Be careful in admitting liability

by Paul Walters

When an agent commits an error, it would be natural to assume that any resulting damages from that error are the agent’s responsibility. In the case where a customer is harmed because of agent error, the agency would want to ensure the customer is taken care of. While the tendency would be to tell the client the agency is at fault and the claim will be addressed, this approach and admission can impair the ability of your Errors & Omissions carrier to settle the claim at the best possible terms. Plus, it could – depending on what is promised to a customer – jeopardize your E&O coverage.

A duty to read
An Errors and Omissions policy is a liability policy. It is not a first-party coverage. Like all liability policies, the E&O policy provides for payment of a claim when an insured is determined to be liable. A standard condition in an E&O policy mirrors other liability policies regarding obligations assumed by an insured without the carrier’s consent.

It’s one thing to say, “I goofed up.” Yet it is another to say, “I goofed up and will pay you.” Be aware of the distinction. In fact, before uttering the words “I goofed up” to your client, first speak with your E&O claims specialist.

There are many defenses available to agents – even when an agent may believe his or her E&O carrier owes the claim. Most states require an insured to read the policy. If there is a change in coverage on renewal, or a policy simply does not contain the agreed upon coverage grants, an agent may believe he or she is at fault because the change was missed. Depending on how long the policy was in front of the customer, though, the blame might be shared if the customer also missed the change. Many claims are settled on a compromise basis because of a duty to read.

Shades of gray
Carriers could be liable, too. Was the policy different than the quote? Was there a conditional renewal notice that points out a change in coverage? Is there another agent upstream to blame?

Regarding carriers, even when an agent causes a policy to be issued that was not at the agreed upon terms, the legal theories of policy reformation and the agency/principal relationship can force a carrier to pay a loss for which it had earlier disclaimed coverage.

Generally speaking, if an agent has binding authority for a particular risk or amount of coverage, carriers are forced to reform the policy if the agent and the client had earlier agreed upon certain terms of coverage and the policy issued did not contain those terms.

Under laws governing the agency/principal (carrier) relationship, an agent’s representations can bind a carrier, even if the agent did not have binding authority. The question then becomes, “What is the agent liable to the carrier for?” In many instances, if the carrier would have written the risk at the terms agreed upon between an agent and a customer, the agent is only responsible for the difference in premium.

Of course, each case is different. There are shades of gray as to who owes what. Many parties may share in the blame: agents, carriers and insureds. Take, for instance, a client who had a policy with 50 percent co-insurance. The agent switched carriers and asked for a policy with 50 percent co-insurance. The policy was issued with 100 percent co-insurance. This was missed by agent and the customer. A loss occurred, with the co-insurance penalty assessed by the carrier totaling about $1,000,000. A lawsuit ensued.

Communication to the carrier clearly reflected a request for 50 percent co-insurance. It was equally clear the intent of the agent and client was to have 50 percent co-insurance. After several rounds of negotiating, the case was settled for $700,000. The agent’s share was $104,000.

Work with your E&O carrier
An agent’s job can be stressful, and the need to take care of customers who have been wronged is crucial. However, that need must be tempered with the need for your E&O carrier to only pay what is owed. The entire claims process can sometimes appear to be daunting and confusing. Work with your E&O carrier to achieve an amicable resolution for all parties concerned.