WOULD HAVE… COULD HAVE… SHOULD HAVE…

WOULD HAVE… COULD HAVE… SHOULD HAVE…

Fairbrother, Joni

What is the standard of care for agencies?

Business people/contestants on the popular reality TV show “The Apprentice” are assigned projects and compete to position themselves in the board room where they criticize each other as to what they would have done in the other player’s place, what could have been done better, and what they should have done-would have, could have, should have. Eventually someone is fired.

As insurance agents we live the same scenario with E&O claims. An allegation of wrongdoing is made against an agency and to support the claimant’s contention, the team players are brought in-otherwise known as “expert witnesses.” It is the expert witness who will testify as to the standard of care that the agency should have met. The “standard of care” consists of the actions that should be expected from a professional in a given situation. Just as in “The Apprentice” boardroom, arguments involve should have, would have, could have.

The difficulty with standard of care as it relates to E&O and the professional expectations of an insurance agent is that it is tricky to determine exactly how to measure it. In many professions, the standard of care is set by professional organizations on a national basis. For instance, accounting standards are set by the American Institute of Certified Public Accountants (AICPA). Those guidelines are used to determine if a CPA has met the standard of care in a given situation.

Several state legislative bodies are rushing to statutorily set the standard of care for insurance agents. Some states’ departments of insurance also are considering establishing a standard through regulation. Many of the standards being proposed would set rules that would at best be very difficult to meet and, in other cases, impossible to meet. An unintended consequence of some of the standards being proposed is that competition, something that is a healthy element in our economy and good for the consumer, would actually be stifled.

What do we do for now? Many staff people in an insurance agency may look at the above statements and think, “What can I do?” or “This is a problem only for the agency principal.” This is where the agency staff plays a critical role-not only in the success of the agency, but in the overall effect of the independent insurance agency business.

The agency way

We work in a profession that begs for ambitious people, people who are creative in marketing, people who like to get “ahead” of the game. Too many times agency staff people try to come up with a better way to attract business or save time and will short cut a process when making a change to or renewing a policy. Some staff members take extra time to communicate with clients, while others in the same agency will try to just “get it done” and cut back on communication. When we think of standard of care, the first thing to think about is the “Agency Way.”

The Agency Way is the set of procedures and processes that everyone must follow, regardless of position in the agency. You must have continuity and consistency within the agency in areas such as advertising, marketing, soliciting new clients, soliciting renewals, applications, checklists of coverages, and reviewing coverages with the clients. Other areas of continuity within the agency relate to proposals of coverages, communications of mid-term changes, cancellations, nonrenewals, and claim handling. All of the procedures and processes should reflect the duties and responsibilities that agents have to clients, as well as to the insurance companies they represent.

It is the responsibility of agency management to set the procedures that become the Agency Way, in order to establish the standard of care within the agency. It is the responsibility of the agency staff to follow those procedures. Failure to do so may make the agency vulnerable to an E&O claim.

When defending an agency in an E&O claim, many times it is the procedures that will become the defense of the agency. For example, consider the scenario of an agency accused of not making a change of automobile on a personal auto policy on a mid-term basis. The client alleges having telephoned the agency to request the change. The agency denies that the contact was made and further states that if the call had been made by the client, the following would have happened (example of procedure):

* Telephone documentation of who called and when

* Review of current policy (paper file or electronic file)

* Checklist of coverages needed completed by the agency during the conversation with client that is documented

* Auto ID forwarded to client and verification communicated of what changes have been made on the policy

* Change request forwarded to the insurance company

* Diary for necessary follow-up for completion

If there were no notes in the file and the client received no confirmation of coverage by way of an auto ID card, then the agency can say with confidence that the call did not take place and could present the written procedures which would serve as the agency’s strongest defense mechanism. The agency could also verify this by offering a review of other client files to prove that the agency always follows the same procedure.

But-if some members of the staff complete the checklists and others do not, if some document phone calls and others do not, then you lose the consistency and you can’t prove an “Agency Way,” resulting in a weakened defense. Perhaps the client is mistaken about having made the call. (Do I dare say that clients would ever be untruthful?) The agency must prove that it didn’t receive the call, and the only way to do that is by proving that staff carries out consistent procedures. If everyone in the agency is doing his or her “own thing,” then you lose the consistency and could lose a large part of your defense.

Duties to clients

In setting the procedures, what are the duties to the client?

Obtain coverage specifically requested by the client. If you can’t, it doesn’t make you a bad agent, but it does make you responsible to let the client know that you couldn’t place the requested coverage.

Carry out instructions using a reasonable degree of care and skill. Courts all across the country have concluded that agents are professionals and therefore are obligated to use special skills and knowledge as professionals to do their job well.

Provide the client with information about available coverage. Clients may not know what coverage is needed or available. Assuming the client will allow us to, it is our job to let them know so that they can make an informed decision.

Act in the best interest of client. As insurance agents we have two masters, the client and the insurance company. We have obligations to both. Most important, we have a responsibility to both and must serve the needs of both. It is not an easy job, but if it were easy, anyone could do this and then they wouldn’t need us!

Duties to insurers

Stay within the terms of the agency agreement. If you don’t know the terms, then you need to find out. Everyone in the agency should be aware of authority limitations.

Follow all underwriting guidelines. Everyone in the agency responsible for completing applications and placing coverage should be aware of each carrier’s underwriting guidelines.

Act in the best interests of the carrier. Didn’t we just talk about this? It is a duty to both clients and carriers that we act in their best interest.

Accurately disclose risks and material information. Basically, tell the truth, the whole truth and nothing but the truth; and if you document that, you will be good to go.

Alert the client about limitations in the policy. Sounds funny having this duty in the group of duties for the insurance company-but many times if an error or omission is made by an agent, the insurance carrier is brought into the claim as well.

So what is the standard of care for insurance agents? It depends on many factors. Following the “Agency Way” is that first step. After that, it is dependent on the testimony of those members of the opposing team called expert witnesses to define the standard of care that the agency should have met. Should have, would have, could have-it will be the courts that make that final determination. No one wants to be in the position of being on the losing team. Just as in “The Apprentice,” no one wants to have the management of the agency saying “You’re Fired” because the staff did not follow the established procedures of the agency. Even worse, you do not want a jury to say “You’re Fired” (lose the case) because you failed to meet the minimum standard of care for your profession.

By Joni Fairbrother, CIC, RPLU

The author

Joni Falrbrother, CIC, RPLU, is an assistant vice president on staff with the Independent Insurance Agents & Brokers of Arizona. Her primary responsibility is running the Insurance Agents E&O program as well as teaching E&O Loss Control seminars in Arizona and other states. Joni also is an instructor of CISR seminars and other insurance technical courses. For more information on the CISR program, call (800) 633-2165 or go to www.TheNationalAlliance.com.

Copyright Rough Notes Co., Inc. Jun 2005

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