19 Jan Will Carriers Sue Their Agents?
The answer is yes. Carriers will sue their agents, and actually, this has been a part of the E&O world for many years. When you look at the claim statistics of the E&O Plus program, there are a sizeable number of E&O claims made against agents by one of their carriers each year.
Why would an insurance carrier sue one of their agents? Aren’t they your friends, your business partners? In an ideal world, yes.
Let’s look at one of the primary expectations carriers have of their agents. There are certainly expectations of growth and profitability; that’s a given. However, for the relationship to develop and stay strong, there is an expectation of trust; trust that the applications being submitted accurately reflect the exposures of that specific client. I believe you would agree that sounds pretty reasonable.
While it may be reasonable, it does not always happen. In any given year, upwards of 5 percent of E&O claims involve insurance carriers suing their agents. Typically, this will evolve when a client has a loss and the carrier determines that the risk is not exactly what the agents purported it to be. If the “incorrect” issues are deemed to be material, the carrier has a variety of options. One option involves the carrier voiding the policy, essentially returning the premiums back to the client. Basically, this is as if the policy never existed. The other option, probably more common, is for the carrier to pay the claim and bring suit against the agency. I would guess the carrier is winning many of these claims.
The questions on the application are there for a specific reason. This speaks to the tremendous importance of ensuring the application submitted to the carrier accurately reflects the risk. Agency sales staff should not be guessing at the answers as an incorrect guess could have significant negative results.
I heard of a situation (not an E&O Plus matter) involving a major P&C carrier. When the agency completed and submitted an online application for a BOP, the risk was declined. The agency producer changed a couple of application questions that he thought might be the reason for the declination and resubmitted the app. Again, a declination. On the 26th time (no, this is not a typo) the agent submitted the application, he got an approval. As fate would have it, that risk ended up with a claim and when the carrier found out the risk was not exactly as the agency had purported it to be, the agency was sued. Guess who won that suit?
Claims by insurance carriers against agents are not going to go away. Carriers are taking this “trust” issue seriously, and they have every right to do that. It would be beneficial for agencies to continually reinforce the message with their sales staff that honesty in their dealings with carriers (including wholesalers) is a must.