Wrecks & Fires
Chapter 13
E & O Insurance
Public Awareness
More and more people today have become increasingly aware of their legal rights. There are many reasons for this increased awareness. Consumers read articles published in newspapers, magazines and periodicals about common legal problems a person may face. In addition, there are television programs dealing with many legal issues. Lawyers advertise their services on television and radio. The result of this available information is somewhat knowledgeable consumers who are more likely to sue someone if their service or product does not fulfill the consumer's expectations. For the field agent, this means professionalism is absolutely necessary. Anything less invites a lawsuit.
Professionals often feel that they do such a good job that they are immune from the threat of lawsuits, but that certainly is not the case. The 1970’s saw the beginning of the trend to sue professionals for negligence and malpractice. The definition of a "professional" was broadened in the 1970’s to include not only doctors and lawyers, but also architects, engineers, accountants, stockbrokers and insurance agents. It also expanded the definition to include such diverse groups as real estate agents, management consultants, crop dusters, data processors, printers, employment counselors, translators and telephone answering services. In this text, we will refer to all of the above professions as “professionals.”
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The 1970’s saw the definition of "professional" broadened to include accountants, stockbrokers and insurance agents. |
Perhaps the newest professional field to be classified as a profession is that of financial planners. Along with the benefits of being recognized as a profession comes the burden of stricter standards of conduct. This also increases the chances of being sued for malpractice. If the financial planner performs poorly in the mind of his or her client, a lawsuit can definitely result. This makes the financial planner especially susceptible since views of good and poor performance are often hard to verify. Clients are very skeptical about any loss of money regardless of whether the financial planner acted in good faith.
The financial planning industry, on the whole, has very few guidelines for avoiding malpractice suits. We would hope that all financial planners have a code of ethics. Even so, being personally ethical is no guarantee of protection. There are various organizations, such as the International Association for Financial Planning (IAFP) and the International Board of Standards and Practices for Certified Financial Planners (IBCFP or shortened to CFP), that have published codes for financial planners to follow. In fact, the IBCFP has continuing education requirements for their agents, specifically requiring two hours in an approved course dealing with their Code of Ethics and Standards of Practice of the International Board of Standards and Practices for Certified Financial Planners. The individual codes published by these organizations provide ethical guidelines, not rules of law. Lawyers have been guided for years by numerous legal cases to which they can refer in order to help determine a course of action along with their detailed code of ethics. The longer the financial planning industry exists, the more guidelines the financial planner will have in terms of more case law, established precedents, and definitive regulations.
Many states now require ethics as part of their continuing education requirements. Typically, of the total amount of continuing education credit needed to renew the agent’s insurance license, three must be in ethics. Of course it is always important for agents to know their own state’s requirements. Obviously agents know it is not moral or legal to lie to or cheat consumers, but ethical standards go beyond that. Ethical standards are intended to promote the profession and make it one each professional can be proud of.
Even without established legal precedents and definitive regulations, it is still possible for a financial planner to take affirmative measures to avoid a malpractice suit. The most obvious and important key is awareness. Through this awareness, an insurance agent or financial planner can achieve a set of standards by looking at the standards of care required by other professionals, particularly those professionals who comprise the majority of the financial planners today. These would include insurance agents, insurance brokers, accountants and stockbrokers. Since the financial planner’s duties often include many of the responsibilities of these professionals, looking at how the courts have treated their cases can be helpful.
This acquired awareness would also include knowing and understanding the duties of a financial planner. A financial planner seldom wears “one hat.” Rather he or she is also an insurance agent, a tax advisor, a retirement advisor, and an estate planner. The financial planner must always be conscience of what role they are currently playing in order to avoid any potential conflicts of interest. For instance, an insurance agent/financial planner has to be careful not to recommend excessive life insurance. If his or her recommendations appear excessive or inappropriate it could be viewed as self-serving (to obtain excessive commissions, for example). On the other hand, if too little insurance is recommended, this could be considered negligence. At all times, it is important for the insurance agent/financial planner to document why such recommendations have been made. These documentations should be dated and kept in the client’s file indefinitely.
In past years we have also seen a rise in the number of larger judgments being awarded to plaintiffs who brought suit against professionals. Not only are courts awarding judgments in excess of the professional's insurance policy limits, but punitive damages are being awarded as well. Normally the courts motivation behind punitive damage awards is to punish the wrongdoer. It is questionable whether punitive damages can be paid out of an insurance policy's fund. However, since punitive damages are awarded only in cases where punishment is required, a financial planner has hope of avoiding this if he or she tries to adhere to industry guidelines and does not intentionally do anything illegal or improper. As stated, documentation of all financial recommendations is extremely important.
Many financial planners believe they will be sued for malpractice at least once in their professional career. Therefore, two issues must be addressed:
1. What can a financial planner do to try to avoid a malpractice suit?
2. What should a financial planner do to mitigate the harm of a malpractice suit if one is filed?
If a malpractice suit is filed, it does not necessarily matter whether or not the professional is found innocent. The harm to the professional exists simply by the filing of the suit and the publicity that nearly always comes with it. People who know the suit was filed may not learn of the outcome. Knowledge of the suit does not guarantee knowledge of the person’s innocence. Damage to the professional's reputation has occurred. To add injury to insult, it is a time-consuming process to be involved in a malpractice suit. During that time, the professional may lose clients simply because they are the target of such a lawsuit. The numerous hours spent in court and giving dispositions will take the professional away from work and result in further decrease in productivity and thus, income. Of course, there will be legal fees as well.
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With a typical professional liability insurance policy, the insurer cannot settle a claim without the insured's consent. |
Malpractice insurance policies also referred to as Errors and Omissions insurance or E&O insurance contains a unique settlement clause in favor of the insured. With a typical professional liability insurance policy, the insurer (insurance company) cannot settle a claim without the insured's consent. In typical property and casualty insurance policies, the insurer is given the right to settle the claim in whatever fashion they feel is reasonable. Because the professional's reputation is involved it is important that a suit not be settled if it lends further damage to the individual’s future. Any settlements made on behalf of the professional could be construed as an admission of guilt. Even with this provision, however, the majority of claims against professionals are settled rather than taken to court. This is true because of the time and expense involved in litigation, the adverse publicity that accompanies a lawsuit and the negative effect the suit can have on the professional's practice. Many professionals opt to settle a claim against them, whether it is valid or not, rather than experience the above stated consequences.
By Any Other Name . . .
Professionals buy their own form of liability insurance. Insurance agents usually know these policies by the name of E&O insurance. Doctors and attorneys call them malpractice policies, and security dealers call such insurance a blanket bond policy. Whatever the name happens to be, it is liability protection for professionals.
Financial planners have less to choose from when obtaining liability protection for their role as a professional. Currently, some of the liability coverage is supplied by the companies who market the products used. The problem is the narrowness of these policies. Insurance agents, for example, are covered for the actual insurance policies sold under E&O insurance, but not for sales of products that are not specifically insurance. This is an important point. We have seen lawsuits filed against agents who were selling revocable living trusts. Their E&O liability policies would not cover any liability which resulted from these sales because it was not an insurance product.
For any risk to be insurable, certain elements must exist. A very important element is the ability to determine what the loss could be. When nursing home policies first came out, underwriters complained that they felt they were working without any guidelines. As one underwriter put it: “I am underwriting with a crystal ball.” The reason was simple: there were no facts or figures from which to gain insight into possible profits or losses for the underwriting companies. It was a new field with little data. As a result, the early policies had so many restrictions that they were nearly worthless.
A similar situation existed for financial planners. Because there was so little data available, insurance companies were reluctant to enter into that market. Until that data emerged, financial planners and insurance agents who dealt with financial planning elements had little options for their liability coverage. Today, this is not the case. There are policies available.
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An insurance company looks at several elements when putting together an insurance policy for sale. |
Policy Elements
An insurance company looks at several elements when putting together an insurance policy for sale:
1. a marketplace that will support the existence of the policy (enough people who will purchase it);
2. the loss must be able to be measured; the insurance company must be able to tell when a loss has happened, and the size of that loss;
3. the loss must be unintentional. No insurance company wants to issue a liability policy for intentional acts! Herein lies one problem. While the financial planner would surely say an error or omission was unintentional, the client may still sue on the basis that they consider it to be intentional. Intent could be a vital issue.
4. the quantity of losses must be measurable. In other words, the insurance company must be able to know that most financial planners will not be sued. If there is the possibility that large quantities of planners will experience a lawsuit, it is not likely that an insurance company would want to develop such products. After all, the end goal of the insurance company is a profit. They want to end up with a profit after all losses have been paid. If too many lawsuits are likely, the risk becomes uninsurable.
Financial planners can find liability protection, but there are fewer policies to choose from. Insurance agents (who are not financial planners) have more options, since E&O insurance has been marketed for many years.
There are two basic types of professional liability policies:
1. claims-made, and
2. occurrence policies.
A financial planner is most likely to find a claims-made policy rather than an occurrence policy. A claims-made policy is more rigid since it covers only claims filed during the time the policy is in force. This is an important point, since many lawsuits are filed years later. Even if the claim is based on a date during the time in which the policy was in force, once the policy has lapsed, it will no longer cover the claim. An occurrence policy covers any occurrence during the time the policy was legally in force, even if that policy has now lapsed.
Even though an occurrence policy is harder to come by, the value of them is considered better by some professionals. Most lawsuits do not happen immediately. They happen much later when the client or their family sees results that surprise or disappoint them. Since the 1970’s, most liability insurance written for doctors and attorneys are claims-made policies. If the professional keeps themselves insured, a claims-made policy will be adequate. The secret to being protected, of course, is continued coverage. Primarily, policies now tend to all be claims-made policies.
Why would insurance companies prefer claims-made policies over occurrence policies? While there are differing opinions, many feel claims-made liability policies offer more protection for the insurance companies. Such policies limit the duration for which the insurance company is liable. With an occurrence policy, the liability for the insurer could potentially go on forever, unless a clause limited it in some way. This point was especially demonstrated by the asbestosis class action suits. People who had been exposed 30 years ago were winning settlements against corporations exposing their insurance companies to huge payouts through occurrence policies.
While asbestosis is a well-known case, any product liability suit can develop at any time. We have seen many examples of this over the years. There are likely to be many more cases in the future as today’s products experience results that were not anticipated or even covered up.
Insurance companies face another problem: the exposure theory. This holds that an insurance company can be held liable once a person is exposed, regardless of when the disease or disability actually becomes recognizable. Another theory is the manifestation theory which states that the insurance company cannot be found liable until the disease can be diagnosed. Yet a third theory, called the triple trigger theory, states the insurance company can be found liable from the time of exposure all the way through manifestation of the disease. Obviously, the triple trigger theory is the most damaging for the insurance company. Of the three, insurance companies would prefer to deal with the manifestation theory.
Because the courts place blame based on the exposure of many conditions, insurance companies face the problem of determining exactly when the occurrence happened. For the insured, this can also be a problem if they must prove coverage during occurrence. Since professionals need to be covered continually, in many ways it can be easier to simply deal with claims-made policies.
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Since professionals need to be covered continually, in many ways it can be easier to simply deal with claims-made policies. |
Different professions have different policies. Each profession must be covered for the perils their profession faces. There will be similarities and differences in the various types. As previously stated, liability coverage for insurance agents is called E&O policies. E&O stands for errors and omissions. Such policies pay on behalf of the insurance agent or broker should a lawsuit arise. The policy, within the bounds of policy limits, will pay all sums for which the agent is found legally responsible due to any negligent act, error or omission of the insured or, if applicable, their employees in the scope of business conduct. It is important to note that this applies only to business as general agents, insurance agents, or insurance brokers. It absolutely would not apply to any type of business or product that was not related to insurance products. While this might seem self-explanatory, many agents now also deal with noninsurance products. These include such things as prepaid legal and revocable living trusts.
Even when the issue is an insurance product, the policy will not cover lawsuits under all conditions. Some things are still excluded. Exclusions would include such things as dishonesty, fraudulent, criminal or malicious acts, libel, and slander. Of course, E&O policies do not cover such things as physical injury, sickness, death of any person, or property damage. This would be true even if injury or property damage happened directly due to the actions of the agent. E&O policies directly relate to the sale of insurance products in the scope of statements made or implied, and omissions of necessary information. The agent can be covered for liability to the clients themselves, to third parties who have an involvement, and to the insurance companies for which they work. Liability amounts vary. Obviously, the agent is covered only to the limits of the policy they own. Some may be for as little as $25,000 per claim/$75,000 single limit, but it is best to carry much higher limits. It is not at all unusual for an agent to carry policies with limits in the millions of dollars.
Some license lines of insurance tend to be insured more often than other lines. Property/casualty lines generally must carry professional liability insurance in order to work. The insurance companies they contract with require it in most cases. In addition, because E&O policies are a type of property/casualty coverage, these agents better understand how they work. Property/casualty agents are accustomed to the terminology, whereas life/health agents may be less schooled in the types of benefits offered by E&O policies. Property/casualty companies may offer policies only for their agents, with policy clauses relating directly to this field of insurance. Life and health agents may need to contact their companies for professional liability policies which relate to their areas of business. Such policies can be quite specific, so it is important to understand who the policy is intended to benefit.
E&O for Insurance Agents
Insurance professionals are realizing how vulnerable they are when it comes to professional liability. The legal profession moves from occupation to occupation in their quest for lawsuits. Insurance and financial planning is sure to be hit massively within the next few years. Some of the suits will be well deserved since there has been little regulation enforced in some areas of financial planning. Other suits will be frivolous and undeserved.
Industry experts have not missed the coming trend. An analysis done by Shand, Morahan, administrators of the National PIA Errors and Omissions Insurance, makes this point clear. Their analysis revealed that three fourths of all liability claims fell into three categories:
44 percent resulted from failure of the agent to place coverage correctly;
22 percent resulted from not placing insurance coverage where it was needed (none at all); and
9 percent resulted from the failure to forward and/or process a renewal of an existing policy.
Seven percent of the claims resulted from agent failure to advise the insured of a pending cancellation of an existing policy. Only 1 percent of the claims came from dishonesty or fraud. This study shows that agent judgment is a primary cause of lawsuits.
E&O for Financial Planners
In the beginning, financial planners had difficulty obtaining adequate coverage. Today, there are policies to choose from, although perhaps not in the quantity offered to insurance agents. Financial planners, as a profession, have only been in existence since the early to mid-1980’s. That is not to say that there were no financial planners prior to that time; rather they were not recognized as a profession until that time period. There have actually been financial planners for as long as insurance has been in existence.
Once financial planners were viewed as professionals, liability protection became a necessity. One of the first companies to offer liability insurance to financial planners was the Alexander and Alexander policy which was offered through the International Association for Financial Planning. They were expensive policies with costs coming in around $450 ($200,000 of protection; $100,000 per occurrence) for a planner with less than two years’ experience. As expected, higher limits of coverage were more expensive. As early as 1985, there were more than 1,500 policies issued. Of course, there were certainly more financial planners around the country than this, but it does show the awareness that was developing.
Standard of Care
One of the first steps to avoiding a professional liability lawsuit is to understand what is required of a professional when dealing with a client. In legal terminology, the professional should know the applicable standard of care owed to a client.
A claim based on liability imposed by law develops as the result of the invasion of the rights of others. A legal right is more than a mere moral obligation of one person to another, for it has the backing of the law to enforce that right. Legal rights impose many specific responsibilities and obligations. Some of these are quite obvious in a general sense, such as not invading the privacy or property of others or not creating an unreasonable risk or actual harm to others.
The invasion of legal rights is a legal wrong. The wrong may be:
1. criminal (public), or
2. civil (private).
A criminal wrong is an injury involving the public at large and is punishable by the government. The action on the part of the government to effect a conviction and impose fines or imprisonment is termed a “criminal action.”
Civil wrongs are based upon:
1. torts, and
2. contracts.
Torts are wrongs independent of contract. Examples of these would include false imprisonment, assault, fraud, libel, slander and negligence. Contracts may involve legal wrongs when applied to warranties which are violated, bailee responsibilities which are not fulfilled or contract obligations which are breached.
For liability insurance, the emphasis is on civil wrongs and particularly on the many legal wrongs based upon torts. Of the greatest importance are torts resulting from negligence (unintentional acts or omissions).
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Negligence is the failure to exercise the proper degree or standard of care required by circumstances. |
Torts include all civil wrongs not based on contracts. As such, they are a broad residual classification of many private wrongs against another person or organization. They occur independently of contractual obligations and may result from:
1. intentional acts or omissions,
2. strict liability imposed by statute law, or
3. negligence.
We are going to concentrate on the negligence portion. Negligence is a tort; a civil wrong not based on a contract. Most of the liability imposed by law stems from accidents attributable to negligence. If negligence can be shown to be the proximate cause of an injury or loss to another, the negligent party is liable to the injured party for damages. Negligence is the failure to exercise the proper degree or standard of care required by circumstances. It may consist of not doing what is required under the circumstances, or doing something that shouldn’t have been done. Behavior in any circumstance which fails to measure up to that expected of a careful, prudent person in like circumstances constitutes negligence. Faulty judgment may result in liability for negligence, even though the motive behind the act was well intentioned. When it comes to finances, this is an important point to remember. Most agents have no intention of hurting their clients financially. Even those that think of their commissions first do not intend to actually injure their clients financially. An agent that fails to buy E&O insurance is putting their own personal financial stability at risk.
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Behavior in any circumstance which fails to measure up to that expected of a careful, prudent person in like circumstances constitutes negligence. |
In an ordinary negligence case (not involving a professional), the standard of care required of the defendant pivots on the questions of whether or not the accused behaved as “an ordinary reasonable prudent person” would have behaved under similar circumstances. In addition, the defendant is required to use any special knowledge they may have obtained through education, training, or experience. This obviously affects insurance agents, since they have received special training and education and probably have some type of experience as well.
As it applies to professionals, the required standard of care changes. If a person offers professional service to the public, it is presumed that the person possesses some degree of special skill and knowledge. Unlike the ordinary negligence cases, where special skill and knowledge is considered only if the accused in fact possesses it, a professional negligence case imposes a certain level of skill and knowledge on the defendant whether or not they actually possess that skill or knowledge. Anytime an individual displays any assumption of professional skill, it is assumed to be real. This would include such things as having business cards printed which read “financial planning.” Having such cards printed indicates training, education, or experience. It does not matter whether or not the individual actually has any training, education or experience. It will be assumed that he does. It is the learning and skill ordinarily exercised by members of the particular profession stated. Since this standard of care applies to the profession stated on the business card, in a lawsuit the individual will be expected to have performed to the level of that profession. That is why it can be very dangerous to allow clients to assume training, education, or experience that does not actually exist.
Since just about anyone can claim to be a financial planner. It may be hard for the average person to know if the individual is qualified as such. There has been much attention given to this matter by individual states requiring specific knowledge of those who profess to be financial planners. However, with the development of the IBCFP and IAFP's Registry, along with the movements by individual states, this is changing. With increased regulation of the financial planning industry, the states are attempting to clarify who can and who cannot make such claims. The lawsuits against financial planners will likely increase as well, encouraging the establishment of legal precedents. Attorneys now have the option of attending classes on how to sue insurance agents and financial planners. It is something that every agent should consider before stepping into dangerous situations.
In Summary
· The definition of a professional was broadened in the 1970’s to include not only doctors and lawyers, but also architects, engineers, accountants, stockbrokers and insurance agents.
· Malpractice insurance, also referred to as Errors and Omissions insurance or E&O insurance, is a type of policy which contains a unique settlement clause in favor of the insured. It does not allow the insurer to settle a claim without the insured's consent.
· Torts are wrongs independent of contract. Negligence is a tort; a civil wrong not based on a contract.
· Negligence is the failure to exercise the proper degree or standard of care required by circumstances.
· A professional negligence case imposes a certain level of skill and knowledge on the defendant whether they actually possess that skill or knowledge. This is a standard of minimum professionally acceptable conduct.
Industry Variety
The financial planning industry has one characteristic that is unique to this industry: its members come from a variety of other industries. Financial planners can be accountants, stock brokers, bankers, or insurance agents. We have also seen the banking industry go into the financial planning field, as well as other industries not otherwise considered a financial planning field.
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Financial planners may originate from several fields, including accountants, stock brokers, bankers, or insurance agents. |
The majority of financial planners develop from insurance agents, accountants, and stockbrokers. The financial planner’s duties often include many of the duties of these professionals. Looking at how the courts have treated these professionals can help us determine how the financial planning field will be treated by the courts. It is particularly relevant since the duties of an insurance agent, for instance, parallels those of a financial planner - preparing and analyzing financial statements, determining risk exposures, determining adequate insurance amounts, investing the client’s money, and planning the client’s retirement and estate planning needs.
In recent years we have also seen cases establishing a standard of care for investment advisors. Certainly financial planners would fall into the category of investment advisors, as do some insurance agents. Looking at these cases also offers a means of predicting how a financial planner will be treated in court.
Professional Insurance Agents
Insurance agents are in the ranks of other professionals in the quest for risk avoidance, which means that liability insurance is a must. Physicians have had to pay plenty over the last few years for professional liability insurance. Attorneys joined physicians as liability risks, followed by accountants, then insurance agents and financial planners. Insurance agents are further faced with limited liability insurance coverage and increasing premiums. Add to this the national awareness about potential liability risks, making clients more apt to litigate in the event of a mistake on the part of the insurance agent. It is safe to say that liability insurance is a necessary part of doing business for insurance agents, just as it is for physicians and attorneys.
As we stated, there could be a conflict of interest for an insurance agent who is also a financial planner. The two roles need to be separately maintained to some degree. Of course, all industries who deal with finances must consider how the various roles interact. The insurance agent who is also a financial planner will want to market their services, but each type of service must be correctly handled. The ethical standard in these circumstances must always consider the client first and commissions second.
We could use the example of a young family, both parents are age 26, with one child, age three, who comes to an insurance agent/financial planner wanting life insurance. It is determined that the family needs at least $250,000 life insurance coverage. However, the family cannot afford the cost of a whole life policy. Should the insurance agent sell them less insurance coverage and receive higher commissions? Or should the agent sell the family a less expensive term policy covering the family the way the financial planner saw fit? Naturally this potential conflict of interest exists for the insurance agent who is not a financial planner, but the problem seems to increase in severity for the agent who is also a financial planner since their primary function is not to sell a product but to provide financial advice. Some industry people feel consumers should seek out a financial planner that does not sell products of any kind; they merely advise consumers.
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Liability of Agents What an agent says in terms of “puffing” or exclaiming the virtue of a policy is often not actionable except in the circumstances where an agent assumes additional duties, has a special relationship of trust with the buyer, or holds himself/herself out as having special expertise. Then a special duty arises. But when an insurance agent gives assurance of proper coverage and it turns out to be false, that agent will be held liable for negligent misrepresentation. That is not to say that an insured can remain intentionally ignorant of the terms of a policy. An insured is not required to independently verify the accuracy of representation made by the agent regarding the policy and an agent can be held liable for intentional or negligent misrepresentation. - Richard Alexander, Esq. |
Insurance Agents’ Professional Negligence
Conflict of interest is one of many professional liability problems facing insurance agents or brokers. They, like other professionals, can be found liable for negligence, violation of a statute, and breach of contract.
Negligence is the broadest field of exposure for an insurance agent. Negligence is a tort - a civil wrong not based on a contract. Negligence is often the result of carelessness, thoughtlessness, forgetfulness, ignorance, or just plain stupidity. It involves errors and omissions made by the insurance agent. The majority of the liability imposed by laws stem from accidents derived from negligence. If negligence can be shown to be the proximate cause of an injury to another, the negligent party is libel for the injuries or damages sustained. We tend to think of negligence and damage to others to be physical, but financial damage is also possible. Negligence could be defined as the failure to exercise the proper standard of care required by the circumstances. Negligence never involves intent. A negligent act may include not doing what was required under the circumstances, or doing something that fails to measure up to what would be expected of a prudent person in like circumstances. Faulty judgment may result in liability negligence, even though the motive behind the act was purely innocent. This point is very important when it comes to anything financial. A financial loss does not necessarily mean faulty judgment; no one has a crystal ball when it comes to investing. However, if the advice given is indeed found to be faulty, then a malpractice lawsuit is possible.
There are laws that require all persons to use prudence in their actions so that others will not suffer bodily injury or property damage. Failure to heed such prudence gives the injured party a right to action against the negligent party for damages. “Prudent behavior” is based upon what society expects of the individual. The conduct must be reasonable in light of the risk involved.
Presumed Negligence
Ordinarily the burden of proof lies on the plaintiff (claimant) in a negligence case. The plaintiff must prove that the defendant failed to exercise the reasonable standard of care for a prudent person. However, this may not always be the case. If the facts presented justify a reasonable form of judgment of negligence, the courts may lift the burden of proof requirement by applying the common law doctrine of res ipsa loquitor (meaning “the thing speaks for itself”). Negligence is presumed without the plaintiff having to prove it. The burden of proof is then shifted to the defendant. Under this law a legally sufficient case of negligence can be established and referred to the jury if the:
· plaintiff’s injury was caused by a defective object,
· injury could not have occurred without the defendant’s negligence, and
· object causing the injury was controlled by the defendant.
These conditions establish presumed negligence.
The law of presumed negligence applies when an accident causes an injury preventable by the use of prudent care and/or safety inspections. Presumed negligence has been applied to a number of accidents which occurred without witnesses: railroad or aviation injuries, medical malpractice claims, and/or damages from defective products for example. The last example of product liability has some difficulty applying res ipsa loquitor in the courts. That is because the claimant, not the defendant, controls the product. The control of the product lies in how it was used: properly or improperly. However, the courts have held defendants in control of the product if it has not been changed since leaving the manufacturer. The courts are not consistent with these decisions, though.
Contributory Negligence
When negligence is presumed, the plaintiff must not be guilty of contributory negligence. The circumstances of the accident must be unquestionable as to the negligence. If the accident could be caused by any other means the res ipsa loquitor law is not applicable. Presumed negligence does not exist if the accident results from circumstances beyond the control of the defendant. The accident must be such that the injury could not have occurred ordinarily without the negligence of the defendant. An accident resulting from a third person’s involvement or from any physical or mechanical action is also not applicable.
Imputed Negligence
Imputed negligence makes an individual responsible for negligent acts of others. Employers may be liable for the action or negligence of their employees, as well as the employees themselves. If an employer uses independent contractors whose employee negligently causes an injury, that employer could be held liable if it provides faulty instructions or tools. Imputed negligence can occur even to unaware individuals. Landlords whose tenants cause an injury from a negligent act could be held liable. Parents could be held liable for the actions of their children.
Vicarious liability laws impute liability to automobile owners even though they are not driving or even riding in their cars. Even if the car was borrowed by a friend, the owners of the vehicle could still be liable for the actions of the driver. Under the family purpose doctrine liability applies particularly to the automobile owner whose family members negligently use the car.
Although presumed negligence may not apply if a third person is involved in the negligent act, imputed negligence does apply to third persons who may not be directly involved.
Negligence in Tort Liability
Where allegations of negligence are made lawsuits present major issues in tort liability. Some of these include the required elements of a negligent act.
1. Before a court will award damages for negligent liability to a plaintiff, four requirements must exist. They are:
a) a legal duty to protect the injured party,
b) a breach of that duty or wrong,
c) an injury or damage to the plaintiff’s person, property, legal rights or reputation, and
d) a reasonably close proximate relationship between the breach of duty and the plaintiff’s injury.
2. Defenses in a negligent action. Since there are never absolutes, a plaintiff may prove all four elements (legal duty, breach of duty, the injury and proximate relationship) of a negligent act and still not be awarded damages. The defendant has several successful defenses available. Two principal ones are:
a) contributory negligence, and
b) assumption of risk.
Contributory negligence means that the plaintiff is also negligent and that negligent action contributed to the loss incurred. If the plaintiff is guilty of contributory negligence, they may be denied damages. Contributory does not relieve the defendant of duty to the plaintiff. Instead, it denies the award of damages to the plaintiff if both parties are at fault.
In a strict sense, the doctrine of contributory negligence does not always produce equitable results. A slight degree of responsibility, (negligence) on the part of the plaintiff could result in no award of damages.
There are two substantial variations of contributory negligence rules:
a) comparative negligence, and
b) last clear chance.
Under comparative negligence, the court, often the jury, attempts to scale or diminish in proportions the awards according to the comparative degrees of negligence of the parties involved. Not all states have comparative laws. Partial comparative negligence statutes are more common.
Under the last clear chance doctrine, the defendant is able to prove that the plaintiff had the last clear chance to avoid the accident. The last clear chance doctrine states that the defendant with the last clear chance to avoid the accident is guilty of contributory negligence by failing to avoid the accident. If both the plaintiff and defendant were inattentive, this doctrine does not apply.
3. Statutory modifications of the common law on negligence.
The most common type of negligence for insurance agents is failure to place necessary insurance, failure to obtain proper coverage, failure to properly advise of the company’s rejection or lack or coverage, failure to cancel a policy at the insurer’s request, and failure to fully disclose the nature of the risk. In addition to this, the agent may be liable for giving unauthorized instruction to insureds or unauthorized interpretations of coverage, delaying the underwriting or claim information, or binding an unacceptable risk.
We can look at some examples of an agent protecting themselves from a liability claim by informing the client of their options completely. Many property and casualty agents are expected to mention the availability of umbrella liability insurance when they are selling an auto or homeowners policy. This is not done for the purpose of receiving higher commissions. Umbrella liability policies do not offer the agent particularly large commissions. The agent who does this is doing it to protect themselves in the event that the insured suffers a loss greater than the amount of liability protection provided under the auto or homeowners policy. By informing their clients of the option of buying more liability coverage, the agent is preventing the insured from filing a suit against them for failing to provide adequate coverage. Of course, this insurance offer should be documented, perhaps even obtaining a reject signature from the consumer.
Another example of an agent protecting themselves from lawsuit is the practice of giving complete information. For example, the insurance agent who informs the policyholder of the minimum insurance coverage required by the state, but, given the client’s assets, suggests a larger amount of coverage as appropriate. The client then has the option of declining the additional coverage, thereby, releasing the agent of a negligent act. The agent should then document that the coverage had been discussed and refused by the client. The agent may go as far as having the client sign a form acknowledging this denial of additional coverage. In this way, the client will not be able to claim that the agent failed to offer the adequate coverage needed.
Insurance agents and brokers can be held liable for a vast array of actions. It should be noted that they can be liable to both the client and to the insurer for which they work. We should also make a distinction between agents and brokers. Agents are considered representatives of the insurer. Brokers are considered representatives of the insured. The broker’s primary allegiance is to the client. Knowledge of the broker is not considered to be knowledge of the insurer. The agent and the insurer are deemed to have the same knowledge.
Express Authority & Ostensible Authority
Identifying the distinction of knowledge could be critical if an insured chose to sue both the agent or broker and the insurance company. Normally, if the broker is involved the insurance company can escape liability. As with anything, there are always exceptions. Sometimes when dealing with the agent, the insurer can still be held liable even if the agent oversteps their express authority. Express authority refers to the powers given to the agent in the agency agreement or contract. In addition, the agent also has certain implied powers. The courts have used the doctrine of ostensible authority to give agents those powers the public reasonably expects them to have. An example of liability would be that of a life insurance agent who accepted the premium for a life insurance contract with a company for which he was not contracted. The insurer had not given the insurance agent the authority to accept the premium. The insurer could be bound since it is reasonable for the public to believe that an agent has the authority to accept premiums.
Another example where ostensible authority can be invoked is when an agent is told by the insurer that the company will not write homeowners coverage on homes over 50 years old. Assuming the agent writes a policy on a home over 50 years old, the insurer could still be liable to the insured if any claims arose since there would be no reason for the insured to know the issuance of such policies was forbidden. Of course, in these situations, the insurer may have recourse against the agent for the actions they took.
In many situations, the agent/broker distinction can become less critical. Instead, the actual facts of the situation will be looked at to determine whom the agent or broker was representing:
1. the insured, or
2. the insurer.
In any case, the agent or broker must and is expected to act with reasonable care and diligence when representing the insured or insurer. Another aspect to look at is how the courts view the insurance agent. Assuming the court views the insurance agent as a professional, the applicable standard of care would be that of the skill and expertise of the average professional in that industry. We all know, of course, that some agents are more expert than others. Those who overstep the bounds of common sense cause the entire industry to experience change, as states legislate to protect the consumers.
We can look at court cases that discuss the implied law duty of good faith and fair dealing that is imposed on agents and insurance companies. In the case of Fletcher v. Western National Life Insurance Company, the court stated:
We think that, similarly, the implied-in-law duty of good faith and fair dealing imposes upon an insurer a duty not to threaten to withhold or actually withhold payments maliciously and without probable cause, for the purpose of injuring its insured by depriving him of the benefits of the policy.
In a similar court case, United States Fidelity and Guaranty Company v. Peterson, it also mentions this same standard of care:
Where an insurer fails to deal fairly and in good faith with its insured by refusing without proper cause to compensate it’s insured for a loss covered by the policy such conduct may give rise to a cause in action in tort for breach of an implied covenant of good faith and fair dealing. The duty violated arises not from the terms of the insurance contract but is a duty imposed by laws, the violation of which is a tort.
The courts here are referring to insurers in speaking of the duty of good faith and fair dealing, but it is also applicable to the insurance agent. Typically, if the insurance company is sued for bad faith, the agent will also be named as a defendant.
Torts & the Basis for Liability Claims
Question: What is the legal basis for a liability claim?
Answer: A claim that is based on a liability imposed by law, which develops as the result of an invasion of the rights of others. This legal right is more than a moral obligation of one person to another. This legal right has the backing of the law. Legal rights impose many specific responsibilities and obligations. The invasion of such legal rights is deemed a legal wrong. The legal wrong may be:
1. criminal (public), or
2. civil (private).
A criminal wrong is an injury involving the public at large and is punishable by the government. The action on the part of the government to effect a conviction and impose fines or imprisonment is termed a criminal action.
A civil wrong is based upon two things:
1. torts, and
2. contracts.
Torts & Contracts
Torts are wrongs independent of contract wrongs. In other words, they involve actions of the agent or others but not the contract. This includes false imprisonment, malicious prosecution, trespass, conversion, battery, assaults, defamation (libel an/or slander), fraud, and negligence.
Contracts may involve legal wrongs when implied warranties are violated or contract obligations are breached.
Liability Under Torts
As stated before, torts include all civil wrongs not based on contracts. As a result, they are a broad residual classification of many private wrongs against another person or organization. Torts occur independently of contractual obligations and may result from:
· intentional acts or omissions,
· strict (or absolute) liability imposed by statute law, or
· negligence. Most torts are based on negligence.
Insurance Agents’ Civil & Criminal Violations
Insurance agents can also be found liable for statutory violations, both criminal and civil. For insurance agents whose livelihood is dependent upon their employment, this is an especially serious form of liability since criminal violations can require a conviction and impose fines or imprisonment or both, depending on the severity of the crime. Sometimes the insurance agent is given the option of having a hearing before the state insurance commissioner rather than appearing in court. In other instances, if the agent surrenders their license voluntarily, no further action is taken.
Fraud is perhaps the most common crime committed by insurance agents, although it accounts for only about 1% of lawsuits. The following are some examples in the “Professional Liability Pitfalls for Financial Planners” by Cheryl Toman-Cubbage of real-life cases of crimes committed by insurance agents.
In Colorado, a man was involved in a car accident that resulted in almost $7,500 damage to his car and another vehicle. When he contacted his insurance agent, he was assured that the damages would be paid. But, as it turned out, the agent was not licensed to sell insurance in Colorado and had never sent in premium to the insurance company. As a result, the man found out he was uninsured. He had no recourse against the insurance company for the agent’s action since, in Colorado; it is unresolved whether an insurance company is responsible for the actions of its salespeople. He sued the agent and was awarded $5,000, but the agent filed bankruptcy, so the plaintiff was unable to collect the judgment. The agent did surrender his license.
Another case involved an elderly couple who took the advice of an insurance agent to discard all their old policies and buy the health insurance he sold. They gave the agent a check, but never received a policy. After contacting the company the agent said he worked for, the couple found out he was no longer employed by this company and had no authority to sell its policies. A result of this incident and other circumstances similar to this, the agent’s license was revoked and he was convicted of theft and sentenced to five years’ imprisonment.
We have probably all heard stories of unscrupulous agents taking advantage of their clients. States pass legislation in the hope of reducing fraud, but it is unlikely that laws will ever be entirely successful. What the examples above show is that an agent can receive criminal punishment for acts of fraud they commit. Unfortunately, many agents who commit fraud receive no physical punishment at all, although they do commonly lose their license to sell insurance. Some agents, however, will simply move to another state and hope that their past does not catch up with them.
It has been said that an ethical code of conduct cannot be mandated. An agent is either ethical or not, and laws merely point out those who are not. While this may be true, laws (and resulting punishment) do at least prevent those who lack any ethics from continuing in the profession. Unfortunately, consumers will remember the unethical agent far longer than they do the hardworking ethical people.
Insurance Agent’s Breach of Contract
Contracts may involve legal wrongs when implied warranties are violated or contract obligations are breached. An insurance agent would likely not be sued individually for breach of contract. The insurance companies and agencies themselves are more likely to be sued for such a lawsuit since they would be viewed as responsible for denial of a claim or violation of a condition.
However unlikely it is that an agent or broker would be sued for breach of contract, it is possible. We can look at the language of the case of Milwaukee Bedding Company v. Graebner:
It is a general rule that, where an application for insurance is made to an agent who represents several companies, no contract of insurance is engendered between the insured, and any particular company until such company is designated by the agent. But, where the company is selected by the agent, and in some manner designated as the company in which the insurance is to be written, a binding contract results. In such case the agent becomes the agent of the insured for the purpose of selecting the company.
The agent of the above case was found not guilty, but the language describes the traditional relationship between a broker and the insured. It could also be assumed from the opinion that an agent can be liable for a breach of contract to procure insurance. For instance, in the case of Marano v. Sabbio, an insurance broker promised to procure burglary insurance for the client, but failed to do so. Some of the client’s property was stolen under covered circumstances. The court held the broker liable for the value of the property stolen under a breach of contract theory.
It is also possible for the agent and the insurance company to be sued for failing to act promptly on an application for insurance. This is sometimes presented as a negligent cause of action, but it has also been presented as a breach of an implied agreement to act promptly or as breach of contract.
Breach of an Implied Agreement Theory
Under the theory of breach of an implied agreement to act promptly, it has been found that the course of conduct of the agent, including solicitation of the application and acceptance of the premium, constitutes an implied agreement that the insurance company will act upon the application without unreasonable delay.
Breach of Contract Theory
Under the theory of breach of contract it has been found that the application is the offer and silence on the part of the insurance company or silence coupled with retention of the premium forms a contract. This makes the insurance company liable for any unreasonable delays in acting on the application.
Legally Binding Insurance Contract
It is important to understand exactly when an insurance contract becomes legally binding. As stated before, the application is considered an offer of insurance. The acceptance occurs when either the agent binds coverage or the policy is issued. By law, an insurance contract does not actually have to be in writing. However, it is normally in written form. While there are many reasons for this, one main reason is to determine when the contract was formed so that one may know when a loss is covered. For example, client Abe Jones applies for coverage with Common Contract insurance company on his car. By accepting the offer of the client, the agent creates a written contract. If client Abe Jones is involved in a car accident before he receives a written contract, the loss is still covered by Common Contract insurance company.
Relevance
The relevance of determining when a contract comes into existence relates to when and if a breach of contract occurs. It is obviously stated that no breach of contract can occur unless a binding contract actually exists.
In the past, a life insurance agent could not bind the insurance company. However, in the case of Smith v. Westland Life Insurance Company, the court stated this opinion:
“... an ordinary person who pays a premium at the time he applies for insurance is justified in assuming that payment will bring immediate protection, regardless of whether or not the insurer ultimately decides to accept the risk.”
In the case of Young v. Metropolitan Life Insurance Company, the courts stated a similar opinion:
“... the very acceptance of an advance premium by the carrier tends naturally toward an understanding of immediate coverage though it be temporary and terminable.... In short to the ordinary layman, payment of the insurance premium constitutes payment for insurance protection....”
A Contract of Adhesion
In the first case mentioned, payment of the premium had been made. The courts are leaning toward viewing the insurance contract as a contract of adhesion and tend to be harder on the agents and insurance companies in finding a contract early in the negotiations. A contract of adhesion basically means that the insured has no option to change or negotiate policy terms. The policy is presented to the insured on a take it or leave it basis. When viewing court cases and decisions, it becomes obvious that any ambiguities in the insurance contract will likely be construed against the insurance company.
To Review
· Many financial planners start out as insurance agents or brokers and continue to sell insurance after they move into the financial planning field. For this reason, financial planners will have the same liability problems that they did in the insurance field as well as additional liabilities as financial planners.
· Even if the financial planner did not start out in the insurance field, they would be involved in providing clients with the risk management advice and even perhaps, would begin selling insurance products. This would thus mean that a financial planner would need to know their liabilities in this field they are expanding to.
· Financial planners can look to court cases involving insurance agents to gain a better idea of how their field will be likely treated in the courts. Like the insurance agent, the financial planner will be viewed as a fiduciary, holding themselves out to the public as having special skills and/or knowledge.
· Like the insurance agent, the financial planner can be held liable for negligence, breach of contract and statutory violations.
Investment Advisor’s Liabilities
The term “investment advisor” covers a broader range of activities than those performed by a stockbroker. It does not cover as broad a range of activities as those performed by a financial planner. It must be considered, however, since most financial planners could be deemed investment advisors. The court’s treatment of investment advisors clearly points out the standard to which a financial planner is likely to be held.
The case of Securities and Exchange Commission v. Suter in 1984 set a trend: the Securities and Exchange Commission (SEC) is very likely to bring a lawsuit against an investment advisor deemed to have violated a securities act. This adds then to the category of people whom an investment advisor, insurance agent, or financial planner can be liable to.
The case of Levine v. Futransky in 1986 was a very important case because it was brought by individuals, not the Securities Exchange Commission (SEC). This case held the advisor to a strict standard of care since it allowed damages to be awarded against the investment advisor even though overall there was no loss.
The plaintiffs in the case were trustees and beneficiaries of various trusts. Over a period of five years, the defendant was employed as their investment advisor to manage certain investment portfolios containing trust funds. The defendant was hired based on his representation that he could invest the funds in relatively conservative covered options. However, he invested in riskier, uncovered options which resulted in a substantial loss to the portfolios.
The defendant disputed that damages could be established by the plaintiffs since the aggregate earnings of the other profitable trust fund portfolios he managed for the plaintiff’s exceeded the aggregate loss of the others. He claimed there was no damage since the overall result was a net profit to the plaintiffs.
The court disagreed. It stated:
In the instant case, this Court holds that plaintiff’s suffered damages even though the investment portfolios incurred a net gain. Plaintiffs may be entitled to recover the difference between the losses incurred on the sale of the speculative securities and the greater amount the plaintiffs would have received had they not been defrauded and the more conservative securities had been bought and sold.
We can see the importance of this case since it points out the rights of individuals against investment advisors. If it can be established that the investment advisor made a material misrepresentation that the clients relied on, which in the above case was found to constitute fraud, the investment advisor can be liable for the difference between the amount lost (because of the investment vehicles) and the amount that would have resulted had the funds been invested as represented.
As stated earlier, the cases involving investment advisors are particularly relevant since investment advisors are performing the same functions as financial planners, though the financial planner’s duties may involve a wider range of activities. Like so many cases, similarities will exist for the financial planner and the agent.
Public Harm
Even the most careful person may eventually face a lawsuit. Even so, it is worthwhile to take any steps which may reduce the likelihood of such an event. If a person is actually sued, the fact that they have taken these precautions can help. How? They show the financial planner’s due diligence and good faith and sometimes this can provide a satisfactory defense against a malpractice suit.
A professional liability or malpractice lawsuit is traumatic in that much of the harm is done the moment the suit is filed. Unlike most legal claims, the situation is not over once the lawsuit is resolved. Harm to the professional’s reputation has occurred simply because the suit was filed: consumers will remember the occurrence. However, no one may remember if the professional was found guilty or not. For this reason, it is important to try to prevent malpractice claims from being filed in the first place.
“Triggers”
To prevent lawsuits, it is necessary to first understand what actions or omissions can trigger a professional liability claim. Then we can determine what preventive actions may be taken to avoid the situation. There are many reasons for lawsuits from outright fraud to simple misunderstandings. For simplicity sake, the following are broad categories:
1. Omissions, which is an intentional or unintentional failure to provide full disclosure (all the necessary facts),
2. Failure to detect a potential problem,
3. Bad advice, and
4. A Potential conflict of interest.
Omissions can be anything from a minor point to a major issue. It might be a failure to provide the client with a prospectus for a new issue of securities, failing to explain the risks involved with the purchase of speculative stock, or any other omission that the client might deem important. Some omissions may be more a matter of opinion than fact (the agent says the issue was discussed and the client says it wasn’t).
Failure to detect a problem is often a failure to use a comprehensive data gathering form. As a result, the financial planner does not have a full and complete set of facts. More often it results from an agent trying to do more than he or she is qualified to do.
Bad advice can be due to many reasons, but often it reflects a lack of agent knowledge. Obviously if the advice is thought to be bad, there was also probably a loss of funds. Why else would the advice be considered bad? Loss of money is the number one reason for being sued.
Failure to disclose a potential or real conflict of interest can be remedied by practicing full disclosure. The most common conflict of interest is representing two or more people who have a financial interest in each other, such as a divorcing couple. To represent both could present problems if there are legal difficulties in terms of property division, life insurance beneficiaries, and the like. Again, this problem can be avoided simply through complete disclosure and common sense.
Transferring the Risk
No matter how risk is defined, someone must carry the burden of it. For the policyholder, the risk is transferred to the insurance company. If the policyholder’s house burns down and he or she had a policy which covered it, the insurance company will pay to replace the home. Therefore, through premium payments, the burden of the risk is transferred to another entity.
Who should carry the burden of risk in investments? Since it is a speculative risk, normally the investor carries the burden. Except . . .
1. when the professional advisor gave bad advice despite obvious signs;
2. when the professional failed to fully disclose all the risks involved;
3. when the professional cannot document that such disclosure was given;
4. when any investor can prove fault on the part of the financial planner.
So, who carries the burden of risk for the financial planner? If he or she is prudent, E&O insurance will. With this insurance, when the planner is legally obligated to pay damages arising from their performance of professional services, caused by error, omission or negligent acts, the insurance company will cover the cost, in part or whole, depending upon the terms of the policy.
Ironically, it tends to be the most reliable financial planners that buy E&O insurance. That is not surprising since those who are reliable are reliable in all areas, including the protection of themselves. Does this mean that potential clients should ask their financial planner if they carry E&O insurance? Absolutely! Some insurance companies actually mandate that those agents who license with them be insured.
Most insurance agents and financial planners do not believe that they will ever be sued. Of course, most consumers also do not believe that they will ever be disabled or need large funds set aside for retirement. Americans are a positive thinking bunch of people! It will be the other guy who ends up in a nursing home. It will be some other family that experiences a disability that financially drains them. It will be some other agent who is sued.
Most insurance agents really do try to do a competent job. What they may fail to realize is that simple competency is not always enough anymore. So you tried to place that nursing home policy, but your clients just wouldn’t pay the high cost. So you advised the young family that more life insurance was needed, but they failed to purchase it. So you told the business man that he needed key man insurance, but he never called you back. When you end up in court, will anyone remember that you gave good advice? Can you even prove that you did? Most lawsuits are not brought by your client themselves. They will be filed by their family members. Without signed documentation you might be left out in the rain.
The daughter and her husband knew that their parents trusted you as their financial planner. They talked about you often. The daughter knew her mother was considering nursing home insurance. So, if you’re so efficient, why didn’t you place such a policy and save the family thousands of dollars in health care costs?
When that nice young man was killed in a car accident, his wife and three children only collected $50,000 in life proceeds. You know she must remember that you advised her husband to buy a larger amount. How can she say she doesn’t remember that conversation five years later?
No matter what the situation, lawsuits happen. Even to nice people. If you cannot produce the signed refusal form for the nursing home policy, how can you prove to the daughter and her husband that you did advise the purchase of protection? How can you prove to the widow that you did point out the shortage in life insurance protection five years ago? Without documentation, there is no proof. Get it in writing!!
What Type of Documentation?
Forms vary. There is no “right” documentation form. There is one requirement for documentation, however, that is a must: your client’s signature. It is not unusual for agents to think their personal notes are adequate. In some cases, they may be. Certainly they are better than nothing. In fact, agent notes are worthwhile for many reasons, but when it comes to lawsuits they are not enough. Always require a refusal signature for any product that is presented. Keep those refusal signatures forever. Lawsuits do not necessarily happen immediately.
State laws do vary and there are time requirements on many things. For most agents, however, constant calls to their attorney are not productive. It is simply easier to keep all refusal signatures, even past the client’s death. Many legal advisors recommend a 3X5 card format for the refusal signatures. These can be easily filed by client name, taking up little space. Each refusal card should state the policy that was presented, the date presented, the amount of time spent on the subject (mere product mention is not a presentation), and the reason given for refusal. If the client indicates that he simply does not want the product “at this time” the agent should put a revisit reminder in his or her calendar and be sure to follow up on it. Otherwise, the refusal signature is not necessarily valid.
Can an agent be sued for being too poor a salesperson? In other words, can the family argue that the agent did not present the product vigorously enough? In this day and age, perhaps so. However, it would seem unlikely that an agent could be sued for not being persistent enough. Certainly, documentation would lessen the possibility of it.
Lying About What You Know or Did
Many types of sales do not require state specified education. Any person can list any type of education or experience, even if it does not actually exist. Such claims do not necessarily have to be expressed; they may also simply be implied. There are always enough foolish salespeople around who take advantage of that ability. Sometimes it is even promoted by the agency for which they work. Of course, the thought is that more consumers will buy from them. Actually, that might even be true. Consumers do want to deal with people who know what they are doing. The danger lies in the increased possibility of lawsuits by clients and their families once the misrepresentation is discovered. At the very least, the policyholder will drop the coverage and go with someone they feel is more honest.
Full Disclosure
No matter what type of insurance is being sold, full disclosure is an absolute must. Many agents and financial planners consider full disclosure to simply be what is in the written plan. However, not all important details regarding risk or tax shelters will be found in the policy or proposal itself. When the client knows what to expect or what might be a possibility, there will not be any surprises. Avoiding surprises also avoids malpractice suits since it is the surprises that cause unhappy clients. Again, document the information given and have the client sign the documentation. It should be pointed out that any ambiguities in the form will likely be construed against the planner. All documentation forms must be clearly written.
When investments go down instead of up, clients invariably begin to worry. This worry can prompt calls to the financial planner. At this point, the planner should again go over all the details of the investment, including risk factors. Often, the client merely wants reassurance. Going over the details confirms for them what their buying decision was based upon. Most financial planners should be using a release of liability form stating that if the rate of return on the investment does go down, they will not be held responsible. Even if this form is used, however, it is always necessary to reaffirm for the client what they have invested in, how it works, and why returns might be down at the moment.
Release of Liability Form
There are no specific release of liability forms. It does not tend to be something that can be purchased at the local stationary store. Agents and financial planners typically make up their own. The wording will depend largely upon the products that are marketed, for example. Wording which is appropriate for one agent may not be for another. Our example is taken from a book by Cheryl Toman-Cubbage titled Professional Liability Pitfalls For Financial Planners.
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_____________________, CPA and Executive Financial Services Coordinator has informed me that consultation with my Life Insurance professional is essential to the proper handling of my life insurance matters and that: 1. the surrender of my current Life Insurance policies may result in the receipt of taxable income which I will have to declare and pay income taxes on in the year that I surrender my policies. 2. My existing Life Insurance Policies may be able to be kept in force without further premium payments by use of the equity accumulated in the policy and the equity that increases in the policy as premium payments are credited even if such credits are the result of policy loans. 3. Any company issuing new life insurance on my life may be able to deny paying a claim to my beneficiary under the “Incontestability Clause” contained in the life insurance contract. 4. The performance of the insurance being purchased to replace my current coverage may or may not, be up to expectations based upon the company’s investment management and the results of any of their accounts in which my policy is participating. Tax law changes, increased mortality and expenses, and many other factors may change the future benefits expected from any life insurance policy. I hereby release my CPA and Executive Financial Services Coordinator of Price Waterhouse, ________, of any and all liability or responsibility that results from my decision to change my existing life insurance. _______________________________________ Signature of Policy Owner Date _______________________________________ Signature of Beneficiary Date Signifying Understanding and Agreement _______________________________________ Witness Date Developed by and provided courtesy of Ben G. Baldwin CLU, MSFS, CFP, ChFC, MSM. |
Keeping Current on New Trends
Although the insurance field tends to stay fairly stable, new products do emerge. Perhaps the most notable addition in insurance recently has been the tax-qualified nursing home plans, but all fields do experience change. Of course, any agent or planner who wishes to be successful long term knows that knowledge is the only option. No one expects any agent to know everything in all fields, but in the field of their expertise, they must keep current. Some fields of insurance and financial planning overlap, so that the agent and planner must know more than one area.
Especially financial planning sees frequent changes. Often those changes involve the law and tax consequences. Perhaps that is why so many financial planners are also Certified Public Accountants. Financial planners must know how changes in the law would affect any financial plans that he or she is recommending or developing. He or she must also keep abreast of changes that will affect those financial plans already in existence. The planner’s clients will surely expect this from them. It has been suggested that financial planners are wise to have established “periods of service.” Insurance agents are accustomed to initiating an insurance policy and considering that policyholder theirs for as long as the policy stays in force. For financial planners, the safer course of action is one year service contracts (there is no fee for this contract). At the end of each year that contract is renewed and there follows a review of the financial plan that has been placed. In this way, the financial planner can address any changes that have taken place in the tax laws.
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For financial planners, the safer course of action is one year service contracts (there is no fee for this contract). At the end of each year that contract is renewed and there follows a review of the financial plan that has been placed. |
Financial planners with designations in this area need to have a specific amount of hours of continuing education in order to keep those designations current. Most states also require insurance agents to obtain education at specified times (such as every two years, for example). The professional realizes the protection this offers them. It is a way of validating their desire to stay current on new laws, policy offerings, and so forth. Industry magazines are also very worthwhile.
End of Chapter 13
2018