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.
"Special Relationship"
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:
- 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.
Summary
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.