15 Sep A Good Outcome
In any given year, approximately 50 percent of all E&O claims against agents are closed for no payment. In other words, at the end of the day, the agency did the right thing and was determined not to have any legal liability for the client suffering the damages they did. So, the reality of whether the next E&O claim against your agency is closed for no payment is largely up to you. Let’s take a look at the following actual situation that developed into an E&O claim against the agency.
The backdrop for this claim involved a personal lines client. Their property included a barn which had been converted to a useable office–type space. When the agency first insured the risk, the client stated that they held holistic health classes in the barn four times per year. The business property consisted of some tables and folding chairs. The homeowners’ carrier felt this was a limited use of the barn and were willing to continue to insure the risk under a HO-3 as a policy extension to the main house. Knowing that things could change, the agent advised the client that if the barn were used more extensively and became more of a commercial business, that it would be necessary for the client to secure a businessowners policy. The agency provided the client a BOP proposal which the client refused due to cost.
Each year at renewal time, the agency inquired in writing if the use of the barn had changed. No response from the client. Three years later (the agency still insures this risk), the barn burns to the ground because of an electrical short. The client claimed over $120,000 in business equipment (that is a lot of tables and folding chairs). During the claim investigation, it was determined that the client was conducting weekly classes in the barn and also performing acupuncture on a daily basis. Since the carrier felt that this was not the risk they thought they were insuring, they voided the policy based on material misrepresentation. The client then sued the agency and the case went to trial. Bottom line, the agency prevailed and the claim was closed for no payment.
When you look at the case, it is easy to see why the agency won. They were very upfront with their communication about the need for a different policy if the exposure changed. The agent had documentation that showed the client refusing the BOP proposal. Another key deciding factor was the annual request from the agency asking the client if anything had changed. The agency was able to show this annual request with further documentation of no response from the client.
What would have been the outcome of this matter if the communication from the agent to the client was only verbal with nothing in writing? What if the agency never checked in on an annual basis to ask the client if anything had changed? I guess we will never know since those are not the facts of the case. Somewhat ironically, the client brought a lawsuit against the agency even though they were clearly in the wrong. Quite possibly, they were hoping that the agency did not have very good documentation.
When a client suffers a loss that is not properly insured, there is certainly the possibility that they will look to bring some form of litigation against their agency. After all, you are their agent. But bottom line, how the claim against the agency is resolved depends on you, as their agent. Quality documentation and the proper use of an exposure analysis checklist are two of the main issues that will determine the outcome of an E&O matter against an agency. Taking the time to do it right on those two key components sure made a difference in this claim.