Is there errors & omission coverage for recommending a life settlement option? The answer is “yes" and “no."
From an errors & omissions perspective, “3 Reasons Why Agents Should Offer Life Settlement as an Option" prompted several questions because many agencies' E&O policies do not cover the brokering of life settlement options.
Agents and agency owners may be risk-takers by nature, but they become very risk-averse when a potential uncovered E&O claim is staring them in the face.
So, is there E&O coverage for recommending a life settlement option? Unfortunately, “yes" and “no" are the correct answers. Let's start with “no."
Selling or managing the sale of a life settlement option is excluded by Swiss Re's unendorsed E&O policy. The relevant policy provisions read:
Section V. EXCLUSIONS:
"O. VIATICALS and STRANGER OWNED LIFE INSURANCE. The sale or servicing of investments in viaticated policies or of the sale or servicing of investments in STRANGER-OWNED LIFE INSURANCE (STOLI)."
Section IV. "DEFINITIONS AND EXPLANATIONS OF TERMS":
"T. STRANGER-OWNED LIFE INSURANCE (STOLI). STRANGER-OWNED LIFE INSURANCE means an arrangement where a life insurance policy is issued to an insured or an individual who has an insurable interest with the insured, with the resources to purchase the policy provided or guaranteed by a person or entity who has no insurable interest to the insured person and who has the contractual right to repayment or other means of satisfaction of the debt such as obtaining control of the policy rights or benefits."
Selling the life insurance policy to a third party with no insurable interest would result in the policy being a "stranger owned." No E&O protection is extended for the direct selling of life settlement options.
Although “no" is an answer, it is not the full answer. “Yes" is also an answer to the question of coverage for an E&O claim arising out of a life settlement option if one of three conditions is met:
1) Agent introduces the concept. Coverage depends on the relationship between the agent and the insured. If the agency simply introduces the idea and introduces the insured to a specialized and licensed life settlement option broker that handles the sales process, there is coverage. As long as the agent is involved in a “consulting" role, there is coverage. If the relationship for the sale moves to an agent, broker or sales role, there is no coverage.
2) No special licensure required. If life settlement option activities are covered under the insurance agent's life license in a specific state, then E&O coverage is provided. Some states require a Life Settlement Brokers license—or something similar—to participate in these activities. In those states, there is no coverage from the unendorsed E&O policy. Because this is a state-by-state issue, the department of insurance should be contacted to ascertain whether a separate license is required.
3) The E&O policy is endorsed. Swiss Re offers the Life Settlement Coverage Endorsement when the agent is located in a state where separate licensure is required. In those states, this endorsement extends E&O protection when the agent is broking life settlement options.
Chris Boggs is Big “I" executive director of risk management and education.
Disclaimer: Remember that coverage for any potential is dependent on the individual facts, circumstances and allegations made and the specifics of the situation. Neither Swiss Re nor the risk management department can advise whether or not there will be coverage for a particular claim or potential claim until such time as the claim or potential claim is presented.