Sharpen Your Skills With Our E&O Claim Scenarios
We believe that insurance professionals can improve the service that their clients receive by sharpening their professional skills by looking over case studies and scenarios that have led to E&O claims.
An insurance agent sold a $100,000 universal life insurance policy to her client in 2010. The client alleges that the agent promised that the premium would stay level for the life of the contract and that the cash values would continue to grow over time. However, several years into the contract, the premium levels increased and the client received a lapse notice. The irate client contacted the agent for an explanation. At their November 15, 2017 meeting, the agent explained that the drop in prevailing interest rates plus the increasing annual cost of insurance had created this situation. The agent stated that this was explained by her at the time of sale and is explained fully in the contract. The client disagreed that this was explained to her at the time of sale and that she relied on the agent when she bought the contract. The client states that she cannot afford the increased premium and the contract does not have any accumulated cash values left. Her health has also diminished and she cannot qualify for a similar sized policy. The client was irate when leaving the agent’s office.
The day after the November 15 meeting, the client e-mailed the agent stating that she has lost $24,000 in premiums over the life of the policy and now faces having no life insurance at all. She goes on to state that she thinks it is the agent’s fault that she is now in this dire situation and is very unhappy. She also threatened possible legal action if the agent doesn’t “make it right.” On March 23, 2018, the client filed a lawsuit against the agent for negligence and misrepresentation. On March 25th, the agent placed her errors and omissions insurance carrier on notice of this claim for the first time.
The agent’s errors and omissions policy (“E&O policy”) has a policy period of January 1, 2018 to January 1, 2019. As is typical for most E&O policies, the agent’s E&O policy was issued on a “claims made and reported” basis. This means that a claim must be first made and reported within the policy period or the 60-day automatic reporting period. In this case, the threatening conversation followed by the e-mail may well constitute a claim under the E&O policy. If the November e-mail meets the definition for a claim under the policy, there may be no coverage as the claim was first made prior to the inception of the policy period.
E&O policies also typically include “prior knowledge” provisions. This provision may preclude coverage if on or before the inception date of the policy, any Insured knew or could have reasonably foreseen that an alleged error or omission could result in a claim. In this scenario, assuming the e-mail does not rise to the level of a claim, the agent was aware that the client was irate, going to lose her life insurance policy, believed that the situation was the fault of the agent and was looking to the agent to “make it right.” Coverage for this matter would likely be denied since the agent could reasonably foresee that a claim was going to be made by this client prior to the inception of the policy.
- When dealing with a disgruntled customer, agents need to be aware of the reporting requirements of their errors and omissions insurance policies.While every situation and customer is different, an agent should err on the side of caution when reporting matters to their errors and omissions carrier. Failure to report claims or circumstances which could reasonably result in a claim can act to preclude coverage in certain circumstances.
- If an agent is unsure whether to report a claim or circumstance to their carrier, they should reach out to their broker or carrier contact as a precaution.
This material is provided for informational purposes only and should not be construed as legal advice. The information contained herein 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 this information.