy provisions to his client. It was determined that the agent was partially at fault for $476,000 of the $775,000 paid by the carrier.
$236,250.00 paid to the insurer in excess of the agency’s retention
$107,675.26 in defense costs

Prevention Tips

The agent was determined to be partially responsible to the carrier because a failure to adequately explain policy provisions to the insured resulted in the carrier being sued and found responsible.

  • Advise the insured in writing of any premium adjustment that will occur after the policy expires and the exact method that will be used to calculate final premiums.
  • If making a determination of final premiums, agents should obtain the approval and sign-off of underwriters before presenting to the insured.