Coming Up Short: Protecting Your Agency from an E&O Claim for Inadequate Limits
A customer has requested a policy and you have procured a quote. The coverage looks good. The deductible looks good. Most importantly to your customer, the premium looks good. Coverage is bound.
Time goes by, a year or two. Maybe 10. Then there's a loss. A claim is filed and fortunately, there's coverage. But there's a snag: The policy limits don't cover the full loss amount—or what your customer thinks is the full loss amount—and a straightforward claim suddenly becomes an errors & omissions claim, with the spotlight on your agency and the question from your customer ringing in your ears: How am I not fully covered?
Limits—or rather, inadequate limits—are an all-too-common claim in independent insurance agency E&O. With inflation today outstripping even the inflation guards inserted on some policies, these claims are becoming more frequent.
But inflation is not the only reason for these types of claims. Often enough, a cost-conscious customer requests lower limits and is pleased to pay a lower premium ... until a loss occurs and they are faced with the gulf between the estimated loss and the coverage available to them.
In these instances, the customer does not remember that they were happy with these lower limits or appreciate the relationship between higher limits and higher premiums, or even recall that they requested those limits in the first place.
When the rubber meets the road, customers want their insurance claims paid in full and are willing to file a complaint with the Department of Insurance or trigger a lawsuit against their agents if they aren’t satisfied.
What should an agent do? Document. Document. Document.
As with any E&O claim, documentation can be of great assistance to the agency. Assuming, of course, there was no agency error. Sometimes, the policy documents are enough to get an agency over the line, either because a state imposes a duty to read on policyholders or because the sheer weight of such evidence suggests the customer could not reasonably argue they wanted something different. For instance, a customer who purchased a $250,000 limit 10 years ago with incremental increases over time, may find it hard to argue they wanted a $500,000 limit instead.
The problem, however, is many states don't impose a duty to read on policyholders. Customers or their attorneys often find ways to argue around inconvenient facts, like a policy that's been in place for many years, and make the case that the customer requested higher limits over the phone or in person or that the customer requested the same policy as they had previously and it wasn't done. In these cases, the agency can still be successfully defended, but it takes substantially more time and money to do so.
This is where good documentation comes in. Documents that clearly show an insured understands their policy and their limits can expedite the resolution of an E&O claim or prevent one altogether. In the event of a claim, a customer who signed a document stating that they have read their policy and agree with the limits at policy procurement or renewal will have a much more difficult time arguing that their limits were inadequate. Written correspondence, such as an email confirmation, can achieve something similar.
The point of these documents is to unequivocally show that an insured understood and agreed with their policy limits. Also, remember to never recommend a limit amount and always include a disclaimer that "higher limits are available upon request.”
With policy limits, it is truly a matter of taking a little extra time now to save you lots of time—and headaches—in the future.
About the author
Brendan McNeal is an assistant vice president, claims specialist with Swiss Re Corporate Solutions and works out of the office in Kansas City, Missouri. Insurance products underwritten by Swiss Re Corporate Solutions America Insurance Corporation, Kansas City, Missouri, a member of Swiss Re Corporate Solutions
This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article do not necessarily represent the views of the Swiss Re Group ("Swiss Re") and/or its subsidiaries and/or management and/or shareholders.
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