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Agents – Your E&O Coverage May Be For More Than You Think
Since you have duties in the Agent – Principal relationship, you need to know who the Principal is!
One of the pet peeves I had as an Insurance Company Manager and as its Corporate Counsel was when it was obvious that the Plaintiff Attorney and even the Defense Attorney had not bothered to read the policy they were ether suing on or defending. Some attorneys apparently believed their bluster would impact the contract more than the policy’s actual wording. That did not usually work out well. But the fact agents themselves may not be reading what they are either selling or buying for themselves is completely inexcusable and a great way to test their own E&O coverage.
Agents, do you, the company you write for, and your E&O carrier a favor, read the policy! I had an insurance company client that was rated (B+) and the company’s President believed, as apparently also did some agents, that the agent’s E&O policy excluded coverage to the agent for any claim arising from any company policy sold by them in which the issuing insurance company was rated below (A-). The Insurance Company spent needless dollars and time trying to obtain a rating based on a wrong belief. Never mind that the ignorant insurance company President was beside himself when he believed that the company’s agents could not sell the company’s policies, the agents themselves were giving up a decent insurance sales market based ultimately on their own laziness. The President never bothered to get the facts for himself. Don’t let your own nonfeasance be a reason to give up a market you don’t need to. Read the policies you sell and those you buy for yourself!
No, your E&O coverage is not excluded because the insurance company issuer happens not to be rated above a certain grade issued by any particular rating agency. The facts are:
- There is NOT an outright exclusion in the agent’s E&O policy for all losses emanating from an insurance policy issued by a Company with less than an (A-) from any rating agency.
- The exclusion is called the “insolvency exclusion” and even if it is present, it is extremely specific in that losses emanating from Insurers that are rated less than (A-) and subsequently go broke after the policy issuance and a subsequent claim arises, the subsequent claim may not be covered.
- It does NOT apply when the insurance issuer remains solvent, and solvency is entirely within the purview of the Insurance Regulator, NOT any rating agency.
- Many Agents E&O policies do NOT contain any exclusion for any reason based on any rating by any rating agency.
- A major agent’s association sponsored E&O carrier excepts out from the insolvency exclusion, any insurer that is a member of the state’s guaranty association, which includes most admitted insurance companies in a state.
- There are many ways to obtain E&O coverage apart from the issuing insurer getting an (A-) rating from a particular rating agency. Such as a Risk Purchasing Group or even if the agent’s policy has such insolvency exclusion, the use of GAP coverage.
In reviewing your E&O, it important to know just whose “agent” you are, to determine where your real exposures lay. In some states, Texas for example, the insurance agent is clearly the agent of the Insurance Company. In three different statutes it shows that the agent is the agent of the insurer, not the Insured. In other states, Michigan for example, as to whose agent you are is not so clear, and arguably agents in such places have a dual agency role, thus owing duties to both. This is important to know because of the legal ramifications of agency-principal relationship. As an agent, you owe ethical duties to your principal, so it’s necessary to know to what party or parties you owe these duties to.
LEGAL DOCTRINE of AGENCY (agent / principal)
- Agency – Relationship in which one person acts for or represents another by the latter’s authority.
- Agent – The person so authorized to act.
- Principal – The one who permitted or directed the other to act for his benefit.
The common law duties an agent owes to non-principal’s are:
- Use diligence in attempting to place the requested insurance; and
- To inform the applicant promptly if unable to do so.
The common law duties the agent owes to the Principal are:
- Utmost Good Faith
- Candor / Full Disclosure / Informed
- Refrain from Self-Dealing
- Integrity, Skill and Care
- Fair and Honest Dealing
- Duty to Follow Instructions / Obedience
Why does all this matter? There are two legal Maxims at work here and why it matters:
LEGAL MAXIM # 1
Where one of two innocent persons must suffer from the wrongful act of a third, the loss should be borne by him who put the wrongdoer in a position of trust and confidence and thus enabled the perpetration of the wrong
This is what vicarious liability is all about, when the insurer has to shell out money because the agent did something wrong.
However there is another legal maxim working here:
LEGAL MAXIM # 2
Acting as someone’s agent does not confer personal immunity on the acting party, the tortfeasor (WRONGDOING AGENT) is responsible for his own actions. The fact is, vicarious liability isNOT substitutionary liability, but is ultimately additional liability and the agent can and often is ultimately held responsible for his wrong actions by the principal for which the principal had to pay.
Far from securing your E&O to simply pay applicants or policyholders, it is often for paying back the principal (insurance company) for the money that it paid due to the vicarious nature of the relationship.
Here is some additional information to consider:
Various Texas Court Positions are:
- “An insured has a duty to read the policy and failing to do so, is charged with knowledge of the policy terms and conditions.”
- “An insurance agent has no duty to explain policy terms to an insured.”
- ”A claim for misrepresentation cannot stand when the party asserting the claim is legally charged with knowledge of the true facts.”
So the agent in Texas can rely on the courts holding the applicant/policyholder to fairly high standards, about now you may be thinking: “let’s all move to TX!” Hold on, Texas is an unusual state, its bad faith law is much less developed than in many other states, for the simple reason that the state legislature did something that most of other states did not, it changed the NAIC’s model law concerning unfair trade practices into a personal right of action for the policyholder, and the definitions are broad enough to include the insurance agents in the process. The NAIC law was originally drafted to give additional authority to the state’s insurance regulator, but in TX, every policyholder has a right to bring a “Deceptive Trade Practices Act” (“DTPA”) claim, not just the commissioner. And it is indeed a hot bed for litigation.
The DTPA is where the TX Agent has exposure from the policyholder /applicant, in addition to the exposure from the principal (Insurer) to whom he owes duties. However, whereas the duties owed to the principal (insurer) include those which involve a positive duty to speak, the DTPA does not. A claim of a breach of the DTPA involves saying something that you should NOT, it does not require for you to say anything. The caveat is if you make any promises or allude to something, you will be held to the standard for which you made a promise. For example, if asked: ”is this covered?” And you respond: “why yes, it is”, it had better be covered. While the common law duty requires the policyholder to read the policy and know for himself, the DTPA is statutory and your statement that it is covered brings it right back to your making an untrue statement.
Something to think about:
- There are approximately 385,700 insurance agents in the USA. (Bureau of Labor Stats)
- There are approximately 792,500 attorneys in the USA (Bureau of Labor Stats)
- There are approximately 44,518 students now enrolled in law schools nationwide.
Something you may not have considered:
Your responsibility to not breach your fiduciary duties to the principal (insurer) are a large part of your professional /ethical responsibilities and the reason for your E&O coverage as an insurance agent… and here you thought the Insurers demanded that you to carried E&O was only for the policyholders protection.