"When automobile claims come into our agency, we always talk to the insured about the benefits of self-insuring the loss if they can, but more and more we are seeing lawsuits being filed for claims sometime down the line.

 

"My question is, if the insured reports the claim to us (the agency) and we note their account, but they decide to self-insure (not report the claim to the insurer), are we in any way jeopordizing their coverage down the line if, for example, they get sued for 1 million dollars by the party they hit 2 years later? Will they have coverage since it was actually not reported to the insurance company?

 

"Another scenario is, what if the insured calls us (the agency), they decide to self-insure, we never note their account, and 2 years later they are sued - will they have coverage?

 

 

This is not a good practice.  Not reporting claims for any reason violates policy conditions (read that section of the policy) and could definitely create future problems. Report the claim...if the customer wishes not to accept money for the settlement of the claim, he/she can discuss it with the company representative handling the claim.
 
I understand in today's marketplace that avoiding incidents on the customer's driving record is a concern to some. Being nonrenewed or paying a higher rate due to accidents/incidents is the way of the world. Often, you have to live with it.
 
In any event, your E&O carrier will be much happier if customers aren't counseled in such a manner. REPORT THE CLAIM, as it's an agent's duty ethically and professionally..

You are engaged in a very dangerous — to your personal finances as well as that of the insured — practice. You are advising your clients to violate a material condition of the policy. In response to your questions:

First, you are jeopardizing the insured and possibly your E&O coverage. Read the policy, it is a condition of the policy that the insured report losses. Why did they pay premium to you and the insurer if they then decide to "self-insure"?  That self-insurance could go all the way to a massive judgment that is not insured and they will come looking for you for indemnity.

Second, if you record it and are an agent of the company, they had notice but will probably look to you for the damages the insurer incurs.

I suggest you contact your errors and omissions insurer for guidance.

 

We, like all consumers, purchase insurance to transfer our risk of loss to the carrier who will pay covered claims, if we have any. If you are telling your customers, after a loss, to pay the claims themselves, why are you selling insurance to them in the first place? If your agency believes that insurance should only be purchased for large catastrophic losses, why are you not discussing this with the client before the sale? Customers can then purchase a policy that includes premium saving options up front, such as high deductibles. They then have made an active decision to “self insure.”

Most important, the PAP contains loss conditions (Insured’s Duties after an Accident). In the PAP, the loss conditions start out with, “We have no duty to provide coverage under this policy unless there has been full compliance with the following duties...(1) We must be notified promptly of how, when, and where the accident or loss happened...." If you look at the rest of the loss conditions, you will see that the carrier is looking for cooperation in investigating the loss, protection of their legal rights, etc.  All of this is intended to protect the insurer’s rights, duties and ability to investigate, verify the validity of the claim, and settle the loss. By advising your insured to pay the loss without notice, they have violated the condition to “promptly” report the claim.

You asked if the insured would have coverage two years later for suits that may be brought for these accidents. They would have coverage, but not under their PAP...it can be found under your agency's E&O policy. When they report the loss to you, they are reporting it to the carrier. You have failed to transmit the information to the company, not because your insured has decided not to report it, but because you are advising them not to report the loss. Check your agency’s E&O limits to see how much coverage the insured would have.

 

Either scenario is an E&O claim waiting to happen!  All I can visualize is a Reservation of Rights letter.

The first situation is clearly the fault of the agency. The wording of the policy conditions calls for prompt notification. The policy is a contract between the insured and the carrier. When the agency takes the notice and does not convey the information to the carrier, they are in violation of their contract with that carrier which calls for notifying them of all material facts. The carrier has not had the opportunity to investigate the claim and possibly make a settlement.

The second situation is not quite as clearcut as the first, but there are many similarities. In this scenario, the client has made the decision to self-insure. Unfortunately, when the suit papers are delivered, the insured will probably say, “I told my agent about it when it happened.” Even if this doesn’t happen, the agent has still violated his contract by failing to notify the company of a material fact.

Always notify the carrier of any claim that the agent becomes aware of. If the insured wants to pay the initial costs out of their pocket, let that be between the claims department and the insured.

 

This becomes a legal question. Two issues are implied. First, is the notice to you notice to the company? If so, they are protected, but the company may take issue with you if their position was prejudiced by the delay. The second is, if the company is successful in denying coverage (notice to you was not notice to them and they can show the delay was prejudicial), then the insured will have issues with you. Either way if it blows up from what is perceived as a little claim into a major claim. The agency's position is one of peril.

 

Here’s an actual claim we had from one of our member agents. The insured left the bath tub to fill and she took a phone call. Thirty minutes later she had a lake in her bedroom. She called and reported the claim and the company paid out on it. Six months later the exact thing happened. When she called to report the claim, she asked the agent, “Will I get cancelled because of this?”  The agent said, “It’s hard to tell but the company will look at this and may nonrenew the policy.”

The insured instructed the agent not to report the claim. A few months later, the company sent a nonrenewal due to the one claim. The insured was ticked, and called the agent to say, “If they are going to dump me, then I want to file that second claim.” The agent did that and the insurer denied for lack of prompt notice. The client looked to the agent and said, “Well I reported it to you, so you pay me.” We submitted an E&O claim for the agent.

Promptly report all losses to the carrier…as hard as that may be today.

 

What can happen if the incident isn't reported?

1.  Discovery of hidden damage discovered at a later date and beyond the time permitted by the carrier to report the loss.

2.  One insured doesn't want to report the loss while another does.

3.  The insured changes their mind too late for the claim to be accepted by the insurance carrier.

4.  The incident involves matters other than those reported by the insured.

If the insured has an incident, but doesn't want to file a claim, submit an incident report with notice to the carrier from the insured stating they do not want to file a claim under the policy.

 

Here is something from the E&O Angle column in a past IA Magazine issue:

E&O Angle: Reporting Claims

This is from the April 2005 IA Magazine, p. 84:

"Three Strikes Comes into Play"

Three claims and you're out is another factor that agents consider when clients come to them seeking guidance on whether they should report claims. Clients with multiple claims in a single policy period may be in danger of being non-renewed and face premium increases in the nonstandard market. What should agents do if clients with several existing claims ask whether or not to report a claim?

Do what is best for the client, but not at the expense of increasing your E&O exposure. Look as this scenario from both sides. First you could not report the claim and risk a future uncovered claim. Or, you could have the client report the claim and risk the insured suing you for increased premiums and lesser coverage in the nonstandard market. You'll need to weigh the options, but it's probably not worth the risk of the insured not reporting it.

Also consider the impact of known losses on underwriting considerations. Applications ask for known losses, whether paid by insurance or not. There is an obligation to include the loss that didn't make it to the insurance company to avoid the misrepresentations on the application. This is especially true in dealing with known prior acts while working with claims-made forms.

 

I would want to know why the people do not want to file a claim  If it is because they think they will get a premium increase, and the claim seems like it might be fairly large, I would advise them that a premium increase might be worth it. One claim should not make that much of a difference, however, if they have already filed several claims they may get dropped and then will have to go to a non-standard writer. If they file, they will also get their defense costs paid, they should be advised that they will have to pay their own costs if they do not file.

If they still insist on not filing, I would ask them to send me something in writing that they do not wish to file a claim.

 

I have an E&O claim on my desk, currently, that involves an Insured not wanting to report a claim and telling the agent they did not want to do so. The agent honored their wishes for six months. As an agent of the company, you are the eyes and ears of the company. If there is a potential incident, accident, and/or claim, which you know about, and you do not meet your ethical responsibility to the company and report, I think it can come back to bite you.

In the claim on my desk it has been denied for late reporting. The insured’s dad happens to be one of the best plaintiff lawyers in town and he is pressing the claim. My client (the agency) is looking at a claim below their E&O deductible, including defense, so they are totally exposed unless they lose, or there is a protracted legal battle. I think the battle itself could eat up their deductible ($50,000). That does not sound like a particularly favorable outcome to me.

In this situation, the insured fixed all the damages and then decided to turn in a claim! The Company, literally, lost all their rights to determine the extent of damage, to investigate coverage, to determine the potential number of occurrences…on…and on…and on. Frankly, I think the agent could be in a spot of hot water, even though the agent acted at the direction of the client. And…I don’t think if the dispute were truly over coverage there would be one iota of merit to it. I think it would be denied and that is why the insured did not want it reported to the company. Truth be known, in my opinion, the agent got set up.

You are the only source for company information from an E&O standpoint. Have I EVER had a claim for a client, about which I did not tell the Insurer? You bet I have. It appears to me you have a chance today of telling the Insurer and jeopardizing the renewal or at least the renewal pricing or getting sued for E&O! How to make an agent liable for an “uninsured” claim!

 

As I see it, claims reporting is simple when it comes to the obligations of the agent, unless otherwise stated in the carrier's contract - ALL third party claims or incidents should be reported, regardless of the insured's wishes. Education of the insured that they need to protect their rights and trigger the obligations of the company should allay fears or objections of the insured in most cases.

First party claims on the other hand, are reported at the consent of the insured after disclosure of the consequences of late reporting are documented. This approach shouldn't be objectionable to a carrier. The refusal to report a first party claim only strengthens the carrier's hand. Proper documentation should protect the agent.

 

The first legal obligation is to the principal in an agency/principal relationship. When an agency contract exists, the agent has a primary principal in the insurer, not the insured. The insured is a secondary principal based on good faith and professional consultation. Claims reporting is not one of those areas.

When the insured prefers not to report the claim, it is generally due to not wanting the insurer to pay a claim due to impact on premiums. These type of claims should be reported to the insurer on a "report only" basis. Let the insurer and insured formally agree to waive the policy provisions covering the loss, not the insured and the agent. Remember the agent is not a contracted party to the insurance policy. The insured is not a contracted party to the agency agreement.

 

Over the last couple of years I have worked with many agencies on their voluntary E&O audits. Of course one area that is scrutinized is the claims process. I can tell you that reporting is all over the board. Consistent though a hesitency to report property losses under the deductible and this is generally on the HO policy. All agencies definitely will report a BI claim no matter what or how bad or not bad if it is reported to them. It is difficult sometimes to tell what actually happens though because so many carriers and agencies have the insured reporting the claim direct to the "800" number. I am not aware of any studies or research that states "this is the way it must be done..." type of document. What I can provide though is something that we find in many agencies.

CLAIMS PROCESSING

Dealing With Insureds and Claimants

Proper claims handling can do much to foster goodwill with insureds and claimants at a time when it makes the greatest impact.  Claims handling should be viewed by all agency personnel as another opportunity to be of service to clients.

Always strive to be helpful and courteous.  Remember, while you may deal with many claims everyday, to this insured or claimant this may be the only claim he or she has ever had.  To every insured or claimant, it is also the most important claim you will deal with today.

Advise what steps should be taken and are required under the policy conditions, such as: protect property from further damage, do not admit liability, cooperate with the insurer, etc.  Advise what to expect, such as when the adjuster will make contact.  If a deductible will apply, make sure to advise.

When taking the claim information, select the proper ACORD form for the type of loss.  Every effort should be made to complete the ACORD form on the computer, however, if you are not preparing the ACORD form on your computer but instead by hand, be sure to write legibly.  By writing legibly on this form, there should be no need to rewrite or retype it before sending to the company.

If a review of the insured's file indicates the claim may not be covered, there are several ways to handle:

1.  Send to Company for determination.

2.  If it is definitely known it is not a covered loss, tell the insured so.  If the insured still insists, file a claim with the company.

3.  Advise insured that it may not be covered but you will submit it to the carrier.  This does not lead the insured to believe the claim is definitely covered and avoids long delays.

When dealing with third-party claimants, take the information and advise that the claim must be reported by the insured.  If the insured denies the accident or liability after being contacted by you, document with confirmation letter to the insured.  (We have times when the claimant will not accept “no”, and we have to file the claim to protect the insured, even though the insured says they were not at fault.  It is best to let the companies decide.)

Beware of and avoid answering hypothetical ("what if..?") questions from insureds.  Always refer to policy language in discussions.

Dealing with the Company

It is important that the loss reports be sent to the company on the same day they are received (unless it is a record only claim or agency pay claim).  The loss reports are faxed to the company.  If it is extremely urgent, or involves a lot of paperwork, the claim is to be Express mailed.  Major losses should always be faxed to the carrier immediately.  Telephone follow up should be made to make sure the fax was received.

The ACORD loss notice will reflect the name of the excess carrier, policy number and policy term.  The primary carrier will notify the Claims Department when the excess carrier should be placed on notice.  In the event a claim appears serious, the excess carrier will be notified along with the primary carrier.

All companies require an ACORD form showing all pertinent information.  Carrier phone, fax number and addresses are listed in the Claims Card File.

Claims History

A claims history for each insured is to be maintained.  This information should include such items as type of loss, policy number and company, date of loss, claim number, amount paid, date closed and loss information.  This listing is useful to review periodically, and when changing insurance companies.  It can also be used when reviewing company provided loss runs for accuracy.

Summons & Complaints

Summons and complaints that come in by mail will be opened, date stamped and given to the Client Services Manager.  The Client Services Manager will distribute them to the Claims Department.  If a summons and complaint is hand delivered to the Claims Department, it should be date stamped before being forwarded to the company.

These are to receive the highest priority and be handled immediately upon receipt.  The client file should be accessed and reviewed.

The company should be called and alerted that a claim is being sent.  It must be noted as to the date and on whom served.

If the claim has never been reported, the Claims Department should contact the client and obtain the necessary information.  Each claim should be recorded on the ACORD claim form and forwarded with the Summons to the insurance company.

If a claim has previously been filed, the summons and complaints should be sent by Express mail to the out of town carriers.

New Reports

New reports receive the next highest priority for processing.  When the claim has been received, either by phone, letter or fax, the claim should be recorded on the appropriate ACORD form and faxed to the insurance company.

Workers' Compensation Claims

Workers' Compensation Claims are usually reported directly to the carrier.  If a client reports the claim to the agency, advise them to fill out a First Notice of Injury and mail it to the carrier.  Some carriers now have phone reporting.

Correspondence on existing claims should be matched to the existing files.  If the claim number or adjuster handling is known, it should be shown on correspondence and routed to the proper company.

First Party Drafts

Company handled first party drafts are sent to the agency for transmittal to the client.  The drafts should be forwarded to the Claims Department.  A notification of the receipt and transmittal of the draft should be noted in the client file.

We also have a variety of templates for all procedures throughout the agency as well as our version of setting up your Professional Standards process including self and internal audits.

Judi Newman

Phaze II Consulting, Inc.

Phone: 239-481-6001

Fax: 239-481-6268

Email: judinewman@aol.com

 

Here is some E&O correspondence from 2005 (excuse any typos since it's not edited for spelling and grammar):

2/14/2005

Hi Guys,

First and foremost thank you all for your well spirited input; second, thank you for your speedy replies!  This impromptu set of E&O questions came to me via an email for my thoughts on the subjects. When I first read the package of questions I wondered if I really wanted to answer the questions.  Then I thought about you folks out in the trenches everyday who address these questions routinely, my idea is to share the questions with you, and share your collective responses.

As you can see from the address line above more than a dozen replies came in. I am going to restate the questions below and list responses under each question. Names have been left off to protect the innocent.  Does everyone have their seat belts fastened? Lets begin our Q and A.

E&O QUESTIONS OF THE DAY

Question #1

Q. If an agent becomes aware of a loss are they obligated to tell the insurer, if:

The insured advises agent of loss, might even be in casual conversation, rather than formally. For example small fire loss, but amount is only slightly above deductible, and insured is will to pay. No bodily injury involved. Does agent need to notify insurer? Lets say later there is a major fire and if company had been notified about prior claim, insurer cancels since they have a "two losses and your out" underwriting guide. Now insured is placed in a insurer with a much HIGHER rate---could insured sue agent for causing this situation?

A. The answer really depends on the agent's relationship with the carrier.  If they are truly an "agent" then the company was actually notified when the agent was notified.  How much the agent is required to pass along to the carrier could be defined by their contract, or by general agency law.  Typically, agency law requires "full disclosure" to the principal (carrier).  If the "agent" is really a broker, he/she represents the insured, so is in a better position to offer up advice to not submit the claim.  So, it's a judgment call on the part of the agent as to what constitutes "full disclosure".  The real problem will come when the agent completes the next application...they are aware of a "loss" (although not a claim) and it would have to be listed on the app since it asks for losses, not claims.  If the agent puts no losses and the insured signs, it could pretty successfully be argued that they have committed a material misrepresentation resulting in no valid policy at all.  As for being sued because the insured ends up paying more, I guess I'd be willing to take my chances since that's a known and quantifiable loss if there is one, versus the unknown claim that could be denied based on the failure to disclose the first loss.

A. Am I not right in my understanding that any knowledge of an agent is knowledge of an insurer?  Thus, if an insured reports a claim to an agent who sits on it, don't we run into trouble when a carrier either declines coverage for filing a claim late or pays the claim and goes back against the agent?  Technically, the agent is obligated to report to the insurer even if it causes the insured to be non-renewed or to pay a higher future premium.  That is the safest course of action, I believe.  With that said, reality dictates that there are situations when a claim won't be reported, such as the time my wife caused $800 damage to our car when she hit the garage door backing out.  I didn't turn it in.  So there are some cases which could be in a gray area, and in these the agent should fully disclose to the insured what could happen if a claim is not filed, document the file, maybe even confirm in an e-mail or letter, and then follow the insureds instructions.

A. Agents routinely hear of accidents and don't report them to the company. My wife rear-ended another vehicle, but it was just a love tap and no visible damage. I called my agent anyway and she asked me if I wanted to report it to the company. I told her I just did and it's her call as to whether the claims department is advised. She decided not to and, sure enough, the woman in the other car called my wife and said a repair shop told her the frame was bent, which was ludicrous. To make a long story short, we gave the woman $100 cash to get rid of her

A. The correct answer is for the agent to read their contract of insurance provided by their E & O carrier and then do nothing that would violate their contract with that company.  As a matter of fact, if the company finds out that the agent settled their own loss, the agency may have their E & O coverage cancelled.

A. I see nothing wrong at all with an insured absorbing lst party claims & with-holding reporting of such claims to the company.  I don't see that as a violation of policy requirements.  It is imperative that decisions to not report be the customer's decision, not the agent's decision.  Customers need to be made aware of policy conditions, etc., so they can make informed decisions.

In fact, the agent has some obligation to advise the customer of potential negative consequences that may arise from excessive claims, etc.

Situation becomes more critical in 3rd party claims.  Failure to report may violate policy conditions which would lead to coverage problems; also, failure to report a situation which later develops into a serious situation may jeopardize coverage if the insurer's rights have been impaired due to the non-reporting of the incident.

As a practical matter, I advise insureds to report all 3rd party claims regardless of potential adverse underwriting consequences.  My philosophy on this is "report the claim & let the chips fall where they may."  This is less of a risk than the greater risk of having a seemingly innocent situation go sour & turn into something big, something way beyond what anybody thought possible in the early stages of the claim.  Again, any decision to not report a liability claim MUST BE the insured's decision and the insured must be made aware of the potential consequences of such a decision.

These situations are very tough, especially in personal auto where there are teen age drivers, driving record problems, or other underwriting issues which may come into play.  These are also difficult issues on any merit or experience rated policy. As in all other types of discussions with customers, thorough documentation by the agent is very important.

A. Yes, it should be reported. The agency (not broker) has the duty to tell the carrier everything it knows because under agency law, knowledge of the agent is knowledge of the principal. It is kind of like two business partners keeping secrets from one another on any risk factor.

A. Knowledge of the agency IS knowledge of the company".  This is all assuming a contractual relationship as an agency. If the questioner works for a brokerage or the client is placed in a brokerage arrangement, then there is no contractual obligation to inform the carrier/intermediary. However, when it comes time to renew the risk, prior loss (not claims!) history is normally required and most of us agree (I know for sure you do!) that honesty is the best policy - so once again, coming clean is the best course.

A. I have run into a sticky wicket of opinions on the agent's duty in such matters.  E&O experts say that the agent is duty-bound to report not only all claims, but "incidents" which might lead to claims, and even "inquiries" by the insured about whether or not they should turn in a small claim. On the other hand, most agents say that small losses in which the insured will pay for the damage themselves (stolen watch with high deductible, tree falls on fence, etc.) are not reported to the insurer.

A. In researching the issues, I've come across numerous articles about some of the problems that exist.  Here are a couple of representative examples: Sample:  From Wall Street Journal, May 23, 2002:  Homeowners M/M Lambres noticed water bubbling up near their driveway.  They called their insurer to inquire about whether or not a possible loss might be covered.

It turned out that the water was coming from a water line break, which a city work crew had earlier caused.  The city came and repaired the water line, and the Lambres did not ever have any actual damage. However, when they went to sell their house some time later, a "water damage claim" appeared on the CLUE Report on their house, and the new buyer's prospective insurance company refused to write a HO policy on the house.  Just imagine how happy they were with their agent for reporting their inquiry to the insurance company!

Also, an article from BestWire from 3/4/03 says, "A unique California law requires that agents file a claim whenever a consumer calls about damage, whether or not the insurer pays on the claim.  The law is to protect the consumer in the event the homeowner wants to file a claim on the same event in the future."  (Quoting in the article from Richard Collier, vice president of sales and marketing for ChoicePoint, who maintains CLUE Reports.) I think most every agent is aware that a loss or incident with a potential BI element must be reported.  However, the petty first party PD claims, losses, incidents and inquiries seem to generate the most confusion.

A. My legal belief is the contract is between the client and the company and it is the clients choice as to if they want to report a loss.

A. The "law of agency" states that knowledge to the agent is knowledge to the insurer.  I often say that if the insured didn't want to make a claim they wouldn't have mentioned it to their agent.  The client is attempting to "play both sides of the street" by letting the agent know (in case things are worse than they appear and/or they do get canceled/non-renewed/placed in a higher rate classification) and by paying for the loss themselves. If the insured did not want to "use their insurance" they wouldn't have said anything.  I would think that by the fact they mentioned it to you that this information would be passed on to the carrier.  Many people decide to "self-insure" once in a while...I know I do and have... (Saving my insurance [auto, home] for the big one).  You could recommend that a notice of loss be completed upon each "casual" notice received by the insured and/or put an electronic note in the file.  I would also ask (if I were the agent) the agent to ask their carriers on their policy for these "casual" notices.  The agent has customers but they represent the carrier.

A. In this situation, I feel that it's the agent's responsibility and duty to notify the insurance company.  For starters, the agent may be contractually bound to do so in the company's agency agreement.  Many agreements require the agent to notify the company of all losses that the agent becomes aware of.  Being an agent for the company, I don't see how the agent can ethically withhold/conceal this type of information. It's hard for me to imagine an agent getting sued for reporting a claim (as in your example where the insured ends up paying a higher premium due to the agent's notice).  The more likely scenario in this type of situation would be that after the 2nd fire, the company learns of the 1st fire that was never reported, and then sues the agent for violation of the agency agreement.  The company pays the loss for fire #2, then subrogates against the agent (assuming they had a "one loss and your out" guideline).

A. (I don’t think it makes a difference, casual or formal.  Notice is notice.) It’s the insureds obligation (not the agent’s) to report a claim, and it’s the insureds right, I feel, to absorb the claim.  I’ve always felt that the insurance contract is a two-party deal between the Company and the Insured.  True, the agent is mentioned in certain places (e.g. notice to the agent is notice to the company condition), but I know of no obligation on the part of the agent to pass this information on.  Anyone can sue for anything at anytime (known hereabouts as “Schmidt’s First Law of Insurance Litigation), so we have to look at the specific situation to see how much exposure there is.  In this case, if the agent made a ‘big deal’ over reporting each and every scratch, and the Company tired of this constant reporting of minor claims, I imagine that the insured could sue the agent if he wound up in some residual market facility.  But the damages would be no more than the increase in premium and/or the shortfall in coverage.  All within the E&O deductible, I would think. Do you have any data internally on these kinds of claims? Pretty remote, I would think.

A. In the case of direct notification from the insured, the agent can not pick and choose what claims he reports to the carrier. He has a fiduciary responsibility to report to the carrier any and all claims (regardless of the deductible question) to the carrier. If he doesn't do this and the insurance carrier is prejudiced in any way by the agent's failure to report the claim, then the carrier has a good cause of action back against the agent for recovery. From an E&O perspective, that would be the more likely concern than the alluded to cause of action for an insured getting charged a higher rate. The loss history of an insured is what it is. A solid defense could be established for the agent if he is merely factually reporting losses no matter the amount to the insurance carrier.

A. I believe the agent is obligated to encourage the insured to report the claim and is obligated to inform the insured of the consequences of NOT filing the claim.  In fact, if I were the agent, I would go as far as having the insured sign a statement acknowledging that I’ve done both of the above.  The contract of insurance is between the insured and the company…the agent is merely the conduit of the transaction.  If the agent tells the insured not to worry about filing the claim, then he/she could definitely be held liable if it later blows up into something bigger and the company sends a ROR letter or seeks declaratory judgment.  Conversely, if the agent reports the claim without the insured’s consent, the insured MAY (I stress that word) have an action against the agent.  Of course, the agent, as an extension of the company, could use the duty of notifying the company of all the material facts as a defense.

Question #2

Q.  Agent hears by "grapevine" that insured has had a loss (had his Rolex stolen from hotel room, where he was entertaining someone else’s spouse), but no direct notification from insured. Must the agent notify insurer?

A. I would rely on what some CPCUs call ‘privity of contract’, i.e. it’s a matter between the insured and the insurer.  In this case, if the agent acted on the information and either reported it to the insurer or confronted the insured for confirmation of the facts, he might wind up being sued for invasion of privacy or libel/slander.  Acting on “grapevine” information is almost always to be avoided, I feel.

A. I would never notify a carrier of anything based on the “grapevine”…there are far too many holes.  Rumor and fact are two different things…until it becomes fact, I’d keep it to myself.

A. Nope, best advice to agents is that they should NEVER act on the word of a third party when it comes to a claim.  If they don't hear it from the horses mouth, it probably didn't happen.  In fact, I think the worst possible thing they could do in this particular situation is act on the basis of a rumor that could wind up causing them even more grief.  The same would be true if a person called the agency and said the agency's insured was involved in a car accident with them.  I would not report anything to the carrier until I verified it with my insured, subject, of course, to the unusual situation where you cannot reach your insured for a long period of time.

A. I don't believe so, nor do I think he has the obligation to investigate whether what heard was true or not.  He may want to follow up with the insured as a matter of customer service, and then follow what was addressed in #1 above.

A. I always told agents in E&O class that, under the law of agency and probably as part of their agency/company agreement or underwriting/claims guidelines, knowledge of the agent is knowledge of the company and they should report claims they're aware of. Personally, I heard a "rumor" that someone had a loss; I wouldn't report it until I heard from the insured.

A. I see no obligation on the part of an agent to report "grapevine," rumor, or street talk which the agent may learn about.  The insured has an obligation to report claims; the agent has no obligation to go hunting for claims or assume the insured's obligations.  A bit of common sense does come into play here - for example, some claim incidents are news items, i.e. serious automobile accidents, serious fires, etc.  In these type situations I feel it is ok for the agent to send news clippings, etc., to the claims department & confirm that details will follow when reported by the policy holder.  This type thing is very situational.  The agent needs to protect the interests of the insurance company while at the same time not assuming any extraordinary duties which in fact may be the obligation of the policyholder.

Again, a strong documentation trail is necessary.

A typical scenario of this type is a situation when an unknown person contacts the agency & wants to file a liability claim against our insured, claiming that our insured was at fault in an auto accident, even though our insured has not yet notified the agency of the incident.  We always contact the insured in these situations & proceed as appropriate after instructions from our customer.

A. The E&O issue is that if the carrier has to pay a subsequent claim and discovers the earlier one that was "small and unreported"  (The insured tells the adjuster, "I don't know why you are hassling me on this. I was a good doobie and didn't even report a prior claim and saved you all that money!)  Then the carrier can say that had they known about the prior incident/loss, they would have gotten off the risk. The agency's failure to report caused the carrier to have to pay the current claim and so the carrier goes against the agency for the claim payment and claim expense. Plus, the carrier then re-underwrites the entire book from the agency and the agency is in the soup!

A. I would say no.  The old legal term of "hearsay evidence" as admitted evidence.  The agent does not have the facts and it is up to the insured to take action (give notice) and not others...short and sweet on this answer.  This is huge personal injury exposure for whoever is feeding the grapevine.  The real problem with this situation is if the insured does make a claim (scheduled item) and they say they had it stolen or lost anywhere else...other than the friend's hotel room, what does the agent do?  I would still say that the agent does not disclose the "grapevine comment".  I would let the claims department do their investigation and in most cases the insured will make a mistake and the adjuster will determine that maybe we have a case of insurance fraud.   I would stay as far away from that as possible as the agent.

A. Hearing something through the "grapevine" is significantly different.  I do not consider that to be a case of the agent having knowledge of the claim.  Under certain circumstances, the agent may want to contact the insured and either verify or deny information the agent has "learned" through the grapevine.  For instance, you hear from neighbor #1 that neighbor #2 (your insured/client) hit a child on a bicycle with their car earlier today.  You've not heard from neighbor #2.  In that case, I would certainly contact #2 and confirm or deny the story, and let the company know about a possible claim.

A. In the case of no direct notification from the insured, the agent is under no legal duty to report the claim. The prudent thing for the agent to do in this scenario is to confront the insured with the information presented and see if the loss info is true or not.   

Question #3

Q. Where does the matter of "Ethics" come in?

A. This whole thing is a matter of ethics.  What I'm required to do, by contract or agency law, is one thing.  What I'm ethically bound to do is quite another.  Any time a claim is being reported to the agency, I think it's appropriate to advise the insured that once it's been reported to me, I have no alternative but to turn it over to the insurer or risk termination, or worse, having the claim later denied by the insurer when it "goes south" on the insured who thought they could handle it.

A.  Ethics?  In insurance???  Just  kidding.  I don't have a problem with ethics when it comes to an $800 property claim.  On the other hand, if we're talking about a 'serious' loss, bodily injury, etc., then the insured is going to have to take his lumps because the agency has to report (I do believe that the insured is better served with this too - they just might not be smart enough to see it).  I think the tough part of all of this is the gray area, and everybody sees different shades of gray.

A. "Ethics" always comes into play.  Or, stating it differently, "ethics is never not an issue."

The agent owes his principal, the insurance company, an obligation to inform them of negative information, etc.  The agent is generally obligated to follow the instructions of the policy holder customer.  The agency frequently has "special" knowledge which the customer relies upon as part of the customer's decision making process.  In all of these situations it is imperative that the agent be honest and forthright, refrain from actively withholding information from the insurance company, advice the customer of his or her obligations, and in the final analysis, NOT make decisions on behalf of the policyholder customer.  Thorough documentation is a constant requirement.

I've used the following technique on numerous occasions:  When confronted by a situation where the customer wants to withhold reporting a claim I will have informal, off the record conversation with the appropriate claims adjuster.  I'll outline the facts, etc., & ask the adjuster for guidance.  Depending upon the situation, I'll report that informal feedback to the customer & allow them to make their decision; sometimes I will merely document my file as to what the adjuster suggested, etc.  In any case, I keep my tracks covered with regard to who I talked to, the essence of the discussion, & whether or not the customer deliberately declined my suggestion to report the incident at hand.

A. Ethics is all around us...that "utmost good faith" doctrine that drives the industry.  One must separate what is "Legal" and what is "Ethical".  We have legislated ethics through codes and regulations.  It is easy to determine if we have violated the code and/or regulation (keeping the premium; mis-classification of a risk for a lower rate; rebates, etc.).  The tough calls are those not written down.  Ethics is, in my opinion, is a "frame of mind", a "blueprint" on how one handles their affairs (personally or in business)...do you keep that extra $20 in your change at the grocery store or do you give it back.  Do you change the year of construction on a home so it qualifies for a new home credit?  Do you "badmouth" another carrier to get a client to cancel their policy and have it re-written in your agency?  Ethics comes in from day 1 and continued throughout the life of the relationship with the customer: placement, servicing, claims assistance, market choices (alternatives).

A. This question is fraught with ethical implications.  In my opinion, the first question that you asked basically comes down to this: How do you balance the obligations (either ethical or contractual) that you owe your insurance companies with the obligations (fiduciary/financial) that you owe your clients (and let's not forget the desire to retain customers and operate a profitable agency!)?

A. When it comes to ethical questions, I find myself generally in disagreement with the CPCU pundits, so what I say here may depart substantially from recognized orthodoxy.  Ethical decisions generally involve choices between alternatives, the assumption being that the higher calling always governs.  So the devil is in the details of what each individual judge to be the greater good.  In question  #1, the insured has a loss and tells the agent that he will take care of it him/herself.  A good agent will counsel the insured about the dangers of not reporting (an unseen factor later increases the value of the claim) versus the benefits (the insured remains in good standing with the insurer).  Since the contract is between insured and insurer, there is almost no ethical issue for the agent.  In any event, the agent did the “right” thing in telling the insured about the ‘what ifs’.  As to the “grapevine” situation, the agent could do a great deal of damage to the client in the course of acting on hearsay information.  I retreat to medical ethics in this case: how does it go?  “In any event, do no harm.”  So my ethics tell me not to say anything to anybody unless the insured comes forward and authorizes a report.

A. Ethics comes in through the entire situation(s).  The problem becomes…what is the “ethical” thing to do.  Sometimes Ethics leaves us stuck between a rock and a hard place!  In case #2, the ethical thing to do is keep my mouth shut until I rumor becomes fact.  In case #1 it’s not as clear cut.  In that case, I protect my own ethical butt first, by notifying the insured of his/her duties in their contract…and then keeping them honest by having them sign something so they can’t be “unethical” themselves later.

Final Comments were given by some respondents….

A. These are great issues to talk about because we end up with a debate about what technically should be done and the real world.  It’s too easy and not realistic to make a blanket statement that all claims are to be reported, because they are not nor will they ever be.  By the way, it’s great for E&O that nearly all comp claims and an increasing number of personal lines claims are reported directly to the insurer by the insured, thus bypassing the agent.

A. Most agencies will settle their own small uncovered property losses and hope that the loss doesn't expand or that the company doesn't find out. I know this is vague, but so are many insurance policies.

A. This topic ALWAYS comes up at E & O classes.  It is a genuine real life issue that places agents in a predicament if the agent is not very careful as to what he or she says. We could debate this for hours; this subject causes vigorous discussion between agents; there is no perfect answer except making certain the customer acts on his or her own, mindful of policy conditions and requirements, and that the agent not breach the obligation of loyalty an agent owes to his principal. A few years ago one of my prominent customers (a wholesale beverage distributor) was experiencing work comp claim frequency problems.  He had a warehouseman cut his hand on a sharp object.  The employee went to the emergency room, was treated (a few stitches) & released, & sent back to work.  A seemingly minor claim worth a couple hundred bucks.  My customer posed the eternal question: "to report or not report."  I advised to report, which he did grudgingly.  A few days later the employee developed a serious infection, was hospitalized several days & the claim was ultimately closed just short of $50,000.  WHAT A LESSON!!!

A. Another angle to this problem is the impact on CLUE Reports.  If the agency "reports" a possible claim, even if based on an initial inquiry by the insured, the insurer will normally open a claims file.  If later there is no activity, the file is apparently closed under the category - "closed - no payment."  However, such information seems to remain on the insured's CLUE Report.

A. These questions come up in almost every E&O class, and there seems to be a lot of confusion or doubt as to what to advise agents when it comes to reporting "incidents" and "inquiries" by insureds.

Some of the folks I've queried hold the view that every loss, incident or inquiry about a possible claim should be reported to the insurer.  Others say this is not practical, especially where no BI or subsequent loss seems possible.  For example, losses which are barely over the deductible, such as stolen jewelry, might generate a call to the agent, but the insured decides not to file a formal claim.

Wrap-Up

Understand your legal position in reporting insureds claims.

It is clear as independent insurance professionals we need to understand the contractual obligations which exists between our agencies and companies. (Agent vs. Insurer)

Likewise you must understand the relationship between your “insured,” and the insurance company. (Insured vs. Insurer)

Most importantly you must understand what contract language you may be violating in your own E&O policy for your statements or omission of statements about insureds claims.

Implementation of an “Agency Claim Handling Procedures,” chapter in your “Agency Procedures Manual” will go along way to keep you and your staff consistent. If you are engaged in an E&O claim you will be asked, “What is the agencies policy and procedure with respect to reporting insured claims?”

Preparing, “Letters of Engagement,” would be a very proactive tool to utilize. (In reality I never knew of an insurance agency that employed one. Do you? If you have a copy of one please forward it to me.)

In the real world of selling insurance and providing services to your clients’ day in and day out, you are bound to encounter gray areas. “Be prepared,” this is the best advice I think I could give someone. Understand what risks you are taking when you take them and if you’re going to deviate from your normal practice, understand you may have placed all the risk on your own shoulders.

I genuinely thank you for your time and idea’s that have come to light from this thought provoking exercise. If you have additional comments or questions please contact my office. If any further reports or summaries come from this caucus I will be happy to share with you all.

Updates 2/15/05

I am a bit troubled by some of the responses to your questions that I read below.  The policy is a contract between the company and the client.  If the client does not what to trigger coverage by not reporting a loss that is the clients business.  The key part is does the client want to report a loss (trigger coverage).  I agree with many of the responses if it is the clients wished to report a loss (but I thought your question was what if the client does not want to report a loss?)...

"The answer really depends on the agent's relationship with the carrier.  If they are truly an "agent" then the company was actually notified when the agent was notified (...the client does not want to turn the loss in).  How much the agent is required to pass along to the carrier could be defined by their contract, or by general agency law."........."Am I not right in my understanding that any knowledge of an agent is knowledge of an insurer (I think this is an underwriting issue not a non claims...and I still thick it is limited to material to underwriting)?  Thus, if an insured reports a claim to an agent who sits on it, don't we run into trouble when a carrier either declines coverage for filing a claim late or pays the claim and goes back against the agent?  Technically, the agent is obligated to report to the insurer even if it causes the insured to be non-renewed or to pay a higher future premium."

But, I must say that I totally disagree with these two statements if it is the clients wish is not to report a loss. Unless this is an underwriting issues, I.e....the company asks the agents and the agent knows and fails to tell them about a material issue......I agree.  We just went to court on an huge E&O situation involving a surety bond where the agent after writing the account knew the client was in financial trouble and did not tell the surety company....while different...the point remains the court ruled the agent had no obligation to tell the company (the company claimed the agent should have called them up....). 

I would hate to have these be the standards....and agent would not be able to afford to buy E&O if we take claims reporting to this level!!  I think the agent should advise the client if they do not want to report a loss they may be in violation of the conditions and claim filing requirements of the policy and would be jeopardizing their coverage if the wanted to exercises the right later.  I think as a matter of principal agents should always tell clients it is their recommendation to report losses....but at the end of the day.....the client has the power of trigger coverage in their contract.

p.s. Heck...most of our own members don't report all their own losses!!!  The reason insured's don't report is all the companies want to cancel you if you have a second loss!  The word is on the street...don't turn in small loses....isn't that what the companies really want anyway (not to have to pay losses)?  The companies can't have it both ways...  (o:

Thanks for the email...I think! My response is not based on claims or underwriting basis but my logic. If you want more clarity than my position I would be happy to forward your questions to the claims department for their two cents...let me know. Here's my perspective...

In most cases, the answer can only be found after it's been litigated. From a reasonable person's standpoint, there could be some potential exposure for the scenario you pose in number one. This is why the application asks about agents settling claims on their own. Without legal advise and a signed release from the insured, you never know what might happen thus the need to ask the question on the app.

In the second case, how much would it take to contact the insured to determine whether the "grapevine" is accurate? I would suggest a simple phone call would alleviate any mystery and thus dictate what the next appropriate step is.

On the final matter, I don't necessarily see ethics overtones to the second issue. Provided the agent acts to clarify/verify "gossip" with their insured -- and given their fiduciary responsibility to the company -- I just can't see it. If they elect to do nothing -- is that someone we want to insure? Ethics on the first matter would only come in if they avoid sharing the claim resolution on their application as I see it -- that from the E&O carrier standpoint. From the company they represent standpoint, I would have to be guided by any written language or any other "documented" discussion with the company. In the absence of a documented position I think from an integrity perspective -- nothing is worth jeopardizing a company relationship.

 

Update

This issue continues to come up frequently. Below is a recent Q&A to supplement the discussion above.

"I write General Liability coverage on a contractor. Several months ago, my insured contactor was hired by a homeowner to do some renovation work which included replacing the roof. The homeowner alleges that the contractor neglected to cover openings in the roof during the renovation and rain caused damage to the interior of the home. The contractor has stated that he did cover the openings in the roof and that there is no water damage to the interior. At that point, it was one man's word against another's.

"When I was contacted by the homeowner and the homeowner's insurance agent, I asked the contractor if he wanted to file a claim on his General Liability policy. He stated that he was not responsible for any damages and did not want to file a claim. Both my agency VP (who is a health insurance agent and not very familiar with P&C coverage) and the homeowner's insurance agent suggested that I file a claim anyway. I told them that I could not do that without the permission of my insured.

"Recently, I was advised that the homeowner has filed suit against the contractor. I was told that I was to receive a copy of the suit, but have not. I again asked my insured if he wanted to file a claim and explained that the policy also includes defense costs. I was told not to file a claim. I am again being pressured by my VP and the homeowner's agent to file a claim anyway. I don't believe I can not do that without my insured's permission. Who is right in this case?"

The insured has a contractual obligation to report claims. If he deliberately fails to do so, he's in violation of the contract and the insurer probably has no obligation to defend or indemnify. Show the following CGL contract wording to the insured and point out his legal, contractual obligations for which failure to comply could create a breach of contract:

 

2. Duties In The Event Of Occurrence, Offense, Claim

   Or Suit

   a. You must see to it that we are notified as soon

      as practicable of an "occurrence" or an offense

      which may result in a claim. To the extent

      possible, notice should include:

      (1) How, when and where the "occurrence" or

          offense took place;

      (2) The names and addresses of any injured

          persons and witnesses; and

      (3) The nature and location of any injury or

          damage arising out of the "occurrence"

          or offense.

   b. If a claim is made or "suit" is brought

      against any insured, you must:

      (1) Immediately record the specifics of the

          claim or "suit" and the date received;

          and

      (2) Notify us as soon as practicable.

      You must see to it that we receive written

      notice of the claim or "suit" as soon as

      practicable.

   c. You and any other involved insured must:

      (1) Immediately send us copies of any demands,

          notices, summonses or legal papers received

          in connection with the claim or "suit";

      (2) Authorize us to obtain records and other

          information;

      (3) Cooperate with us in the investigation or

          settlement of the claim or defense against

          the "suit"; and

      (4) Assist us, upon our request, in the

          enforcement of any right against any person

          or organization which may be liable to the

          insured because of injury or damage to which

          this insurance may also apply.

   d. No insured will, except at that insured's own

      cost, voluntarily make a payment, assume any

      obligation, or incur any expense, other than

      for first aid, without our consent.

 

The insurance contract is between the insured and insurer...the agency is not a party to the contract so, while I'm not a lawyer, I doubt that you have the authority to override the insured's wishes UNLESS your agency/company contract imposes that responsibility on you with regard to your carrier obligations as specified in your agency/company agreement or pertinent documents.

If the agency/company agreement has a reporting requirement for claims, then the agent would be in violation of the contract by failing to report claims. The agent could be between a rock and a hard place. The agent could review the agency/company agreement or pose the question "hypothetically" to the carrier. Legal advice might not be a bad idea on this.