Specialty Insurance Blog

Insurance Agents Required to Communicate

Insurance agents and brokers need to communicate effectively with their clients in order to avoid professional liability (E&O) claims.  Another article in American Agent & Broker (see here) refers to a case in South Dakota which turned on this point.  In this case, an important question of fact was whether the agent had communicated to the client that the requested coverage was not provided.

Most insurance agent and broker professionals know that documentation is critical in avoiding insurance agent and broker professional liability insurance claims.  This case goes a bit further in noting a widespread requirement for an affirmative communication from the agent to the client that certain coverage has not been placed.

The court noted that numerous cases have determined that if an insurance agent is unable to procure insurance coverage according to a client's instructions, the agent has a duty to notify the client of his or her failure to do so. Whether the agent in the case at hand breached this duty, the court said, was a question of fact for a jury to consider.

Insurance Agents E&O - Summary

Insurance agents and brokers have seen some softening in the market for insurance agents professional liability (E&O) despite increasing exposures and claims.  A recent article in American Agent & Broker provides an excellent summary of the segment (see here), so a short sabbatical from our sabbatical is warranted.

The article starts with a key point:

There are two types of insurance agencies: those that have had E&O claims and those that are going to

Another key point is made in a more roundabout way: virtually all agents E&O claims are avoidable or defensible if proper procedures and documentation are in place.  Since the average agents E&O claim is over $25,000, and since claims significantly impact premium, putting effort into loss prevention is imperative. Important loss prevention techniques include:

• Documentation is your best defense
• Have a well documented procedures manual
• Monitor to ensure compliance with procedures

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Sabbatical

Due to time pressures, we will be taking a sabbatical on Specialty Insurance Blog.

Insurance Agent Duties

Insurance agents may be surprised by a recent Ohio court ruling regarding the legal duties of an insurance agent to an insured.  The decision and its implications are discussed in an American Agent & Broker article by Barry Zalma, a highly experienced consultant and attorney specializing in insurance.

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The article (see here) describes a couple who claimed that they relied on their agent for the proper amount of insurance.  The court decision stated that an insurance agent or broker is not ordinarily a fiduciary of the insured, but also indicated that the relationship might be altered by practice.  Documentation of the relationship between the insured and agent is critical in determining whether an extraordinary relationship exists.

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Rating Lawyers is OK

The idea of rating lawyers on the quality of their service would seem to make all kind of sense.  Products, docs, and other professional services are rated by a variety of web-based services, so why would anyone object to a web site dedicated to rating lawyers?

A lawsuit against a lawyer rating site, Avvo.com, has recently been dismissed (see here, and order here).  It seems that two attorneys were not enthusiastic about their ratings and sued the site.  They lost.  The Avvo lawyer comments:

This is a huge win for our First Amendment rights to express our opinions as Americans…Keep in mind that this case was initiated by a sanctioned attorney that did not like having his recent misconduct brought to light.

For commentary prior to the suit see here and here, and for commentary after see here, here, here, and here.

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Are Intentional Acts Covered by an E&O Policy?

It should be obvious that intentional acts are not covered under a professional liability (E&O) insurance policy, but it is rare that a court rules on this question.  The intentional acts exclusion in an E&O policy will normally read something like this:

…based upon, arising out of directly or indirectly, or in any way involving
intentional wrongdoing, fraud, dishonesty, criminal or malicious acts by
the Insured

In a recent case summarized by Wiley Rein (see here) a court ruled that intentional acts are not covered.  In the case, a real estate appraiser had purchased an appraisers professional liability insurance policy and was facing lawsuits alleging a scheme to appraise property at higher than the true value.  The insurer provided a defense and was seeking a declaratory action on coverage based on intentional acts, while the appraiser claimed that the acts involved negligence (which would be covered).  The court ruled:

the insurer had no duty to defend or indemnify the appraiser because the factual allegations in all . . . of the underlying complaints would, if found to be true, demonstrate that [the appraiser] acted intentionally, but not that he acted negligently

On the question of defense, the court ruled differently:

an insurer ordinarily is entitled to withdraw from the defense of an insured when it becomes clear that no claim against the insured falls within policy coverage… however… an insurer's withdrawal must be accomplished in an orderly manner, in order to avoid prejudice to the insured and comply with the insurer's duty of good faith.

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Doing Good

Two recent articles, completely unrelated to insurance, are unusual in that they provide a positive perspective on our world.  The first, from Fortune, is an article on the work being done by Melinda Gates and the Gates Foundation (see here).

Would Buffett have given the Gates Foundation his fortune if Melinda were not in the picture? That's a great question, he replies. And the answer is, I'm not sure.

The second, from The Economist, measures our progress in terms of social conditions in poor countries; poverty alleviation; and the incidence of wars and political violence (see here).

Public attitudes generally seem to have become more pessimistic and inward-looking…  [But] the world seems to be in rather better shape than most people realise.

Worth reading.

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Update: Subprime Impact on Professional Liability

Subprime and related credit market losses will impact both the professional liability (E&O) and the directors & officers (D&O ) insurance lines, and underwriters will respond (and some have already) with all the normal moves following catastrophic losses: tighter underwriting, reduced coverage, and higher pricing.  For example, some underwriters of mortgage brokers professional liability insurance have already exited from this line.

The real question is whether the underwriting responses will be contained to those entities suffering the losses or will be more widespread, and what the order of magnitude will be.  Not everyone agrees on the answer (see our prior post), but it should be clear that the problem is still unfolding.

There are indications that the problems are spreading beyond the subprime mortgage segment (see here).

The credit crisis is no longer just a subprime mortgage problem…This collapse in housing value is sucking in all borrowers.

And AIG’s recent announcement that its auditors found material weakness in its financial reporting for valuing credit default swaps is disturbing (see here).

American International Group said that it had incorrectly valued some of the swaps it had written and that sharp declines in some of these instruments had translated to $3.6 billion more in losses than the company had previously estimated

Are there other companies (other insurance companies?) with the same problem? (see here)  It sounds like it.

We are going to see more and more problems come to light like this,  said Lynn E. Turner, a former chief accountant at the Securities and Exchange Commission. This is an indication that these large financial institutions do not have the risk management systems in place to give us accurate data.

Troubles that began a little over a year ago in an obscure corner of the financial system, BBB-minus subprime-mortgage-backed securities, have spread to corporate bonds, auto loans, credit cards and now — the latest casualty — student loans…Why has a crisis that began with loans to a limited group of home buyers ended up disrupting so much of the financial system? Because, ultimately, it’s more than a subprime crisis; indeed, it’s more than a housing crisis. It’s a crisis of faith. (see here)

How does all this impact the professional liability markets?  First, companies that were directly involved in the problems will get sued, such as mortgage brokers.  This is already happening: lawsuits are being filed at a record pace according to a recent study (see here):

The study found that virtually every participant in the subprime collapse is being sued

Second, as public companies suffer losses and their stock prices decline, shareholder suits and significant D&O losses can be expected (see here).

In early February, New York-based Advisen Ltd. estimated that write-downs of subprime exposures by 120 financial institutions exceeded $230 billion, and that D&O losses for these institutions could reach $3.6 billion.

If close to accurate, this will obviously impact D&O rates.

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Bermuda Insurance History

Bermuda has a long history as a center for insurance beginning with the early development of offshore financial companies (see our prior post).  Today, Bermuda is one of the leading centers, if not the leader, for international insurance and reinsurance.  In Risk & Insurance, Roger Crombie provides an entertaining chronology of Bermuda’s evolution in the insurance world (see here).  He begins with the suicide of a villain, Ivan Breuger, covers the development of the captive insurance industry starting with Fred Reiss, and ends with Bermuda as the most dynamic insurance market in the world.

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Are Intentional Acts Covered by an E&O Policy?