The Power of a Signed App

By Paul Walters, E&O Claims Manager

Claims and lawsuits arising from the alleged failure of agents to provide accurate information concerning the nature of a risk are becoming more common. Agents can become targets in two ways. The first threat is from carriers that paid a claim associated with a risk they didn't intend to insure. The second peril stems from clients whose policies (and, therefore, coverage) are rescinded after the carriers discover inaccurate information about the clients' property or operations.

Some of these claims can be very costly to defend and/or settle, as is evidenced by the following examples. As you'll see, the common thread is a disagreement between the client and the agency as to the nature of the information provided to a carrier. These disputes, which all resulted in lawsuits, hinged on whose testimony was more believable in a court of law.

Example #1 — A large manufacturer with an asbestos exposure, carrying $100 million in coverage (a primary layer of $1 million and multiple excess layers of varying size), endured claims in the 1980's from plaintiffs who were exposed to asbestos. The primary coverage was exhausted quickly, so the excess layers kicked in. While the claims were being investigated, several carriers in the excess layers balked on payment, claiming that when they wrote the risk, they were not informed of the asbestos exposure. The client retaliated by filing a suit against the excess carriers, which were eventually settled. Unfortunately, several paid only 75 percent of their limits, which left the client faced with a $13 million gap between claims to be paid and available coverage. The agent denied culpability, saying the information he submitted to the carrier was provided by the insured. However, the client sued the agent, and only after protracted and very expensive litigation was the claim against the agent settled—for a considerable sum.

Example #2 — Claiming false information was provided on the policy application, a carrier sued an agent after paying a claim in which a restaurant was destroyed by fire. It turned out that there was more to the insured restaurant than the carrier knew. It was, in fact, a nightclub that employed exotic dancers. Once again, the agent maintained that the information submitted to the carrier was provided by the client. Even though the lawsuit was eventually settled, it was very costly.

Example #3 — An agent secured coverage for a client who rented space in a building that was destroyed by an explosion/fire—caused by the client. During the course of the insured's daily operations, dust from highly flammable material ignited. When the liability carrier investigated the loss and discovered the true nature of the risk, they disclaimed coverage, maintaining they would never have written the risk had the true nature of the client's operations been known. The client then sued the agent. Again, the agent claimed the information provided to the carrier came directly from the insured.

One thing all of these cases lacked was an application, signed by the client. The applications either were submitted with no signature or with the agent's signature on behalf of the client. When applications, signed by the client, are produced as evidence, claims such as these are fairly easy to defend.

While it may be quicker and easier to submit an application to a carrier without the client's signature affixed, don't be surprised if your client's story changes after a loss occurs. When money is at stake, friendships and loyalties often take a back seat. Always obtain the client's signature on an application. This will protect you and the agency from claims by carriers or clients when the nature of a risk is in question.