The Pitfalls of Reducing Coverage
By: Paul Walters

There are a lot of valid reasons why an agent may request reduced coverage for a client.

However, that doesn’t stop an E&O claim from being made!  After an economic loss, the client’s memory may be different from the agent’s, and he or she just may not remember exactly requesting that reduced coverage. Two stories emerge, leaving a jury to flip a coin.

Let’s first go back to those reasons a client might request lower coverage amounts. A change in exposure may warrant less coverage. Concerns over premium costs may warrant a change in coverage… and in the current economy that can happen much more  than not. A change may be made to a law where certain types of claims to which a client had previously been exposed were no longer legally viable. The imposition of award caps for certain types of personal injury actions by state legislatures may greatly lower a client’s exposure.

The reasons are all valid… however, communication with the client is the key. And good documentation of such conversations is a MUST.

Take, for example a claim by an owner of a large six building apartment complex. Business was slow, and the client approached the insured and asked that two of the buildings be removed from coverage on the Commercial Property policy to save premium. Those buildings were removed from the policy. The policy was subsequently written by another carrier, and only four buildings were listed. In that particular state, there is no duty for a client to read and examine a policy! After policy inception, the client, without telling the agency, decided to rent the two vacant buildings out to victims of Hurricane Katrina, at government subsidized rates. A fire occurred, and the two buildings were destroyed. While the agent’s file contained a copy of the request to the previous carrier to remove the buildings, there was nothing in the agent’s file documenting the discussions with the client.  The client stated he did not want the buildings removed. Nothing was sent to the client by the agency memorializing the request to remove the buildings. The damage to the two buildings was approximately $1,000,000. Faced with a word vs. word scenario with no documentation to back up the agent, the case was eventually settled for $500,000.

In another example, a restaurant asked its agent to reduce the contents coverage mid-term from $275,000 to $150,000. The carrier lowered the limits as requested and issued a refund which the client cashed. The policy renewed. And yes, a claim came.  A large one:  Following a total loss to the building, the carrier paid the $150,000 limit for contents. The client claimed he did not read the new policy, and said he thought the refund check was due to a car being removed from a personal auto policy. He claimed he never asked for a reduction in coverage. Again, there was no correspondence from the agency to the client documenting the request for a reduction in coverage. Following a trial in the matter, the jury chose to believe the client, and awarded $125,000 plus interest and attorney fees.
During hard economic times, clients will look for ways to save premium. Agents will be looking to hold on to current clients by trying to keep premiums down. Carriers will push agents to market their products in the best economic light to avoid competition. All of this activity will occur. Regardless of the circumstances, agencies will be vulnerable when there is no clear documentation reflecting a client has been told of the reduction, and is well aware of the risks involved in the event of a loss.