I have seen and heard seemingly an infinite number of agents, agents’ associations, and errors and omissions (E&O) attorneys advise that agents should have a low standard of care and rely on the insured having the “duty to read your policy” caveat to protect the agency from an E&O claim. These statements, advice and exercises all have a high level of laziness involved. Before addressing the laziness though, I’ll address where this disclaimer has some value.
Certain aspects of insurance coverage are simply not determinable by agents. Possibly the best example of an undeterminable coverage is the replacement cost of a building.
Agents have a duty to explain how coverage works, co-insurance, ordinance or law versus regular replacement cost, and maybe even walk a client through a replacement cost estimator. However, agents are not builders and cannot be expected to determine replacement cost with any certainty. It is important for agents to let insureds know that the agency is not in a position to accurately determine the replacement cost. It is important to include a disclaimer to this effect. One can’t have it both ways by causing someone to think you know what you are doing by avoiding the disclaimer and then not be held accountable.
Liability coverage limits are another example because these limits are ultimately always the insured’s personal or contractual decision. Agents certainly can make recommendations relative to excessively low limits, and they can advise higher limits may be available, but the insured has to determine the limit that is best for them.
On the other hand, telling an insured they have a duty to read, which implies a duty to understand, their policy and call to make changes is an excuse to be lazy and a peddler. This serves an important purpose for those agents that only want to sell insurance without caring about their clients’ welfare. Unfortunately, plenty of these agents exist.
Whether it is an agency, an association or an E&O attorney telling me how agents need to rely on the insureds’ “duty to read” to protect themselves, let’s explore what this really means.
Duty to Read
If an insured needs to read and understand the policy themselves then they do not need a professional agent. The professional agent’s role is to explain and guide an insured to the coverages they need. If an agent does not fulfill that role, the end result is that no one needs an agent. One E&O certainty is this: an agent without clients is unlikely to incur an E&O claim. At least these agents will be safe from being sued.
Next, advising insureds to read their policies is rich advice because a huge proportion of agents do not read the policies they are selling, much less understand them. I state this as a factual basis after completing 25 years of E&O audits, due diligence projects and teaching insurance classes. I cannot begin to tell you how many times producers and account executives have explained they do not understand how ordinance or law works, the major parts of a D&O policy or the different kinds of business interruption coverage. They seem to think a business owners policy (BOP) covers it all and that all BOPs are the same.
The reality is that producers and many agency owners like the “duty to read” camouflage because then they feel they don’t have to take the time to read the forms, understand the forms and actually have conversations with their clients.
Some have even declared that if they must take the time to talk to their clients, they won’t make enough money. The upshot is they like making money for nothing. So much of insurtech is aimed directly at taking these clients. Many industry veterans decry that insurtech can’t provide the individual service human agents can, and I agree, assuming these human agents do the work. But many agents don’t do any work. The gravy train is going to end either way, and I am glad because these lazy agents ruin lives.
The goal of insurance is to restore the insured’s financial situation, their balance sheet usually, to the exact amount less a deductible just prior to the loss. People need this protection when they suffer a large loss. When that protection is not provided, what happens? Here are some examples of what I have seen:
The insured declared bankruptcy. The insurance company paid the claim up to the correct amount, but the agent sold the insured far too little insurance advising they [the agent] could save them some money. The insured did not know the difference between replacement cost and actual cash value (ACV). They had a “duty to read” their policy.
The insured was fined because they could not comply with environmental clean-up rules because their policy did not provide adequate debris removal. Besides losing their business, they incurred large fines. A good agent would have asked about asbestos in the roof and recommended the appropriate, applicable coverages. The insured is financially ruined and still owes fines.
An insured is now choosing between buying their prescriptions and paying for their forced placed homeowners’ insurance because their agent completely misled them relative to their underwriting requirements and coverage. The result was no coverage and a nonrenewal. When the insured complained they did not understand why they did not have coverage for the claim, the agent literally said, “Did you read the requirement to read your policy?”
A retired couple lost their home for which they had too little insurance in a fire. While agents should not be responsible for calculating the coverage amount, insuring to 100% of value, offering the replacement cost endorsement and offering extra ordinance or law all are easily within an agent’s ability. Determining the amount of coverage is difficult and not likely the agent’s job, but an agent is far better or should be far better positioned than the insured to recommend what kinds of insurance the insured should purchase. If the agent had done so in this case, the insured would have had adequate funds with which to rebuild rather than dipping into the retirement fund they hoped to keep for long-term care.
Too often, I see articles written about unfair E&O claims, but many E&O claims are completely legitimate. In these four examples, because of the state laws and/or the fact that the agent was a captive agent only and never an agent of the insured, the agents did not even suffer an E&O claim. These insureds, and in fact no one, needs an agent who does not know their coverages well enough to provide quality advice. Agents should be held accountable for not providing quality coverage advice. We do not need attorneys that do not know the law upon which they are advising, and we do not need ear doctors practicing medicine on our spines.
At the very least, agents that hide behind the “read your policy” language should read the policies themselves and then advise, specific to that client, what coverages the agency recommends. Agents may not be able to recommend with precision the coverage amounts most applicable, but they can recommend with accuracy the kinds of coverage an insured should consider. After all, the agent is the one with the insurance license, not the insured.
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