By Ed Barbosa, JD, Assistant Vice President, Swiss Re*
Every fire loss claim covered by an insurance policy begins and sometimes ends with the agent who sold the policy. However, avoiding an E&O claim related to a fire loss begins and always ends with you understanding the process. Remember, the fire loss doesn't start with the fire, it starts with the application.
I. Getting started - the application
It has become increasingly common for carriers to attempt to avoid covering a loss when they determine that the risk as represented on the application is materially different from the actual risk insured.. In some states, the misrepresentation on the application does not even have to be related to the ultimate cause of loss for the carrier to deny the claim and void the policy ab initio (back to the beginning). And if that happens, where's the first place your customer will look to have that loss covered? Hint: go look in the mirror. Faced with an uncovered loss, the policyholder may begin to focus on the agent in an attempt to shift blame and recover any damages. Therefore, it is essential to submit accurate information on the application for insurance to avoid potential E&O liability.
After an uncovered loss occurs and the customer brings suit against the agent, typically they will testify that they gave the correct information to the agent who then incorrectly filled in the blanks on the application. The policyholder may go on to say he did not have a chance to review the information and relied on the agent to correctly complete the application. Lesson One: NEVER fill out an application for a customer. ALWAYS make sure THEY complete and sign the application themselves. Other claims arise when the policyholder alleges that he told the agent the correct information but the agent specifically advised that the information did not need to be disclosed on the application. These situations typically descend into a scenario where it is one person's word against another.
Lesson Two: NEVER advise a customer that information should not be put on an application. When in doubt, write it down. Matters become worse if the customer testifies that even though the application is signed, it is not his signature and the customer did not authorize anyone to sign on his behalf. Agents are often tempted to complete an application with information received over the phone and they are given permission to sign the application on the customer's behalf in order to save time. See Lesson One and Two. Don't give into the temptation.
After you receive the completed application from your customer, be sure to review it to ensure that all the questions and information have been completed and included. The agent should make sure the application includes accurate information regarding prior fires/claims (regardless of size), prior denials/cancellations and unusual fire hazards. You may not realize it, but unusual fire hazards can be encountered with the application for a homeowner's policy where the applicant has a hobby or part time job that requires them to store large supplies of flammable liquids. This is the type of risk a carrier will say they would not knowingly accept. Further, agents should include all known relevant information an underwriter would obviously want to know, such as prior losses at other properties owned by the same individuals (even if technical ownership is by a different corporate entity).
II. Claim assistance
Fires can be big news events for the local media and many times the agent becomes aware of a fire while it is still burning. Often a policyholder will call the agent from a fire scene wanting to know what to do and ask for assistance in reporting the claim. Problems can arise when the agent is asked if there is coverage for the fire loss and the agent responds without reviewing the policy. Lesson Three: Never advise the policyholder what will or won't be covered. While your first inclination is to tell them what you think, let the adjuster for the carrier give that information. You can help them contact the carrier, but after the loss is reported, get out of the way. Without looking at that customer's actual policy, an agent may assume fire coverage is in place and tell the policyholder not to worry. While many policies are identical, there is a chance that there is some special provision that could apply. In many instances there is no coverage for a number of reasons including the policy recently lapsed for non-payment of premium. In other instances the policyholder may have several locations covered under the policy but forgot to add the location that suffered the loss. Sometimes there are special requirements under a commercial policy that require the policyholder to take certain precautions to lower the fire risk such as having sprinklers in place or special fire alarms. If the policyholder has not complied with these requirements it may cause the claim to be denied.
A significant problem arises when an agent assumes a legal duty he may not otherwise have by agreeing to notify the carrier of the fire. If the agent agrees to assume this duty, care must be taken to notify all of the customer's potentially responsible carriers. Courts have held that if an agent assumes a duty it must carry out that duty without negligence.
After a fire is extinguished and all the fire fighters, trucks and equipment are gone, the policyholder can be very anxious to get the cleanup work started. The policyholder may ask the agent if he may proceed with the cleanup work. Although the cleanup seems to be a routine matter to the agent, this approval to start should come from the adjuster or carrier, and not from the agent. If the work is started because the agent told the policyholder to start but the carrier later denies the claim after investigating, the agent may be in a difficult situation. The policyholder will look to the agent for any costs associated with the cleanup if the carrier refuses to pay.
The same holds true with repair work. Sometimes the policyholder, carrier and contractor point their fingers at the agent when the carrier refuses to cover the work entirely or says the expense is in excess of what the policy will allow. Let's assume the agent tells the policyholder to start the repair work and the current building codes require additional work beyond just repair. The policy may exclude or limit coverage for any work associated with the improvements to meet the current building codes. When the carrier denies this expense in whole or in part the contractor will look for payment from the policyholder. The policyholder in turn will look to the agent since he gave approval to proceed.
III. Paying the claim- actual cash value vs. replacement cost
After the fire and cleanup, then comes the task of paying the loss from the fire. In general, there are two methods to determine how much should be paid: Actual Cash Value vs. Replacement Cost. Simply stated, Actual Cash Value (ACV) is the actual value of the property at the time of the loss less depreciation. Replacement Cost (RC) is how much it would cost to replace the property if it were to be rebuilt just as if it had never been destroyed. There are many variables that can play into these amounts, but in most instances ACV is less than RC. The agents' job is to make sure that at the time the policy is applied for, that the customer understands the difference and that they make the decision about which type of policy they want, so that if a loss occurs, they know exactly what they will receive. After the loss, the policyholder may ask how much they will be receiving for their property. Many times, in an effort to be helpful, an agent may tell them that “everything is covered", and these words could come back to haunt them if everything isn't covered. It is the carrier's duty to review the claim and determine how much is to be paid, not the agent's. Lesson Four: Let the carrier discuss payment of the claim with the policyholder. You can be sympathetic with your customer, but after the loss only the carrier and their representatives can tell them how much they will receive.
Hopefully, this has served as a refresher and reminded you that as the agent you must use due care when underwriting and responding to fire losses. That care starts with having your customer complete the application accurately and correctly. It continues through to claim reporting; but remember - adjusting the claim and all activities related to it should be done by the carrier or its adjuster – not the agent. While all of this may seem routine, it is not inconsequential and is sometimes overlooked during the rush of doing business. Oh, and one more thing: always remember to document, document, document. Because if you didn't document it, it didn't happen.
*Ed Barbosa, JD, is an Assistant Vice President of Swiss Re/Westport, handling insurance agents errors and omissions claims. Prior to attending law school he was on the Kansas City, MO Fire Department for 10 years. After law school he practiced for 13 years and has been with Swiss Re for the last 8 years.
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