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Change in Policy Terms – Agency Responsibility

“One of my insurance companies just issued a bulletin letting the agency know that as of a certain date they will be removing, reducing or altering a coverage on renewal policies. The bulletin stated that the insurer would be providing notice to the customer; are we, as agents, obligated to also advise the customer?" This question is asked of me in nearly every errors and omissions (E&O) class I teach. I also receive many emails on this specific topic.

My answer to whether the agent is “obligation to notify the customer" falls back on statute. Each state promulgates its own regulations regarding policy changes; in Florida, 627.43141 - Notice of change in policy terms states who is responsible to do what. (Remember, this a Florida-specific statute; each state has its own rules.

627.43141 Notice of change in policy terms.—

(1) As used in this section, the term:

(a) “Change in policy terms" means the modification, addition, or deletion of any term, coverage, duty, or condition from the previous policy. The correction of typographical or scrivener's errors or the application of mandated legislative changes is not a change in policy terms.

(b) “Optional coverage" means the addition of new insurance coverage that has not previously been requested or approved by the policyholder but that does not include any change to the base policy or a deductible or an insurance limit.

(2) A renewal policy may contain a change in policy terms. If such change occurs, the insurer shall give the named insured advance written notice of the change, which may be enclosed along with the written notice of renewal premium required under ss. 627.4133 and 627.728 or sent separately within the timeframe required under the Florida Insurance Code for the provision of a notice of nonrenewal to the named insured for that line of insurance. The insurer must also provide a sample copy of the notice to the named insured's insurance agent before or at the same time that notice is provided to the named insured. Such notice shall be entitled “Notice of Change in Policy Terms."

In Florida, there is no statutory requirement that the agency also notify the policyholder if the insurer does, assuming that the insurer has properly notified the policyholder as noted in the statute above. That is the easy part of the answer.

Let's look next at what an agency, perhaps, “should" do. Granted, some of what follows may seem to come from the “Ivory Tower," and some may sound like it's coming from the “eternal optimist!"

Put yourself in the shoes of the customer and ask yourself this, “Does my customer expect me to contact them and let them know that they are losing coverage, and I may have the option for better coverage elsewhere?" I think that most agents, if they were “gut honest," would say that the customer does expect the agency to notify them that valuable coverage was lost. After all, most customers if asked the name of their insurance company name the agency rather than the company.

Losing coverage is not a pleasant situation or feeling for the customer. Questions such as, “Why did they take this away" are sure to be asked. Rather than focusing on a loss of coverage, turn the conversation toward the opportunity to sell the coverage, perhaps with another insurer? Yes, that creates extra work (many times a lot of work) but this loss of coverage can be transformed into an opportunity to actually sell coverage. This contact with the customer creates the opportunity to review all of their coverages and make sure the policies they have are adequate.

Think, too, about the fact that most independent agents are “Trusted Choice" agents. The name alone says a lot (to me anyway) about what an agency should do in situations like this. In addition, I have seen scores of agency websites and marketing pamphlets that significantly “raise the bar" in similar situations. Examples include wording such as, “We will contact you multiple times per year to discuss your insurance coverages," and “Our service is second to none; we work hard to make certain you have the proper coverage."

I consulted with three E&O defense attorneys with whom I routinely work and presented this situation to them for comment. Each responded almost exactly the same: “The agency may have no legal responsibility to contact the customer, but I can promise you that after a claim denial and an E&O claim is filed against the agency I won't be able to get it easily dismissed. It will be hard to defend the situation, especially if it can be shown that coverage could have been obtained elsewhere."

One industry veteran, with over three decades in the insurance industry, who often serves as an expert witness in E&O claims says, “When I am asked what an agency should do in a situation like this, I ask how many zeroes can be on the E&O claim." By that, he means how much could a claim cost an agency? If it's a minor issue, such as perhaps an insurer reduces coverage for theft of jewelry from $1,500 to $1,000 the potential financial impact on an agency is minor. Consider, however, the loss of coverage for a pool screen enclosure (generally a Florida-specific issue). At a minimum cost of $10,000 per enclosure multiplied by the number of claims that could come from all policyholders with that insurer, the potential for “a lot of zeroes" on E&O claims is significant.

What an agency does or does not do relating to contacting customers when coverage is removed or reduced will likely vary based on what is being lost. Certainly that creates issues with “invariable practice." If a customer had been notified about the loss of $10,000 is screen enclosure coverage but was not notified about a loss of $500 on theft of jewelry, that could come back to haunt the agency. As is often the case, there is no “perfect solution" to a customer losing coverage.

I'd close with this situation: My name is Fred Jones; I own a lawn care business, am married, and have two teenage kids. My insurance is with XYZ Insurance Agency, I found them on the Trusted Choice website. Their web page references quality customer service, trained staff and the ability to look at various insurance companies in order to get me the best coverage. I have almost all of my insurance with the agency, including a CGL and BAP for my business, a homeowners' policy, a personal auto policy, a flood policy, and a jewelry floater. My annual premiums are a lot, (to me anyway) well over $5,000 a year. I know the agent is paid in part by commission and she makes several hundreds of dollars per year from my policies. I don't understand insurance and read almost nothing that the insurance companies send me; I count on my agent to make sure I have the best coverage.

My homeowners' insurance company took away coverage for my $12,000 pool screen enclosure. I suppose they sent me some notice about it, but like I said, I don't read anything they send me. My neighbor has the same insurance company and he lost the same coverage. He told me about it last week while we were cooking burgers. He said his agent sent him a personal letter several months back telling him about the loss of coverage and was able to get the screen enclosure covered for a little more money with another company. I told him that XYZ Insurance Agency never contacted me about this; to which my neighbor responded, “If your agent isn't going to tell you when you lose coverage, why do you need them? Why not just buy from the Internet?" I didn't have an answer for his question, because what he said makes sense. I think maybe I need a new agent.

Last Updated: December 8, 2017

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