Author: VU Faculty
Your agency services an area subject to catastrophes. Is it the responsibility of your insureds to contact you if they want quotes/coverage for excluded perils (e.g., flood and earthquake) or are you responsible to contact each of them and offer the coverage?
"During the past few weeks we've experienced a series of small earthquakes. Since our property policies don't include earthquake coverage, we're questioning if we should notify all of our insureds that coverage may be available...before a large quake hits, if ever. Obviously, the cost in time, envelopes, postage, etc., would be substantial.
"Additionally, we questioned potential E&O problems if we did or didn't contact each and every insured. There have been articles in the local media on a daily basis. Today, on the front page of our local paper, a direct writing agent was quoted saying there is no coverage on a homeowners policy, indicated they'd quoted numerous policies but, due to the cost and the deductible, had not issued one policy.
"How far do we need to go? Is it the responsibility of the insureds to contact us if they want quotes/coverage or are we responsible to contact each of them?"
You pose a good question as to both potential legal liability for failing to offer coverages otherwise excluded vs. the business practice of whether this is a good idea from the standpoing of addressing the exposures your customers may have. Courts have generally held that the responsibility lies with the customer but below are some considerations offered by the VU faculty.
Sounds like a good marketing tool. You have just as much chance of an earthquake as those of us in California. You can put info in renewal packages. You are not obligated to tell your clients but it would be profitable to do so and provide your clients with useful information.
Depends on what you mean by "should" notify your insureds. In terms of your legal duty, that depends on either state statutes or jurisprudence. Many states have case law that simply puts an agent's duty at providing the coverages requested by the insured, or notifying the insured when such requests cannot be met. Often, this relationship is characterized in the literature as an "arms length transaction," meaning the agent is not acting as an adviser. However, other states place a higher duty on agents, especially if there is a "special relationship" between agent and insured.
At the same time, many agents don't look for the minimum they have to do for insureds, but approach each account with a standardized, systematic approach which includes a coverage checklist of some sort. This would include standard coverages (including EQ, flood, excess flood - building & contents), and common endorsements and options/limits.
Some agencies use the vehicle of an annual renewal letter to inform or remind insureds of important coverages, such as EQ, flood, etc. If that approach is implemented, each insured will be contacted in the course of a year. At the same time, a specific mail campaign is not a bad idea. If you mail to everyone in your data base, your E&O exposure seems remote, even if you inadvertently "missed" someone. Then again, if it was your "invariable practice" to contact every insured with the mailing, it seems to me that the burden would be on the insured to prove they didn't get one.
You might consider some cost-effective methods for the mailing, such as bulk rate, or even cheaper postcards.
There is always a story or local incident that triggers these types of questions for agencies. I am sorry about getting on my soap box but when you take E&O courses I am sure that the speaker talks about using checklists and renewal questionnaires. These offer the opportunity to present various loss exposures and give the insured/prospect the chance to determine their interest in coverage. Waiting for an incident to make headlines and trying to scramble to reach all insured about the need for possible coverage will always result in a large cost of time and money. I mention this only as a suggestion for the future. This question and recent events offer an opportunity to review your agency's procedures on exposure identification.
From your question, it appears that to send out earthquake information to customers would not be financially practical. That being the case, I would suggest that any contact with customers over the next year should include a discussion on earthquake coverage. Since each carrier's pricing and deductible options varies, you need to contact your carriers and determine this information. In addition to adding earthquake to your renewal/new business discussions. you can do other things that are more cost effective to get the word about earthquake coverage out. Some suggestions - contact your local newspaper and offer to do an article on earthquake coverage, add something to the agency website, if you have a neon message sign outside of your office add an earthquake insurance message, add a message on earthquake to bottom of your e-mail messages, etc.
While you may not have a legal obligation to offer excluded coverages, it's probably a good business decision. It is highly recommended that agencies use coverage checklists that include offers of things like earthquake and flood coverage. As much press as there has been over the years with regard to homeowners policies not covering flooding, the uninsured and the trial bar will still find a way to go after you for not offering coverages. As for the cost, many agencies offer regular communications to their customers via newsletters or other mailings, so it can be affordable...particularly if you generate sales that will offset the cost.
The reality is that which ever way you decide to go, there is an attorney who will say you were wrong. This happened in the mid 80’s when our agency took the high road and sent a mailing to our clients. Because of the press and doomsday prediction, we endorsed over 500 policies in the span of a week. They were stacked everywhere. We processed the additional premiums and all within a month when the predicted event did not occur and one of the TV reporters let it be known that you could, in fact, take the coverage off. We processed almost 300 endorsements removing the coverage. And by the end of one year after the event, we had only four policies still with EQ coverage. Just one agencies tale.
In custom and practice, the duties and responsibilities of an insurance agent is to obtain the coverage the client requests using the requisite skill and knowledge. It is up to the insured to advise the agent of the desire for coverage and protection. Do you have a newsletter or web site where you can place information regarding earthquake and show some rates and deductibles? It is my opinion the responsibility is for the insured to contact the agent. That said there may be some additional opportunities for the agency to market its services.
Yes, you should inform your insureds/prospects of the availability of coverage. Become familiar with any limitations in the available coverage and its pricing so that you can provide indications. Do so in writing.
I suspect earthquake out west is similar to flood here in Florida. We always suggest that our agents recommend flood to all customers and document it. During our 2004 storm season, claims involving the lack of flood insurance were the second most common E&O loss (next to off premises utility failure) our member agents suffered.
I'd recommend that customers be contacted, if they have not been done so, and offer coverage. Do the same for all new customers to the agency, and document the offer.
“Since our property policies don't include earthquake coverage, we're questioning if we should notify all of our insureds that coverage may be available... before a large quake hits, if ever.”
YES!
“Obviously, the cost in time, envelopes, postage, etc., would be substantial.”
Why not include a discussion of this subject when you send renewals or renewal invoices or when they are due to be sent from the insurer? Perhaps you can prevail upon your carriers for help with this communication.
At the end of the day, common law in most states obligates the agent to do two things (in the absence of special circumstances)...to act in good faith and to follow the customer's instructions. In short, if they didn't ask for it, how are you negligent in not providing it? But that doesn't prevent E&O claims from being filed against your agency. look at it the way any agent on the coast would have to deal with flood insurance. If there is a flood, or in your case an earthquake that causes widespread damage, people without coverage who suffer a serious loss are very likely to look into an E&O claim against their agent, regardless of reminders, offers or whatever.
If the agent had proactively reminded customers that their homeowners or other property policy does not cover earthquake, and that it was available, and all they need to do is contact them, and they can prove the communication took place, then they are in a much better position to get the plaintiff's attorney to give up on the claim. This is done by many agents in flood-prone areas routinely, every few years or so. It increases sales and adds a layer of defense should the worst occur. Just a thought, but if you are worried about the cost, consider how many email addresses for customers. Its a far cheaper way to communicate these kinds of messages.
Many agencies in coastal areas send letters well in advance of each hurricane season reminding their insured customers that flood is not covered under property policies and the availability of flood coverage through the NFIP - and other sources. A significant percentage of the letters provide the amount of coverage on the insured's property under both property and flood policies. The letters briefly describe waiting periods to purchase or change flood coverage and restrictions on changing property policies when named storms are in the Atlantic Ocean.
The results are two-fold.
1. These letters sell significant property and flood insurance.
2. The value of these letters after the hurricanes cannot be understated.
Let me suggest you consider your opportunity to communicate important information to your insured about earthquake - and other important - coverage. In the event of a major earthquake in your area, what will be the value of your annual letter?
This might be a legal question. Your responsibility might depend on your relationship with your client. Do they depend on you for insurance advice? Do you normally offer coverage endorsements or do you wait for them to ask you? Do you make an effort to identify exposures or do you sell policies on a "one size fits all" basis? Insureds often decline coverage but want that same coverage after a loss.
Do you have an agency newsletter? If so, you can advise your clients of the exposure. However you advise them, the cost of an E&O loss might far outweigh the cost of the mailings. In addition, you might develop enough additional premium to pay for the expense. You will also raise the customer's opinion of your agency by making them aware of needed coverage. It's also an opportunity to make a proactive contact with your clients and further solidify your relationship. If you don't service your clients somebody else will.