Agents’ Standard of Care and Insureds’ Duty to Read Their Policies

I recently wrote a short article for my newsletter and LinkedIn about the ludicrous standard in most states that it is the insured’s duty to read and understand their policies. This is a ridiculous standard for many reasons, including the fact that these policies are written far above an 8th-grade reading level (the standard reading level for ordinary people to reasonably comprehend what they are reading). These are complex, legal documents written by attorneys, creating a very unequal playing field.

My primary point was that this standard is 100% oxymoronic because agents have no requirement to understand what they are selling. Agents must have a license, which gives the appearance of knowing what they’re doing. But if you have no requirement to understand what you are selling, no duty to advise clients of what they are buying, and no duty to assess whether what clients are buying is correct, then there is no reason agents need continuing education.

It makes ZERO sense for the party possessing the license to have a lower standard than the consumer. Should a patient have more knowledge than their doctor? How about the attorney? How about the pilot? How about any profession requiring a license?

My point was absolutely not, as some commenters suggested, that insurance companies should make policies simple to read. Other comments described how burdensome it is for agents to help insureds determine their needs and inform them about what they are buying. Seriously? No one needs to pay 13% commission for no advice. That is why going direct is often cheaper.

Standards Vary by State

Insurance agents’ standard of care varies materially by state; by how the agent presents themselves; and whether they are an independent agent, a captive agent, or a direct writer. In other words, many variables exist. For anyone who would like to learn more about these standards by state, I recommend reading the latest version of the Brownson-Norby, PLLC summary of “50 State Insurance Agent Standard of Care Update and Overview.” Swiss Re often has a summary on its E&O website by state, as well. Hassett Glasser, P.C., also publishes a compendium of the Standard of Care by State.

As the Brownson-Norby summary begins, “Order taker standard generally applied in most jurisdictions.” They then quote my favorite book on insurance law, “Understanding Insurance Law,” by Robert Jerry and Douglas Richmond: “No duty to give advice is created simply because the insurance intermediary becomes a person’s agent.” If I, as the agent, have no duty to advise, then I have no duty to know.

If the agent has no duty to advise, then where does that responsibility fall? It must then fall upon the insured to read and understand the policy so they can determine if their coverage is adequate. This also means the insured must understand their exposures.

To recap, agents must spend time and money to obtain and then maintain a license to sell insurance, but they don’t have to do anything with that knowledge, so they really don’t need the knowledge. This is why it is so easy to get 8 to 12 hours of CE in one hour for $149.

Education on E&O

Another angle of the oxymoronic nature of this standard of care environment is typical E&O education. I suspect every E&O defense attorney and instructor most people have ever had has said, “Don’t tell people you’re an expert! Don’t create a special relationship!” A quote from one such program states, “Watch out for raising the standard of care with statements of: ‘Specialized’ or ‘Expert’ expertise.” Why should people buy insurance from someone who is not more expert than they are? Otherwise, why not buy insurance from a vending machine?

As a real-world example, I recently asked my agent for an umbrella policy and a new auto policy because I’ve moved to a new state. The account manager offered me an auto policy with one carrier and an umbrella with another. I asked her if the umbrella was a follow-form umbrella that would cover auto accidents without gaps in coverage. She got back to me later and advised the umbrella would not likely cover my auto because the auto carrier she had recommended used a form the umbrella would not follow. How many regular consumers would have any idea whatsoever how to read those two forms and identify that problem? But in my state, the agent has no duty to advise.

If an agent has no duty to advise, continuing education should be eliminated. It’s simple: if an attorney has no duty to advise a client, they don’t need to know what they’re doing, and the client doesn’t need them. Insureds don’t need agents who don’t advise. The insurance industry is simply lucky that consumers don’t know they don’t need an agent who doesn’t provide advice.

Opportunity

I also understand that it takes a lot of time and energy to advise insureds. But this oxymoronic environment creates a fantastic opportunity.

During one of my very first consulting jobs, back in the ’90s, I made a bet with a very successful agent. I bet him that if he made all his producers advise clients, he would make more money. I bet him his producers would make more money. And I bet him that his clients would demonstrably prefer his agency over his competitors, leading to more referrals and higher reviews. He was already a multi-millionaire, so the bet was far more important to me than him. I’ll always be thankful he accepted the bet and was so gracious when he “lost.” He still won, of course. He was going to win regardless of the outcome.

Continuing education is oxymoronic for amateurs who have no duty to advise. It shifts the burden to consumers who have no background, no legal training, no insurance training, and no exposure training beyond simply common-sense things like fires and auto wrecks, to figure out for themselves what insurance they need and whether the insurance offered meets their needs. This means by default, they have a duty to read and understand their policies. And they have another duty to advise their agent of what changes must be made, such as I have no need for an umbrella that does not follow my auto policy.

Over the years and through many E&O audits, I have witnessed that 100% of the time, when agents properly advise clients, their revenues increase. When they use their knowledge and do their jobs correctly, they have sold more insurance policies, and their clients are better protected. Time and time again, a professional approach is more successful than a know-nothing approach.

Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. E-mail: chris@burand-associates.com.

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