AZ Court Decision Could Increase Agent E&O Premiums

The Arizona Supreme Court is weighing in on the state’s uninsured/underinsured motorist coverage selection form — a decision that could dramatically increase insurance agency’s errors and omissions premiums, according to the Independent Insurance Agents and Brokers of Arizona.

According to IIABAZ’s amicus brief in Ballesteros v. American Standard Insurance Co., the Arizona legislature has mandated the use of an “uninsured and underinsured motorist coverage selection or rejection form,” which advises policyholders that they have the right to purchase UM/UIM coverage equal to the limits of the bodily injury coverage. If the policyholder elects to purchase coverage in any amount less than the bodily injury liability limits, they must sign the form.

At dispute in the case is whether the UM/UIM form can be used as evidence of the policyholder’s election to include or exclude UM/UIM coverages in instances when the applicant cannot read English.

According to court documents, the insured Luis Ballesteros did not read English, and he has argued that because he was unable to read the acceptance/rejection form he was not offered UM/UIM coverage, and therefore he should have been provided coverage even though he did not purchase it. Whether he was read a Spanish translation of the form or not is not a disputed fact.

The lower courts decided in Ballesteros that complying with the mandatory UM/UIM offer requirement requires insurance producers to do “something more” that secure and insured’s signature to an Arizona Department of Insurance approved UM/UIM selection/rejection form.

IIABAZ is concerned because most insurance companies have filed only an English version of the UM/UIM selection form. The form is designed to provide policyholders with an easy-to-understand explanation of the coverages. This “something more” than a signature to the UM/UIM form would nullify the rule the Legislature created to assist insurance producers in complying with the UM/UIM offer requirement, explained Lanny Hair, IIABAZ executive vice president.

“The very few who have filed the Spanish version of the form now need to worry about applicants/insureds who speak French, German, Chinese and any of the hundreds of other languages,” he said. And by requiring ‘something more’ than a signature to the approved form, the ruling exposes producers to malpractice claims by any applicant who signs the approved form rejecting UM/UIM coverage but who, after a loss, alleges that ‘something more’ was required of the insurance producer to adequately explain the form, Hair added.

IIABAZ estimates that if the Supreme Court agrees that “something more” is required to explain the UM/UIM form, then the incidence of claims asserted against is agent/producer members will increase by 25 percent to 30 percent, and make it virtually impossible for insurance producers to verify their compliance with the statute. (The adoption of the UM/UIM form in 1993 virtually eliminated the UM/UIM-related professional negligence claims reported by IIABAZ’s insurance producer members, Hair said.)

Other consequences of the Ballesteros ruling include the negative impact on insurance producers’ relationships with insurers who are forced to pay claims based on assertions about the inadequacy of producers’ coverage offers, and who then bring indemnification actions against producers, Hair added. “Additionally, because of the uncertainty caused by the Court of Appeals’ opinion, insurance producers will likely not sell auto insurance to consumers who want to reject the UM/UIM coverage, thus increasing the likelihood that such consumers will not procure mandatory auto liability coverage at all. The net result will be more inadequately insured drivers on Arizona’s highways, thus exacerbating the problem the [UM/UIM coverage selection and rejection form statute] was designed to address,” he said.

IIABAZ, the National Association of Mutual Insurance Companies, Property Casualty Insurers Association of America, and the state Department of Insurance have all filed friend of the court briefs to this case. Oral arguments on the case are scheduled for Oct. 5, 2010.

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