THIS ARTICLE APPEARED IN THE OCTOBER 08 ISSUE OF AGENT & BROKER
By Richard Mintzer CLU
I am an insurance industry "brat." I grew up in the industry, occasionally working in my father's agency on school vacations or when I needed extra spending money. After graduating college, I thought it would be a great idea to pursue the American Dream and go to work for my father. However, my father refused to hire me, saying insurance was a poor career choice for a young person to pursue. (He actually used stronger language than that.)
Fortunately, I did not take my father's advice and went into the business about 10 years after my father's refusal to hire me. My father was wrong; the insurance industry has been incredibly kind to me, my family and my former employees.
However, our profession is much more complex and technical than when I entered the business. Although we all like to be thought of as professionals, the privilege of being considered a "professional" carries considerable responsibility. As we continue to enhance our professionalism, our ethical and professional responsibilities become more complex and demanding. This article will outline some of the professional responsibility issues that members of our industry face every day.
The paramount duties of an insurance producer
An insurance producer's highest duty is to strictly follow the insurance instructions of the client. If you don't, you can be liable to the customer for any damages resulting from the failure to follow instructions.
The insurance producer also has a duty to procure insurance as instructed by their client. There is a developing trend in determining the legal responsibility of insurance producers who, despite an attempt, are not able to obtain the requested amount or type of coverage. Many insurance professionals, if asked what their duty is to their clients in the event they were not able to procure requested coverage would reply that they have an obligation to notify the client in a timely manner to give them the opportunity to seek coverage elsewhere.
But recent personal experience has convinced me that any insurance professional who gave that answer would be at least 50 percent wrong. Although timely notice is important, the other half of the correct answer is that the agent's standard of care must be responsive to the customer's expectations. According to an AICPCU publication, "an insurance producer owes the principal (client) the duty to exercise reasonable care and diligence in locating and assisting the customer in obtaining available insurance.". The key words in this statement are "reasonable care and diligence." The standard verbalized by this statement is considerably broader than the commonly held belief of timely notice ending the producer's responsibility. Recent cases on which I have consulted illustrate the trend of courts to impose a strong emphasis on the producer's reasonable care and diligence.
Does this sound familiar?
Consider the facts of a case in which I am currently involved. A high-asset individual approached his agent requesting high limits of personal and automobile liability. The producer surveyed his markets and found he could obtain high limits of personal liability. However, the maximum limit of automobile liability he could find was $500,000 per occurrence.
The producer advised his client in a timely manner that he could not obtain higher automobile liability limits because of the exceptionally poor driving record of both the applicant and his wife. Relying on the agent's advice, the insured accepted a proposal that included the lower limit of automobile liability coverage. The insurance version of "Murphy's Law" occurs as result of an at-fault accident a few months after policy inception. The litigation was settled for $750,000. Fortunately or unfortunately, we have high-asset individuals as defendants in this litigation and the insured is out of pocket $250,000.
The insured instituted legal proceedings, claiming that the producer did not meet his professional responsibilities. The insured's attorney gave our organization the task to determine if a higher limit of automobile liability coverage was available before the loss at a reasonable cost in excess of $500,000. We conducted a market survey of available liability limits for persons with driving records similar to the plaintiffs. In less than two hours we discovered that higher liability limits were available at a reasonable cost. We then established that the producer had access to the insurance company that was willing to provide higher limits of liability.
In the ordinary course of pretrial events, attorneys for the defendant insurance producer filed for summary judgment, contending "that a broker's duty is satisfied if either the coverage is obtained or the client is notified." To paraphrase the court's response, "it is undisputed that timely notice was given to plaintiff, but the diligence issues and the reasonable care responsibilities of defendant are very much in dispute." The summary judgment motion was denied. Are there any insurance pros out there who are as surprised as I was at the court's decision?
Our team is also involved in several cases related to Hurricanes Katrina and Ivan. A main issue in all these cases is the question of whether excess flood coverage was available to the insured before the storm (it was) and if the producers were diligent in their efforts to obtain the requested coverage (they were not). In all cases except one, the insured received timely notice of the unavailability of the requested flood coverage. Litigation continues in two cases while the others have resulted in favorable plaintiff settlements.
No harm, no foul
One of the key factors attorneys consider when deciding whether to pursue a legal remedy on behalf of their clients is the availability of the desired insurance coverage before the loss. I call this concept "no harm, no foul." The theory is that even if the producer did not use his or her best efforts to obtain the desired coverage, they did no wrong if coverage was not available. Application of this rule seems simple, but it actually creates a substantial burden on insurance people. Every experienced insurance professional has had the experience of being unable to find a market for a particular risk, only to discover that another producer found the coverage exactly as desired. That is why when you agree to procure coverage on behalf of your client and are unable to do so, in addition to timely notice you must document your efforts -- so there can be no question that you used reasonable care and were diligent in your efforts to place the insurance protection as instructed.
There is an old insurance axiom which goes something like this: If you give 500 insurance agents the same problem and ask for a solution, you will get 500 different responses -- and each agent will be supremely confident that he or she has the correct answer. There are probably at least 500 solutions to creating a meaningful system to document an agency's adherence to reasonable care and diligence. Each agency must find a system that works for them - a paper trail that will stand the test of time.
Documentation must be complete and easily accessible, while recognizing that the agency files are discoverable. Of course, questions will arise as to what constitutes sufficient documentation, the definition of diligence and the standard expected of insurers and/or their producers. What will satisfy a court's understanding of the duty of "reasonable care and diligence"? We don't know yet. Suffice it to say the jury is still out. In the meantime, document everything you have done to comply with your client's instructions and your agreement to procure insurance.
Having been an insurance producer myself, I feel extremely fortunate that our agency was never subjected to E&O litigation. As the managing principal of a general insurance agency employing more than 60 people I would love to take credit for the brilliant management of my agency. When I take into consideration the volume of phone calls, the countless pieces of paper on everybody's desk and the number of transactions in a busy insurance agency the real truth of the matter is that we were very lucky. In today's high pressure and competitive insurance industry it is no longer satisfactory to simply be lucky. Any insurance professional who does not implement systems which make it possible to explain in detail the process for procuring insurance is in peril of being involved in litigation because of a lack of diligence and reasonable care.
Richard Mintzer is managing partner of Richard Mintzer Associates LLC, a Boulder, Colo.-based firm specializing in litigation support to the insurance industry. He has more than 40 years of industry experience, including CEO of a regional general agency. For more information, contact him by e-mail at rsm@rmaexperts.com.
Richard Mintzer Associates LLC
5551 Jewel Creek Court
Boulder, CO 80301
Telephone: 877-461-1656
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