Chapter 7 - Section 2 Flashcards
The Errors & Omissions Exposure - An Analysis
There have been a number of Canadian court decisions that have imposed upon brokers a standard of duty of care to clients approaching perfection. Briefly outline the facts and decisions of the “Fine Flowers” case
- Involved an insured in the horticulture business with stock highly susceptible to temperature changes
- When questioned about his coverage, broker gave the insured assurances that he was “fully covered”. A water pump failed causing a $42,000 loss to greenhouse stock
- In the resulting civil action, that court held that the broker had been negligent in the failure to warn the client of exposures for which no coverage was available
- The brokers reassurance of everything being “fully covered” has misled the client into a false sense of security. Even though a boiler policy had been written, it did not extend to include the water pump and, even had such coverage been provided, the policy contained a normal wear and tear exclusion
- The broker had misled the client by assuming he was fully covered
Identify the six common caused of broker errors and omissions claims
- Inadequate coverage
- Misrepresentation and Description Errors
- Cancellation/Renewal Errors
- Policy Change Errors
- Processing Delays
- Agency Agreement Violations
Which of the six common causes of brokers errors and omissions claims is by far the largest cause of errors and omissions claims?
Inadequate coverage
Explain three examples of Inadequate Coverage
- Failure to provide proper coverage
Brokers must understand the nature of the loss exposures facing their clients and make appropriate coverage recommendations - Failure to advise clients of policy exclusions, exemptions, and other disadvantageous terms
In other instances, brokers may be aware of the risk, but inadequate cover could result because they overlook an exclusion - Failure to place coverage
Failure to follow up on an application for insurance can lead to the broker being named in an E &O suit
Almost 1/4 of all errors and omissions claims are the result of misrepresentation and errors in description. Outline the facts and decision in the “Hornberg” case
The court ruled that the broker ought to have known that his client would only be using the property being insured on a seasonal or casual basis. Failure to disclose such information to the insurer resulted in the insurer voiding the policy and the broker being ordered to pay for the subsequent loss to the property
Approximately 10% of all E &O claims involve the improper handling of policy renewals and cancellations. Give three examples where improper handling of renewals can cause problems
- Not renewing at all
- Not renewing adequate coverage
- Not warning of pending expiry
Provide an example of an E & O claims for the following:
Policy change errors
An automobile policy may insure several vehicles. During the policy term there may be numerous additions and deletions of vehicles and/or changes in coverage. If care is not taken it is possible that the wrong vehicle may be deleted or coverage deleted on the wrong vehicle
Provide an example of an E & O claims for the following:
Processing delays
Brokers must respond promptly to an insured’s request for a coverage change. The period of time in which the broker must place the requested coverages appears to be related to the time in which the broker has previously been able to place similar insurance
Provide an example of an E & O claims for the following:
Agency Agreement violations
It is customary for brokers to enter into written agreements with the insurers they represent. Among other things, these agreements generally set out the limits of the binding authority regarding the types of risks brokers are able to bind, and the amounts of insurance applicable to those risks. When these limits or underwriting guidelines are exceeded and a loss occurs, brokers will usually be responsible for payment of the loss
Outline and explain six measures that will help brokers to prevent E & O claims
- Ensure they are acting within the level of their competence
Some risks will demand a higher level of expertise. If brokers have any doubts, they would be advised to direct the client to another broker(s) having the necessary degree of expertise and confidence - Take all steps necessary to properly determine their client’s needs
Brokers should learn all they can about their clients and their businesses. Includes inspecting the business premises to determine loss exposures. When dealing with specialized risks, brokers might need to research - Be advisers rather than deciders for their clients
Brokers must present all available coverage options to their insured’s. Brokers must remain in an advisory role. Brokers should not fail to offer a certain coverage because they feel it’s unlikely of the event happening or that it may be too expensive for the insured. The insured should be making those decisions - Time required to place coverage
When coverage might be difficult to place, make sure that the client knows that it might take longer than normal - Keep within the bounds of their binding authority
Brokers who exceed their binding authority may find themselves liable for the loss, or liable to reimburse an insurer - Be sure insured’s are aware of any special restrictions or limitations in their insurance
This is particularly important in the case of home owners, tenants, and condominium unit owners’ policies which limit coverage on certain types of personal property
Identify eight steps a broker should follow when they have been notified of a claim by an insured
- Report the claim immediately to the insurer
- Inform the insureds they will be contacted by an adjuster and remind them of the duties imposed by the policy
- Do not authorize the insured to proceed with repair or replacement nor make any statement that would commit the insurer to a particular course of action
- If certain the loss is not covered, inform the insured of this fact
- Follow up periodically with the insured to ensure settlement is progressing
- Maintain proper claims records
- Be helpful to insured’s while at the same time, avoiding any interference in the adjustment of the claim
- Maintain their integrity and professionalism
What is the best defense against an E & O claim?
Why?
Documentation
Without documentation, the broker’s credibility is difficult to establish. A judge or jury is more likely to give credence to broker’s who are able to produce documentation of conversations they had with insureds
Identify two types of documentation that may help to prevent E & O claims?
- Conversation/Telephone Logs
- Confirming Letters
Even with the best practices E & O claims still occur because brokers do make mistakes. For this reason, brokers purchase E & O insurance, Summarize the following about E & O policies:
Who is covered?
All broker’s working for the brokerage firm are insured
Even with the best practices E & O claims still occur because brokers do make mistakes. For this reason, brokers purchase E & O insurance, Summarize the following about E & O policies:
What is covered?
Generally, coverage is provided for claims that arise from any negligent act, error or omission of the insured or any person for whose acts the insured is legally liable
