Advising Clients on Specific Dollar Values of Coverages They Need to Consider May Create Unnecessary Exposures
There have been an increasing number of lawsuits brought against agents in situations where the client/policyholder does not have sufficient liability coverage limits to pay for the liability exposure caused by an accident. Typically, in these types of situations the client/policyholder sues the insurance agent alleging that the agent should have recommended the purchase of higher policy limits. This situation also arises frequently with uninsured and underinsured motorist (UM/UIM) claims as well.
In most states, insurance agents are not required to recommend a specific amount of coverage. Also in most states, insurance agents are only required to provide to the client the appropriate insurance products to protect against the client’s risks. This recommendation does not include the limits of coverage which should be purchased, however.
At the time of the insurance purchase the amount of insurance coverage necessary to protect the insured is purely speculative. Irrespective of the client’s financial status, if an insurance agent were to recommend large limits and no accident occurred then the client would have, in hindsight, overpaid for the amount of risk coverage needed.
On the other hand, when an accident does occur which produces substantial injury or liability exposures — that realized exposure— in hindsight demonstrates that larger limits should have been purchased and that the purchase of higher limits was a prudent decision.
The point to this is that the agent, at the time of the policy sale, cannot predict with any accuracy the amount of coverage that the insured should purchase. Any recommendation will cut both ways depending on hindsight.
Assessing the Amount of Liability
In order to assess the appropriate amount of liability and UM/UIM coverage that the client should purchase would require the agent to have substantial access to the insured’s financial investments and properties. With respect to UM/UIM coverage, the amount of health insurance can be relevant. Even with this information, an agent cannot accurately assess the insured’s risk which is expressed through the dollar amount of the policy’s limits.
Perhaps one of the most comprehensive discussions of the public policy for judicial refusal to declare that insurance agents owe a duty to recommend specific amounts of insurance can be seen in the Maryland case of Sadler v. Loomis Co., 139 Md.App. 374, 776 A.2d 25 (Md. App. 2001). In Sadler, the Maryland Court of Special Appeals found that a lawsuit brought by an insured against her insurance agent for “woefully underinsuring” her was not a legally recognizable claim. The court in Sadler noted that the majority of states refused to hold agents liable for failing to recommend a sufficient amount of insurance because it is the insured who is “in the best position to assess the value of his or her assets, and the extent of potential loss in the event that a risk materializes, whether by adverse judgment, business interruption, fire, theft, or the like.” (139 Md.App. at 400, 776 A.2d at 40)
Additionally, the court observed that it is the “insured [who] is generally considered best able to balance the factors relating to potential economic loss against the expenses of purchasing additional insurance, the likelihood that a particular risk will materialize, and the insured’s own comfort level with the risk versus the cost of greater protection.”
The court expressed concern that requiring agents to advise policyholders of the amount of coverage they should purchase would “readily encourage an insured who suffers a loss to fabricate that he or she would have bought more insurance had it been recommended.” In essence, the creation of such an obligation to advise insureds on the amount of coverage they should purchase would indirectly afford insureds the opportunity to insure after the loss by merely asserting that they would have bought the additional coverage had it been offered.
Minimizing Risk of Litigation
Where does this leave the insurance agent? It is appropriate and required that insurance agents assist their clients with the selection of the right products to protect their clients. Oftentimes agents will recommend that an umbrella or excess policy be purchased above the primary limits because of the client’s general financial condition or the size of the business being insured. This type of advice falls under the category of the agent’s obligation to present the right products for the client’s needs. Specific dollar values are not directly recommended, although they are independently obvious, i.e., a $1 million umbrella. By recommending an umbrella or excess policy, the agent is recommending coverage in excess of the threshold attachment point.
With respect to UM and UIM coverage, agents will often tell their clients that they should consider insuring themselves as much and as fully as they insure themselves against the prospect of a lawsuit against the insured. This type of general advice does not rise to the level of a specific recommendation for coverage limits.
In order to minimize the risk of litigation, the prudent insurance agent should prepare a letter which is sent to every insured indicating that the insured must determine how much coverage he or she believes is adequate to protect against the possibility of risk exposure. The letter can tell the client that the agent may make a recommendation, generally, that it is the client who must choose the amount of coverage purchased. As an example, the agent could recommend an umbrella or excess policy as a type of product and then explain the coverage requirements that are a condition precedent to the availability of that product.
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