Insurance agents—be careful about advocating for your clients when the insurance company has denied their claim. Insureds—understand that your insurance agents may be more hesitant to "go to the wall" for you on a claim than in the past for fear that you may end up suing them.
Most agents tell their insureds that one of the prime benefits they provide for their clients is that they will advocate for them with the insurance company when there is a claim. So, I was surprised recently to hear advice from one of the nation's leading providers of insurance agents' errors and omissions (E&O) coverage that agents should be very careful about advocating for a client when there is a claim denial. Their bottom line was that agents need to take due precautions about when and how they advocate for their clients so they do not end up on the wrong end of a lawsuit themselves. As a result of that shift, I believe insureds may need to take more responsibility to advocate for themselves.
The Dangers of Agents Trying to Be Coverage Attorneys
Recently, a group of highly experienced agent E&O defense attorneys were asked what practices were most likely to result in an E&O claim against the agent. One of their top picks was, "Advocating in writing on behalf of the customer once a claim has been submitted and denied by the insurer."
Why is that such a problem? Isn't that just what good agents do for their clients? One defense attorney explained to me that if an agent writes a letter insisting that a claim should be paid and then the insurer successfully upholds its denial in court, the agent may have just demonstrated that he did not understand the policy he sold. The attorney for the insured can then use the agent's letter as "Exhibit A" to prove that the agent misled the insured about the coverage he was buying.
Here is an example that shows how that scenario might play out in real life.
A friend of Ben's had recently opened one of the increasingly popular indoor trampoline parks. After an extensive marketing effort, Ben was able to place the coverage with a leading excess and surplus lines insurer. Among several other exclusions, the policy contained one that deleted coverage for participants in organized teams. Not long after the policy was written, a 17-year-old boy suffered a paralyzing neck injury while playing trampoline dodge ball. It came to light that several churches in the area had organized a trampoline dodge ball league, and the boy was playing on one of them when he was injured. The insurer denied coverage based on the exclusion.
Ben wrote a strongly worded letter to the insurer insisting that the claim should be covered since the "league" was not incorporated and was really just a bunch of church kids having a good time. The court found for the insurance company, reasoning that the policy unambiguously excluded participants in organized teams, whether their organizations were incorporated or not. The insured then sued Ben's agency, alleging that Ben had misled him about the coverage provided, using Ben's letter as evidence.
As with many E&O cases, whether a client would be likely to win such a suit would be highly dependent on the state law that applied and the facts of the case, but a letter like Ben's would rarely be helpful to an agent's defense. A highly respected defense attorney told me, "I have been litigating coverage cases for decades, and I still cannot tell what a particular court will rule in a particular case. How can agents be so sure? During a claim, agents should provide information, facilitation, and communication, not try to make a coverage determination. And, if agents insist on doing so, they certainly should not do it in writing."
If You Can't Stand the Heat, Stay Out of the Kitchen
Agents should understand that anything they do that encourages an insured to sue its insurance company may increase the chances that the agent will be sued, too. A policyholder attorney explained it to me this way:
Let's say that the insurance company is based in New York, but my policyholder client is in Georgia. That situation is referred to as diversity of citizenship, since the two parties are based in two different states. If the amount of the claim is also over $75,000, those two factors usually make the case eligible to be heard in federal court. Attorneys know that federal judges are generally less likely to send a case to a jury than state judges. So the insurance company would usually try to have the case tried in federal court, since they often don't want to face a jury, which is commonly pro-policyholder. But because I do want to try the case in front of a jury, I want to keep the case in state court. If the agency is also located in Georgia, and I have a legitimate basis to bring the agency into the suit along with the insurance company, I have a better chance of keeping it in a Georgia state court. So, if I can reasonably bring the agent into the suit in that situation, I am going to.
There is another danger to agents in raising their client's dissatisfaction with an insurance company's claim denial. In the course of the litigation against the insurance company, agent errors that were not discovered previously may come to light. For example, an agent believed that the insurance company was allocating too great a portion of the home owners' damages to flood and not enough to wind in a hurricane claim. That resulted in the insureds hitting their maximum flood limit of $250,000 on the dwelling. The agent made her case loudly, and the client sued the wind insurer. During the litigation, the clients learned that it would have been possible for them to have purchased excess flood insurance, a possibility they were unaware of and that the agent had never mentioned. As a result, the insureds brought a suit against the disbelieving agent for not advising them of the existence of excess flood coverage.
There are scenarios in which it is both generally safe and helpful for agents to advocate for their clients. However, once a final denial has been issued, agents need to be careful about turning up the heat on the insurance company because the goose they cook may be their own.
Fighting the Good Fight
The above exceptions do not negate the rule that agents can provide their clients with much needed service and advocacy at claim time.
Reporting the Claim
In the 2013 Property Claims Satisfaction Study published by J.D. Power and Associates, they reported that satisfaction among home insurance claimants who filed through agents was 50 points higher than it was for those who filed claims directly with the insurance company. Jeremy Bowler, senior director of the insurance practice at J.D. Power and Associates, commented, "Especially during times of hardship when someone's house has been destroyed or their valuable possessions have been lost, it's difficult for a call center representative to replicate the personal relationship customers get with an agent."
Insureds that start the claim process with a clear understanding of what lies ahead and a sense that their agent will help them through are less likely to end up in litigation about their claim. Even if an agent talks the client through the process and then directs the client to a call center, the agent's contribution may be pivotal.
Correcting the Facts
If the insurer's claim denial is based on its mistaken understanding of the facts of the case, the agency can correct the record.
Keeping the Company Focused
At all stages of the claim process, agents can work to ensure that their clients are getting the attention they deserve. One agency manager commented, "Advocating for claims can be very good and very healthy. It normally takes the form of a call to the insurer saying, 'Hey, you already said this is covered. Now hurry up and pay the people.' I think insureds appreciate this, and it is very much inside our role as a good agent." I agree.
Citing the Experts
Sometimes, the insurance company just gets it wrong. If the insurer is clearly misinterpreting the policy, citing authoritative reference works, such as those published by IRMI, can sometimes help them see the light. Different state and national agents' associations also offer "ask the expert" services, which may help an agent convince a mistaken claims adjuster. But timing is key. The director of one such agents' expert service says, "We have had a very successful experience in helping agents get claims paid that should be covered. The key is to get the insurer to reverse its initial denial before the attorneys get involved."
So, it is generally low risk for agents to advocate for clients on a claim before the attorneys get involved, humbly citing objective experts. (Something like, "I am not an attorney, but the IRMI Risk Report on this subject states....") It is much more perilous for agents to advocate for their clients after the attorneys get involved, whether citing outside experts or not.
If the advice about how and when agents can safely advocate for clients does not seem clear-cut, that is because it isn't. These are litigious situations, in which the rules are seldom black and white. But the following may clarify the recommendations of defense counsel:
Lower Risk to Agent—Advocating:
Higher Risk to Agent—Advocating:
Before a final claim denial—attorneys not involved
After a final claim denial—attorneys involved
Quoting the opinions of industry experts
Relying on the agent's own opinions
Observations from the Agent's Point of View
The recommendation that agents should be careful about advocating for clients in a claim may run counter to what many agents believe is their responsibility. We know that those we depend to protect us—police, firefighters, soldiers—often put themselves in harm's way for our sake. At times, agents advocating for their policyholders may see themselves in a similar role. Personally, that is the kind of attitude I want my agent to have. But just as firefighters should not rush into a burning building without adequate preparation and an understanding of the risks they face, agents should not rush into a problem claim without understanding the possible consequences to themselves. What nobody wants is a disillusioned Don Quixote who lies bleeding on the floor and says, "If I would have known what this was going to cost me, I would never have joined the fight."
Observations from the Insured's Point of View
Insureds who read this article may be surprised to see how their interests and their agents' interests may sometimes differ at claim time. What does that mean to insureds? I believe it means that the insureds may want to have a conversation with an experienced policyholder attorney earlier than they otherwise would. If the claim may touch the agent as well, then that attorney should also be familiar with agent E&O claims. In my experience, policyholders are frequently represented by attorneys with little or no insurance coverage or agent E&O expertise. The attorneys are often chosen just because the insured happened to have a relationship with them at the time of the claim. They are not likely to represent the insured well and may bring unwarranted and alienating actions against both the insurance company and the agent. Even if the attorney is charging on a contingency basis, the enormous waste of time, energy, and opportunity makes it well worth it for the insured to find counsel who knows the ropes.
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