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Train novice agents, producers: if agency uses its binding authority, it acts as an underwriter.

When someone makes a mistake in the publishing industry, the publication usually puts out a retraction correcting the error. Consider this article a retraction of past statements where I have consistently boasted that in 30 years as an insurance professional, neither my organization nor I have ever been involved in errors and omissions litigation. My premise was that avoiding E&O litigation was not a case of being lucky, but rather a case of being careful.

A case in which I am currently involved makes me realize that although avoiding E&O problems and legal proceedings takes skill, a little bit of luck does not hurt. Those of you who do not know me wouldn't understand how difficult it is for me to admit that I was slightly wrong, but the fact is a certain amount of luck helps to avoid legal complications.

Consider this: A woman who owned her own home decided to purchase a second home so she could have a place to visit with her children and grandchildren. She made an arrangement with her daughter and son-in-law that if she made the down payment and purchased a home, they would set aside a room for her so she could visit whenever she wanted. In return, the married couple agreed to make the mortgage payments, pay the taxes and maintain the property.

The couple obtained a mortgage commitment; the next step was to purchase insurance. They approached a local agent who suggested an insurance program that the agent indicated would cover the needs of the family arrangement. The couple completed an application, the agent reviewed all of the questions on the application and the policy was issued, naming the purchaser of the home as the named insured. The grandmother purchased the house, the married couple and the grandchildren moved in, along with their personal property. They set aside a room for the grandmother and brought in some of her personal possessions.


At first, everything went according to plan. The grandmother's daughter and son-in-law made the mortgage payments, paid the taxes and maintained the residence. Unfortunately, 2 years into the arrangement, a fire broke out and the home and possessions were lost. The couple made a claim and a payment tendered for the home, including the insured's personal property on the premises. The insurer denied the claim for the personal property of the insured's family and for the loss of use. The basis for the denial was that the home was not the grandmother's primary residence, and therefore is not entitled to a loss of use claim. In addition, because the grandmother was not the primary resident, the personal property of the actual residents was not covered.

Hindsight is terrific. It is easy to say, "Why wasn't a tenant's policy issued for the property of the named insured's children?" or at least add them as additional insureds as their interest may appear. The agent, who was relatively new to the industry, testified that she asked all of the questions on the application. But guess what--there were no questions on the application as to who would be the residents of the home. This is a perfect example of doing most things right and still being very wrong.


Because the level of experience of the selling agent doesn't count, the first and most important step is to educate and train your sub-agents and producers. Using the previous example, a more experienced producer who realized the home being purchased would not be a primary residence might have asked about the residents of the property, if only to deal with potential vacancy issues. Training doesn't only include technical issues, but the ability to understand the inferences a producer gains when taking an application for insurance.

Another important consideration is to ensure that office procedures require that applications for insurance, especially those where a deposit has been taken, to be sent out of the office immediately. In my organization, we had a rule: applications went out on the same day taken. Because this was not always possible, it was mandatory to submit the application the next day. Nobody went home on Friday until all applications and binders were transmitted.

Another good rule to follow is that "guessing is not allowed." Although this should be easy to follow, I venture to say every insurance producer who forgot to ask a question or did not get the required information has taken upon him or herself to fill in the blanks. A better way to handle this situation is to leave the missing information blank on the application with a note saying, "Information to follow." This procedure allows for the prompt submission of applications and binders and rids the practice of guessing.

I have written and testified extensively that the paramount duty of an agent is to follow the instructions of his or her client. Likewise, the duty to follow the instructions of the insurance company is equally significant. An agent has the duty to obtain and forward information to the insurer that is material to the risk, even if it is not on the application. This includes not only risk acceptance issues, but also any issues that would affect the premium to be charged.

This situation often occurs when the producer conducts a really good sales interview and completion of the requisite applications. It usually yields more information than required by the application. There is a very good chance that if you fail to forward information that was material to the risk and a problem occurs, you or the agency will be held responsible.

Finally, rules of agency provide that most information you have gathered is imputed back to the insurer. This means that any information acquired by the producer or the agency is considered to be in the hands of the insurer. Simply put, your insurance company is responsible for the information obtained by the producer or agency.

If your agency regularly uses its binding authority, you are acting as underwriters for the companies you represent. Withholding relevant information is a dangerous practice. No client, however big, is worth putting your agency relationship on the line. If the information you have gathered is relevant to your underwriting decision, submit the information. If it is not relevant, keep it in your file as documentation, which may be called on later.

It is often said that in our crazy business, there are always at least three sides to every argument: the insured's, the insurer's and the intermediary's. Being the intermediary exposes us to questioning from both sides. If there is a moral to this article, it's probably that keeping out of trouble requires a great deal of skill-and yes, a little bit of luck.

Richard Mintzer, CLU, is managing partner of Richard Mintzer Assocs. LLC, a firm based in Boulder, colo. that specializes in litigation support to the insurance industry. He has more than 40 years of industry experience, including as cEO of a regional general agency. For more information, contact him at
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Title Annotation:Avoiding E&O
Author:Mintzer, Richard
Publication:American Agent & Broker
Date:Oct 1, 2010
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