11 Feb Is Every Agency Mistake an E&O Claim?
Does everyone in your agency know the exact legal standard that the agency and any individuals involved will be held to? Quite possibly, some of the new agency staff may not have been educated on this key issue.
So, let’s use an example situation where the requested coverage was not placed. Is that an E&O claim? Probably not, especially if the client has not had a claim dealing with the requested (but unplaced) coverage. Bottom line, just because the agency made a mistake, it does not mean that an E&O claim will occur. Obviously, the agency should fix the issue as soon as it is identified. In the world of Agents E&O, there is a common analogy that says the planets need to align for a mistake to develop into an E&O claim. Essentially, the agency makes a mistake and the client suffers a loss because of the error. This is the situation that has the potential to become an E&O claim.
Conversely, there is the possibility the client suffers an uninsured (or not fully insured) loss, yet the agency technically did not make a mistake. For example: the client puts an addition on their house that would increase the value of the home, yet they fail to advise you of this exposure change. The home sustains a loss and the settlement is less than what the client believes is correct. The client could bring an action against the agency alleging an error. This falls under the “you don’t have to do anything wrong to be sued” category.
Since you don’t have to do anything wrong to get sued, the agency must be diligent in not admitting any degree of liability. Even if the agency technically did make a mistake, it is still critical that the agency not make an admission of guilt. If the agency were to do so, there are potentially some very serious implications as E&O policies typically include language dealing with admission of liability.
The premise of an E&O policy is one of legal liability. Just because the agency made a mistake and the client suffers a loss, it does not automatically make the agency legally liable. There are essentially two main theories of what constitutes an agent’s duty.
Basically, the main theory is that the agent is an order taker, and that they are responsible for providing the coverage the client requested. For this reason, producers need to listen to what the client is requesting. It is vital that if the agent cannot get the coverage the client requested, the agent must advise the client. Failure to do so has been a key element in the client’s defense should an uninsured loss occur, and the client alleges that they requested the coverage necessary that would have covered the loss.
There is also the concept of special relationships, which probably applies for some E&O Plus agencies. If a special relationship can be proven (it is alleged by the plaintiff attorney on most E&O claims), the agent may possibly be under a duty to take some sort of affirmative action, rather than just follow the instructions of the client. There is no magical formula to determine a special relationship, but it could involve issues such as how long you have insured the client and how much of their insurance program you insure. It could also possibly apply if additional compensation is involved.
As agents have legal liability standards, actually so do clients. One of the more common is the duty to read standard – and while it is rarely a slam dunk to resolve an E&O matter, it can potentially help in the agents’ defense. Client ignorance / failure to read is not a defense.
Having a basic understanding of the Agents E&O world can help you handle various situations such as these.