How to Handle Life Insurance-Related E&O Claims

Who among us hasn’t learned the hard way that many tasks look easy when you’ve never tried them?

On the surface, it seems like dabbling in procuring a life insurance policy for a good customer would present little risk for an errors & omissions claim: The agent discusses why the client wants the policy, the types of policies available and the amount of coverage the client wants. The agent then shows the client policy illustrations, asks them to answer a few questions on the application, collects the check and delivers the policy. Simple, right?

In reality, these seemingly foolproof steps can result in a claim against even the most experienced insurance agent in several common ways.

Material nondisclosure: The most frequent type of life insurance E&O claim arises when a client dies and the life insurer refuses to pay death benefits on the basis that the client failed to disclose material facts regarding their health history.

The policy beneficiary sometimes files suit against the life insurer and the agent, alleging that they disclosed health history to the agent or that the agent was negligent in the application process by not asking all the questions, not explaining the questions accurately or not highlighting the importance of full disclosure. Or the beneficiary may point out that English is the client’s second language, so they were counting on the agent to read, interpret and complete both the application and the client’s responses.

As an agent, avoid passing judgment on whether an insurer wants to know a particular bit of history about the applicant. Always err on the side of disclosure. If the application is on paper, the client—not the agent—should complete the answers. If the application is online, complete it there side by side with the applicant. If the applicant is not reasonably proficient in English enough to understand the application’s questions and caveats and provide meaningful responses, consider using a translator.

Contestability and suicide clauses: Sometimes a claim involves a client who already has a life insurance policy in place but decides to replace the policy to obtain increased limits or reduce premiums. That new policy contains a contestability clause providing that if the client dies within the first two years in most jurisdictions, the insurer can deny the claim for material nondisclosures as discussed above.

After two years, however, the insurer cannot deny the claim unless it can prove the material nondisclosure was due to fraud, rather than simply an oversight by the client. Similarly, the new policy will not pay if the client commits suicide within the first two years after the new policy is issued.

If the client dies and the insurer denies payment under the new policy based on one of those clauses, the beneficiary may sue the agent for failing to adequately explain the clauses. Consider having the applicant sign a separate statement confirming their understanding that, by replacing policies, the contestability clause and suicide clause become effective again for the stated period. Alternatively, summarize those objectives in an email or other communication to the client and capture it in your system.

Cancellation for nonpayment of premium: Most life insurance companies send premium invoices directly to policyholders. Some policies are cancelled for nonpayment of premium, even though the policyholder had both the ability and intent to continue paying premiums—for example, a client might not receive an invoice from the life insurer due to a change of address. In other cases, an automatic withdrawal payment does not go through due a change in bank accounts, resulting in a claim that the policyholder did not receive the notice of cancellation for nonpayment.

In many jurisdictions, the agent has no duty to serve as the go-between for insurer and insured on such matters. But once the agent starts down that road, such as by promising to “look after all the customer’s insurance needs!” on the agency website, they must carry out that task with reasonable care and timeliness. Other jurisdictions may impose a duty on the agent to make reasonable efforts to contact a client if the agent learns of a policy cancellation for nonpayment, even without a special relationship.

Always keep documentation in the client’s file to thwart an E&O claim that the agent failed to forward change of address information to a life insurer, and carefully record efforts to contact the client about a cancellation.

David Holt is a vice president and claim expert at Swiss Re Corporate Solutions and works out of the Overland Park, Kansas office.