NAIFA Professional Liability Insurance Program’s Loss Control Seminar
Seminar Objectives After completing this seminar, you will be able to: Identify the legal basis for agents professional liability claims • Identify professional liability exposures and causes of loss • Identify specific risk management procedures for all areas of • agency management Identify liability exposures unique to insurance products • commonly sold by NAIFA members
and the Insurance Agent Professional Liability
The Role of the Insurance Agent & Advisor The National Association of Insurance and Financial Advisors protects and promotes the critical role of insurance in a sound financial plan and the essential role provided by our professional agents and advisors – NAIFA Vision Statement
Claims against Life Agents It is more common that an E&O claim arises from……… A. Technical Compliance B. Communication C Neither of the above
Factors Contributing to claims against Life Agents Claims in the news/ litigation Deep pockets Presence of E&O policies Expanding theory of liability Status as a Professional Risk Management Approach Due Diligence Focus on Top Line or Bottom Line Growth
E&O Claims - Impact on You Direct Costs Attorney fees Loss payments or deductible Time away from office while in discovery or trial Loss of current business Increase in insurance premium
E&O Claims - Impact on You Indirect Costs Loss of reputation Opportunity cost Psychological and physical toll Anxiety & stress
Self-Evaluation Test See workbook
The Right to Sue A client has a right to sue. A client doesn’t have to be right to sue you. The only requirements are a plaintiff, a filing fee and a complaint alleging wrongful conduct A third party trier of fact will ultimately decide if the elements of a claim have been met.
The Elements of a Claim Duty Owed Duty Breached Damages Proximate Cause
Duty Owed Reasonable behavior so as not to cause harm There must be the establishment of a level of behavior owed to a claimant, entity or society
Duty Breached An act or failure to act that establishes a duty was breached The attempt to establish this breach manifests itself in various legal theories
Damages & Proximate Cause For a claim to be successful there must be some form of damages Those damages must flow directly from the breach of duty
Legal Theories Negligence - Failure to perform in a manner consistent with what a reasonable agent would do under similar circumstances Negligent Misrepresentation Intentional Misrepresentation / Fraud
Legal Theories Vicarious Liability – responsibility for acts of those you employ Breach of Fiduciary Duty – exercising your own discretion and expertise in making decisions on behalf of another .
Damages Actual Punitive Statutory / Treble
Standards of Care (Duty Owed) The relationship between agent and client can impact the Standard of Care General – Reasonable Knowledge of policies being sold, different terms and coverages available in the marketplace. Special – Fiduciary, Expert
Special Relationships Express – holding yourself out as an expert Implied – circumstances of a particular transaction and your relationship with a client.
Duties to Insurer Know underwriting guidelines/authority Disclose all material facts Make sure applicants complete applications with full explanations Don’t sign for the insured Good faith
Duties to Insured Obtain requested coverage within a reasonable time or advise of inability to do so Select carriers and review Know products Understand client needs No unsubstantiated statements (Don’t guess) Know your authority
Names / Designations Expert Specialist Counselor Advisor Consultant Professional
Frequency of Claims
NAIFA CLAIMS FREQUENCY BY ERROR TYPE Policy Change Beneficiary 2% 9% Tax Loss 4% Suitability Business Mgmt 6% 9% Misrepresentation Other 25% 2% Failure to Provide 13% Due Diligence 2% Premium Error Failure to Explain 6% Office Error 11% 11%
NAIFA CLAIMS FREQUENCY BY PRODUCT TYPE Management or Business Issues Variable Annuities Other 6% Fixed Annuities 4% 9% 6% Pension Plans Individual A&H 13% 9% Group Life 4% Group A&H Individual Life 22% Long Term Care 21% 4% Individual Disability 2%
Average Cost of Claims Group Life: $10,808 Individual Life: $40,479 Annuities: $20,386 Disability Products: $149,116 Pension Products: $71,068 Financial Products: $13,270
A few claims statistics … 54% of all claims are reported as potential claims, and do not result in further activity 18% of contested claims are closed with no indemnity payment Average cost to defend these claims is $19,145 30% of closed paid claims are settled without defense costs incurred
Risk Management Strategies - Minimizing Claims
Documentation Importance of Documentation Memories Fade Misunderstandings can be clarified and corrected Evidence for the claim file Demonstration of professional behavior when credibility contest develops
Misrepresentation Terms and conditions of the policy Life Products Surrender charges Policy loans Cash Value
Misrepresentation Health Products Pre-existing conditions Maternity Benefits Excluded coverage – riders Eligibility Deductible PPACA - It’s a new world.
Completing the Application Never answer on behalf of a client Don’t filter information Customer’s own handwriting where possible Importance of accuracy & honesty can’t be overstated
Vanishing Premium / Interest Rate Don’t use term “Vanishing Premium”!!! Use illustration Copy to applicant, copy to file Use disclosure form – advise of changes in assumptions Monitor and review
Replacement Policies Is replacement necessary? Avoid appearance of twisting, churning Provide required forms Disclose the impact of new policy terms Advise on tax consequences Disclose new incontestability provisions Is coverage identical?
Cancellation Keep old policy in force until new policy effective! Late payment of premium Lapse Reinstatement representations Notice of lapse or cancellation
Coverage Adequacy Avoid advising on which type of coverage and limits to purchase Clients decision on affordability and comfort Advise of policy limits and exclusions Take notes on conversations and follow up in writing.
Beneficiaries Accuracy is important Implement immediately Document changes in writing
Don’t sign the application on behalf of applicant!
Delays in Processing / Delivery Errors Time is critical Insurability can change – prompt delivery of application to carrier Timely documentation of all follow up attempts for information from client Timely follow up with carrier on questions and required forms
Policy Delivery Timely Delivery of policy Has client health deteriorated since date of application? Verify policy & riders accurate Review coverage with customer
Releasing Blank Applications Never release blank apps Have applicants complete forms in your presence Take action promptly on application Never “front” premiums for clients Explain when coverage is effective
General Risk Management & Agency Management Procedures
The Basics! Proper documentation reduces exposure to E&O Lack of documentation is leading cause of paid losses Documentation is a cost of doing business
What Level of Documentation Do You Practice? Level 0 – No Documentation, Rely on Memory Level 1 – Use File Notes Level 2 – Use Confirming Letters Level 3 - Firing the Client
Documentation – Level 0 No Documentation – Rely On Your Memory Does not carry much weight with juries. • You have handled hundreds or thousands of transactions since this one, why should we believe you can remember the details of this one accurately? • May still be able to carry the day by Testifying as to regular habit and practice Pointing out customer’s story is inherently implausible.
Documentation – Level 1 File Notes File notes bolster your credibility and answer the question of how you can remember details of this one transaction out of the many you handle. Record what the customer asked for, what you recommended, and whether they accepted or rejected your recommendations.
Documentation - Level 2 The Confirming Letter A letter to the client confirming recommendations and decisions is even more persuasive because the client has a chance to correct any misunderstanding. A letter from Client such as “I appreciate your business, but I do want to confirm that you chose not to follow my recommendations to …”
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