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Insurance agents covering their malpractice bases with E&O

It is well known that doctors carry malpractice insurance. Less well known to the general public is that most professionals, including insurance agents, also carry liability insurance.

For insurance agents, the coverage is known as errors and omissions (E & O) insurance. And while there has been literally a flood of lawsuits against insurance companies over the wind vs. flood debate following Hurricane Katrina, lawsuits against agents for failing to recommend flood insurance to customers have been rare.

Mississippi Insurance Commissioner George Dale said the problem with suing agents for allegedly recommending against flood insurance is that most of the conversations were verbal and undocumented.

“When you start saying, ‘I was told thus and so,’ it becomes a matter of who can prove what,” Dale said.
Dale said that while it isn’t required, he wouldn’t be an insurance agent without E & O insurance. He said most agents have a policy that protects them against errors. Types of issues covered might be putting a wrong date on the policy or not sending in payments properly causing a policy to lapse.

Most insurance agents turn into insurance customers when it comes time to renew their E & O insurance, says Debbie Shempert, president of the Independent Insurance Agents of Mississippi, and an officer with Renasant Insurance Inc. in Tupelo.

“All of the sudden we become a consumer instead of the agent,” Shempert said. “We have to do just like our clients. Every year we have to fill out an application, go to different companies to get quotes, review several quotes and pick one. We live in a litigious society. Twenty years ago suing wasn’t the first thing people thought about.”

The cost of coverage can hinge on the size of the insurance agency, the number of companies represented, the number of years the agents have been in business, any previous claims, and limits and deductibles.

Shempert said agents might go 20 years without having a lawsuit filed against them, but it is also not unusual for an agent to be sued.

After Hurricane Katrina many policyholders have been suing their insurance companies over claims that were denied based on the flood exclusion in their homeowner’s insurance policy. A separate policy from the National Flood Insurance Program is needed to cover flooding damages. Some insurance customers have felt they should have been paid more for wind damages because their damages weren’t entirely caused by flooding. And some have argued that their insurance agents were negligent in not advising them to purchase flood insurance.

In most cases, policy holders are suing the insurance companies instead of the agent. Shempert believes that is because many times customers are close friends with their insurance agent.

“The agent provided policies that had coverages and exclusions,” Shempert said. “The agent is just selling a product. Did wind or flood come first? That isn’t anything the agent did or did not do. The question isn’t whether or not the agent failed to sell them flood insurance, but a question whether the damage was from wind or from flood that was specifically excluded in the policy.”

After the Katrina experience, many agents have made changes in how they do business. Shempert said now if an agent offers a client certain coverage and the client is not interested, it is documented and put in the customer’s file.

“It is more common now to have the customer sign something saying they have been offered insurance and declined,” Shempert said. “The insurance industry is also trying to make the language of the policies less ambiguous.”

Robert Hartwig, chief economist, Insurance Information Institute, New York, said most professionals carry some type of professional liability coverage.

“Whether a doctor, lawyer, architect, tax professional or insurance agent, generally you carry some type of professional liability insurance coverage,” Hartwig said. “Basically, the coverage there covers negligent errors, acts or omissions. That is the intent to the policy.”

Hartwig said doctors are sued often, and most cases are thrown out. But doctors still feel it is necessary to keep liability insurance in order to cover legal costs. It is the same for insurance agents; the policy provides protection in cases where agents are sued without merit.

“The principal reason to purchase the insurance is the legal costs,” Hartwig said. “In effect what you are purchasing is legal defense to a very large extent.”

Hartwig said it wouldn’t be appropriate for home owners to sue their agents for failing to offer them flood policies. He said the purchase of flood policies offered by the National Flood Insurance Program should be a matter of personal responsibility. He said many people have flood insurance when they first get their mortgage. But 10% to 15% each year allow their policy to lapse.

“There is something peculiar about southern Mississippi,” Hartwig said. “It has some of the lowest percentage of penetration rates for flood insurance of any other coastally exposed part of the country. It is much lower than Florida, Louisiana, the Carolinas, and parts of Texas, too.”

Hartwig said the reason for the low amount of flood coverage in Mississippi is that many people felt if their homes did not flood with Camille in 1969, then flood insurance was not needed.

“Generally speaking, many homeowners made a voluntary decision not to maintain the flood insurance,” he said. “That decision, which proved to be a fateful one, is out of step with most other coastal counties exposed to hurricanes. Fewer than 20% of coastal homes in Mississippi had coverage whereas in areas around New Orleans, 60% to 80% had at least some flood coverage.”

Contact MBJ contributing writer Becky Gillette at bgillette@bellsouth.net.


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