News Currents

Hurricanes spawn E&O troubles for insurance producers

With regard to potential errors and omissions claims against insurance producers in Louisiana arising out of Hurricanes Katrina and Rita, three main coverage areas are emerging as being particularly vulnerable: the wind vs. flood controversy; property valuation; and business interruption, according to James H. “Chuck” Morgan III with the law firm of Seale, Smith, Zuber and Barnette in Baton Rouge, La.

Speaking at the 2006 Louisiana Surplus Lines Association “Life After the Storms” convention in Lake Charles, La., in late April, Morgan explained that lawsuits falling into those categories are already popping up against producers-he currently has a number of them on his desk.

The “conflict between flood coverage and windstorm coverage, between the flood policy and the regular homeowners policy and commercial property policy” is “going to be the largest area where we can expect claims,” Morgan said. “And we are already seeing those.

“The second area where we’re probably going to see claims is in the area of property values. I already have a couple of those. [They say] ‘Oh, Ms. Agent, why didn’t you tell me that I needed to value this property higher? Now that it’s washed away or blown away and I don’t have enough coverage.’ I think you’re going to see some significant litigation in the property value area.

“The third area will be business interruption-we’re going to see some claims there-business interruption [and] additional living expense coverages.”

He said there are about six prominent historical cases that courts in Louisiana generally look to when trying to determine the responsibilities of an insurance agent or broker (both of which under the state’s insurance code now are considered “producers”) and four of them arose out of storms.

“It seems that most often when the courts decide they want to either broaden or perhaps reduce the liability and responsibility of an agent, they’re going to take the storm setting in which to do it,” Morgan said. “That tells me we’re looking at the next year or two or three with our courts tinkering with the legal duties.”

He said it’s very important that agents realize what their duties are with regard to their clients and how those duties come into play in a storm situation. According to Morgan one “storm case” that “greatly expanded” the duties of the insurance agent is Durham v. McFarland, Gay & Clay Inc. 5126 So2d 403, 405 (La. App. 4th Cir. 1988). Arising out of Hurricane Juan, one issue central to the case was the fact “of whether there was communication between the agent and Mr. Durham concerning flood coverage for the boathouse” on Lake Pontchartrain where Durham resided following a divorce.

Durham claimed he never received communication from the agent about flood coverage but the agent said he sent it. Morgan said during the hurricane Lake Pontchartrain rose five or six feet and flooded Durham’s boathouse. It was only when the insured turned in a claim that he found out he didn’t have flood coverage. “Needless to say, he sued his agent,” Morgan said.

“In holding for Mr. Durham against the agent,” Morgan explained, “the court said. ‘Not only do you have the duty to use reasonable diligence to get the coverage, but you also have the duty to advise the client with regard to recommending coverage. To investigate and ascertain the financial condition of the companies with whom you place coverage and to notify the insured of cancellation, termination or inability to place the
coverage.’

“This is the key language from this point forward the insurance broker is no longer a mere order taker,” Morgan said. “Which means you now have moved from being a sales person up to being a professional, giving advice, recommendations and really having a fiduciary duty to your
client. …

“There have been several opportunities since that case was decided for the Supreme Court to look at that and on each of those occasions the Supreme Court has chosen to deny the writ. Which makes you think that the Louisiana Supreme Court clearly approves of the language of Durham.”

Morgan said that the Durham case could apply to any number of lawsuits arising out of the 2005 storms since at its core the problem was flood coverage.

“The agent had a duty to make sure that this man knew if he did or did not have flood coverage because of the fact that the agent knew that the boathouse was located right on the shores of Lake Pontchartrain and there was certainly the possibility that it would flood.”

Morgan offered the following suggestions to help agents avoid E&O claims:

1. Document coverage requests. Use checklists and make clients sign those checklists.

“I have never seen a current checklist either for homeowners or commercial property that doesn’t have a flood section,” Morgan said. “If they don’t want flood and they don’t want to talk about flood, you have them sign that checklist where it says ‘I don’t want flood.’ They’ll get up and testify ‘I didn’t know what I was signing, the agent said I had to sign all this in order to get my coverage. I didn’t understand it. Lord knows I can barely read.’ When they sign that with the check box on there it at least gives your lawyer the chance to” project it on a big screen in front of a jury and point out where the client “signed it saying they didn’t want flood coverage.”

2. If you can’t get the coverages your insured has requested, confirm in writing “that you didn’t get this coverage for them and you don’t have access to it.”

3. Don’t act as an expert in an area where you are not an expert. If a client asks you how much a building should be valued for, “if you’re not an expert appraiser and you don’t have and appraiser’s license, don’t appraise the building. You can’t be acting as an expert in area where you are not an expert.”

4. Document policy delivery. Many policies are lost in a flood situation because the flood simply carried them away.

“You need to have in your files some documentation, a transmittal letter, something that proves you did get that policy to that insured,” he said.

5. A yearly review of insurance with your insured. Morgan said this is not only a good marketing tool; it is also helpful in preventing errors and omissions.

6. Don’t make commitments for the insurance company. Don’t assure the client that specific things will be covered.

“Tell them, ‘I will submit the claim and it will be up to the insurer whether they are going to pay the claim,'” he said.

7. Keep up with literature, read industry publications and journals.

8. “Finally, do what you’ve been doing, which is being good agents,” Morgan
concluded.

Topics Agencies Louisiana Flood Property Hurricane