Independent insurance agents—chances are the courts in your state will say that you have a greater responsibility to give insurance advice to some of your policyholders than to others. Who are those policyholders, and what services should they be receiving from your agency?
First, let me address a common assumption that I believe is usually incorrect. You may believe that you always have the duty to advise your clients about the coverages and limits that they should carry. While that may be an excellent business practice, my understanding is that in nearly all of the states, in an "ordinary" agent-client relationship, you do not have that duty. Under ordinary circumstances in most states, your responsibility is to use the degree of skill, care, and diligence that a reasonable, similarly situated agent would use to procure the coverage your customer has requested. If you cannot obtain that coverage, you have the duty to inform the customer of that promptly. You also have a duty not to mislead or misinform your customers about their coverage.
Every state makes agents responsible to meet at least the above standard. In most states—all but Montana, Rhode Island, Utah, and West Virginia—agents are held to a higher standard in some circumstances. If the court finds that there was a "special relationship" between the agent and the insured, the agent may also be responsible to advise the client about additional coverages, higher limits, or both.
Some states, such as Arizona and New Jersey, hold that an insurance agent is a professional. Those states make it very easy to establish that the agent's relationship with the client requires the agent to advise the client on coverages and limits. Others, such as the courts in Georgia and New York, have rarely found that the facts supported the policyholder's claim of a special relationship. Most states are somewhere in the middle.
Whether it is easy or difficult for a policyholder's attorney to establish an agent/insured special relationship in your state, the key point is that, in all but four states, agents have a greater responsibility to special-relationship clients than to others. So it is important for agents to try to determine who those clients are.
What factors are used to determine if there is a special relationship? There is no uniform list, but the courts generally look for evidence that the insured relied on the agent to be an adviser, not just a salesperson. Courts seek to determine if the relationship goes beyond what would be standard in a sales transaction between an agent and an insured.
States where it is comparatively easy to establish a special relationship generally have more factors they are willing to consider than states where it is harder, but specific questions that are often raised are:
Did the agent represent that he or she was an expert, and did the insured rely on that claim of expertise? The courts have generally reasoned that when an agent invites the insured to rely on the agent as an expert, the agent should be held responsible to live up to this claim.
Did the agent give inaccurate insurance advice to the insured, which the insured relied upon to its detriment? There is probably no quicker way for an agent to establish a special relationship with an insured than to tell the insured that it is covered when it is not.
Did the agent volunteer advice to the insured? Did the insured specifically ask the agent for advice, which the agent gave? Did the agent promise an ongoing review of the insured's needs on the agent's website and in his or her marketing materials? A court might look at those situations as evidence that the agent's dealings with the insured had moved beyond a mere buy/sell relationship.
Was the agent actually involved in making insurance decisions for the insured? It may be a factor if the insured told the agent something like, "I do not understand any of this insurance. I trust you. Just tell me what I should have."
Did the agent collect a fee in addition to the commission for providing advice to the insured? It may be challenging for an agent to maintain that he or she had only an ordinary responsibility toward the insured when the agent charged a fee for what he or she claimed were extraordinary services.
Was there a long-term rapport between the agent and insured, which would cause a reasonable person to believe the insured was relying on the agent for guidance? If an agent has written all of the insurance for his best friend for 20 years, is the godfather of his friend's children, and plays golf with him every week, it may be difficult for that agent to maintain that he had no responsibility to review the adequacy of his friend's coverage.
Identify Your Special-Relationship Clients
Since most courts are likely to hold your agency to a higher standard with special-relationship clients, it makes sense to try to identify who those clients are and to treat them accordingly. You can go through your renewal list and ask questions like this.
Have we given them advice on coverage and limits in the past?
Does our website and advertising promise to advise them on their insurance needs?
How long have they been our client?
Do we write all of their insurance coverages?
Do they trust us so much that we play a key role in their decision-making?
Do we charge a fee for our services in addition to the commission we earn?
Do we have other connections with them that may increase their reliance on us?
Do we claim to be an expert in their type of risk?
You will probably be well served to devote extra time and resources to the clients who score high on those questions. Make it a priority to survey their risks and recommend the coverages and limits that they should consider.
A sometimes surprising fact to agents is that the courts generally do not have a lower standard for personal lines and small commercial accounts. There is also no exception for accounts that are not profitable. If a jury finds that your agency had a special relationship with an insured, you may be found to be negligent for not providing them with the proper advice, even if it was a small account on which you lost money every year.
Loss Control Suggestions
With all of this in mind, here are a few loss control suggestions to consider.
Do Take Time To Identify Your Likely Special-Relationship Clients
Most agencies devote extra resources to insureds that pay big premiums or that cause a big commotion. Consider including a third type of client to get extra attention—those a jury will likely find have a special relationship with your agency.
Do Not Take Your Most Loyal Clients for Granted
Agents often spend their time pursuing new accounts and trying to save their existing accounts that are at risk. Their most loyal clients sometimes do not get the attention they deserve. But those are the clients that a jury is most likely to find had a special relationship. Ignoring them is dangerous.
Eliminate Exaggerated Claims
I frequently see policyholder attorneys quote directly from an agency's website when filing their lawsuit against an agent. Those websites make statements such as, "Our qualified agents analyze your insurance needs and then recommend the coverages that are best for you at a price you can afford." And, "We continually monitor your situation to make sure that your insurance coverages stay up to date as your circumstances change."
In reality, few insurance agencies have the resources to consistently fulfill those promises to all of their policyholders. More and more, insureds review an agency's website before they decide to do business with that agency. After a claim, they can tell a jury that one of the reasons they chose your agency was because of the promises you made on your website. The pledges you made there may be the deciding factor for a jury that would otherwise have concluded that no special relationship existed.
Remember, anything on your website or in other marketing materials may be used against you in a court of law. Realizing that, wiser agencies eliminate promises that they cannot consistently fulfill for all of their insureds.
Discover, Offer, and Document
If a suit is filed against you, the policyholder's attorneys are likely to attempt first to establish that there was a special relationship. They will then seek to show that you had responsibilities to your client that you did not fulfill.
Discover. You will want to be able to show that you sought to identify your client's exposures. Did you send out an annual exposure questionnaire or meet with them regularly to review their changing needs? Using standardized risk questionnaires, like those published by IRMI, can be invaluable in this process. Every step you take is likely to weigh in your favor. One policyholder attorney told me, "I look for low hanging fruit. If it is obvious that an agent has made an honest effort, I usually just move on."
Offer. Don't grow weary of offering your insureds the extra coverages and higher limits they will want when they have a claim. The best errors and omissions (E&O) loss control that exists is to sell your clients the protection they need. Covered clients don't (usually) sue their agents.
Document. If your client does not buy the coverage you offer, and you don't document the offer and rejection, you are likely to be caught in a "he said/she said" dispute before a jury. One policyholder attorney told me, "I am glad to take he said/she said cases. I have at least a 50/50 chance." So document everything, and remember that you are not preparing your file for the underwriter—you are preparing it for the jury.
Serve or Separate
Your special-relationship review may reveal that you have many small clients that are already marginally profitable but that scored high on your special-relationship test. It can be difficult and painful to tell clients that you can no longer serve them. But if you cannot find a way to profitably provide the service that a jury will expect of you, that is probably the smartest E&O loss control strategy. Helping them find a new agency home may soften the transition.
In most states, the law holds that agents have a greater duty to advise some of their clients than others. A greater duty is generally owed to the ones that a jury will find meet the special-relationship criteria in that state. Agents who want to avoid E&O claims will seek to identify those insureds in advance so they can take extra measures to provide them with the services a jury will expect. They will also eliminate exaggerated claims on their website and in other marketing materials, which could be used to establish a special relationship where it otherwise might not be found. They will seek to discover their special-relationship clients' risks, consistently offer additional coverages to those clients, and document when the client rejects their offer. They will either find a way to serve their special-relationship clients profitably or help them find a more suitable agency home.
Because the duties addressed in this article are generally the same whether an independent agent is described as an agent, broker, or producer, the term "agent" is used throughout. It is acknowledged that there are situations where the duties of agents and brokers may differ depending on the particular state, their contract with the insurer, and other factors. However, those distinctions are beyond the scope of this article. This article seeks to provide E&O loss control advice to agents based on a general overview of the duties of insurance agents as established by state laws. It does not purport to address the specifics and exceptions in any particular state's laws or due to any particular situation and is not intended as legal advice.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.