E&O Claim Scenario: The Vanishing Premium

We think that every industry can help improve the service that the client receives by sharpening the skills of the professionals who do the work on a daily basis. This is the first in a series for Life and Health Insurance Agents that we will be posting that looks in depth at Errors and Omissions claim scenarios

An E&O Case Study

Here’s the setup: A 61-year-old client has an insurance policy with a death benefit of $500,000 and a cash surrender value of $250,000. This older policy will last until age 100 without additional premiums. She is interested in a policy with a larger death benefit so she can leave more for her children and grandchildren and goes to her agent.

However, she does not have the cash flow for additional premium payments.

The Transaction

The agent advises the client that she can do a 1035 exchange of the existing life insurance policy, using the cash surrender value to get a policy with a higher death benefit without the need for out-of-pocket premiums. The agent runs an illustration for different policies based on a single premium payment “dump in” of $250,000 with future premiums being paid by policy values. One available policy from ABC Company will give the client a $1 million death benefit with no additional premium payments required until age 84 based on guaranteed policy assumptions. Based on her medical condition the client’s life expectancy is 77.

While the illustration for the policy has columns for guaranteed values and non-guaranteed values, the agent presents the policy, both verbally and in e-mails, as lasting for her “life” since her life expectancy is 77. The client purchases the new ABC Company policy.

The E&O Liability Exposed

When the client reaches 75 she begins receiving notices from ABC Company that her policy will expire in 2 years without the payment of additional premiums. The annual policy premiums will be $15,500. The client files a lawsuit against the agent for misrepresenting the terms of the policy since she was promised a larger policy with no additional premium payments for life.

She argues that had she been told that she could face paying additional premiums in the future, she would have kept the policy she had. While the illustration clearly shows which columns are based on guaranteed values and which are based on market assumptions, e-mails from the agent mention that she would not have to pay premiums for the rest of her life.

To win at trial, it will be necessary to convince a jury that the technical illustrations sufficiently represented the potential possibility for additional future premium. This is a difficult burden because the agent sent emails that appear to contradict the risks outlined in the illustrations.

What Lessons Can We Learn From This Case Study?

Issues with communication, documentation and/or expectations cause most Errors & Omissions claims; this scenario hits all three:

• COMMUNICATION: Make sure clients have the same understanding of the product being sold as you do. Take your time in explaining the product and how it is intended to work. In this case, the agent needed to make sure his client understood that in exchange for the larger death benefit there was a risk that she could outlive the coverage. In other words, her life expectancy of 77 years defined the period during which she would not have to pay additional premiums – not 84 years.

• DOCUMENTATION: Clearly and accurately document your conversations and interactions. In this case, the agent’s use of casual e-mails that were not technically consistent with the illustration hurts the chances of defending this case. Proper documentation is the best defense to a professional liability claim.

• EXPECTATION: Make sure the recommendation is suitable for the client’s needs. While this client wanted to leave more money to her heirs, she could not afford additional premium payments. Was the client willing to take this additional risk for the extra death benefit? Perhaps this was too great a risk for this particular client. Either way, the agent’s file needed to reflect that this risk was explained to the client prior to the sale and the client knowingly took on that risk.

DISCLAIMER:

This article/blogpost is provided for informational purposes only, does not necessarily represent Aspen’s views, and reflects the opinion of the authors in light of market, regulatory and other conditions which may change over time. Aspen does not undertake a duty to update the article/blogpost.