As many states keep watch for the "next wave" of COVID-19 infections, the insurance industry is keeping watch for the "next wave" of potential claims that could be directed at independent agents.
In a recent webinar by RiskGenius, E&O in the Age of COVID, moderator Chris Cheatham, CEO of RiskGenius; and panelists Dave Hulcher, executive director of the Kansas Association of Insurance Agents (KAIA); and Will Larson, attorney for the KAIA, discussed what agents can expect following the pandemic.
In most states, insurance agents are obligated to provide a "duty" to clients which defines their responsibilities with respect to their customers, said KAIA's Larson. "In Kansas, for example, insurance agents are obligated to obtain the insurance that the insured requests."
An important element in determining "duty" when agents face an errors and omissions (E&O) claim is the judge presiding over the case, Larson noted. "It's the judge, not the jury, who determines whether or not there is a duty in the particular circumstances of a case," he said. For example, an agent wouldn't necessarily have a duty to determine the value of an insured's building -- they would only have a duty to obtain the insurance for the amount that the insured says it's worth.
For most states, there are three categories of an agent's "duty." In some states an insurance agent is only considered an "order taker," meaning the insured tells the agent what they want and the agent obtains insurance for that request. In these states, an agent doesn't have any other obligation, according to Larson.
There are special circumstances to consider. In some instances, the "order taker" duty can be elevated to an "insurance advisor." For example, if the insurance agent claims to be an expert in a particular area, or says to an insured that they will make certain there is coverage for losses in particular circumstances. In those instances, the agent is assuming the duty of an insurance advisor and that duty is significantly different than just an order taker, Larson explained. "And the exposure increases significantly as well."
In addition, there are some states where an insurance agent has a duty to advise like an attorney would and in those cases the duty and the exposure is significantly higher than in a place like Kansas, or a pure "order taker" state.
Standard of care is another issue that must be considered in an agency E&O situation.
If in a case against an agent the judge determines that the agent does have a duty then the question becomes one of standard of care, Larson said. Was the standard of care delivered to the insured considered to be "reasonably prudent?"
"What was the duty of the insurance agent? Did he do what he was supposed to do in a reasonably prudent manner that any insurance agent would?" Larson asked.
He cautions agents against elevating their "duty" to that of an "insurance advisor." This is often a concern when agencies represent their firm as a risk manager online. "In most cases, insurance agents aren't risk managers but if they claim to be a risk manager or insurance advisor that increases their duty and exposure to E&O."
The panelists said following Hurricane Katrina the insurance industry saw a surge in agency E&O claims.
"Prior to Katrina, Louisiana was primarily an 'order taker' state," said Cheatham. Post-Katrina, given the "natural sympathy" toward the many victims of the hurricane, the duty imposed on insurance agents and brokers became somewhat blurred, he noted.
"When a lot of people are hurting and there's a lot of potential claims, judges tend to be more liberal in construing insurance policies and in cases against insurance agents, as well," Larson said. "There's always the risk that judges are going to bend over backward to try to find coverage under a policy or try to determine that somehow the insurance agent breached his duty for standard of care and hence there should have been coverage."
But unlike Katrina where claims hit one geographical area, COVID losses will be more dispersed, and that makes a difference, Larson says.
"When you look at Katrina, the majority of claims were flood claims," said Hulcher. There is a flood product that can be offered to insureds for purchase. "But in the case of COVID, with business interruption and specifically virus exclusions, there wasn't a product readily available to cover that exposure." Hulcher says that is a big difference. Was coverage readily available that could have been offered through the rank and file agent? Likely not.
KAIA's Hulcher reminds agents that anytime there is a catastrophic loss scenario to expect that there's going to be a "great uncovering" of E&O claims.
"Where coverage is not offered there is going to be issues, so catastrophes are the opportunity to uncover coverage gaps," he said. "Also, from an agency perspective, operational issues and knowledge-based weaknesses get uncovered."
The most common allegations against agents for E&O are consistent, he said.
"It starts with failure to procure coverage -- negligent misrepresentation of coverage, failure to handle claims in a timely fashion, failure to duplicate prior coverage, failure to adequately identify exposures, failure to recommend coverage type -- all of these are the types of allegations that we see made against agents," Hulcher said.
He also warned agents that it's not just allegations from insureds. "Between 5% to 10% of agency E&O claims actually involve the carrier suing the agent," Hulcher said.
Mitigating agency E&O exposure boils down to proper documentation. "When you look at trying to protect yourself and your agency, we always talk about document, document, document," Hulcher says. "There's no way of talking about E&O and risk management without saying that." And that also includes documentation with the underwriter as well.
Hulcher expects to see agency E&O claims stemming from COVID alleging failure to recommend pandemic coverage, failure to recommend coverage that didn't contain a virus exclusion, failure to turn in claims in a timely fashion, and perhaps failure to recommend cancelation and event coverage.
From a risk management standpoint, what can agencies do to lessen their risk with pandemic related claims?
"Our advice to agents is that even if a carrier is telling you that certain claims are not going to be covered, you still have an obligation, and it's a best practice, to not discourage your clients from submitting the claim," Hulcher said. "The agent is not part of the contract. The contract is between the carrier and the insured so we don't encourage agents to position themselves to make coverage determinations."
Hulcher wanted to remind agents that just because there's a claim made against them that doesn't mean they did anything wrong.
"When a claim occurs, the agency may advocate on behalf of their customer, and say, 'Hey, I really screwed up, I should have gotten this.' Then they will put that in writing and if that happens, then you are hung," he said. "Not only is that putting you in an adverse position or your E&O carrier in an adverse position, you also may be doing things to jeopardize your right to coverage underneath that policy."
Finally, Cheatham reminded agents to check their customer's policies, often.
"There's a hardening market and carriers are looking to change how they are writing their insurance policies," he said. "Check for form changes and notify the customer."