Could you get sued?

If a client’s claim is denied because they were underinsured, who’s to blame?



It’s the call that no broker wants to receive.

An angry and confused client is on the line, wondering why a claim sent to an insurer was denied. The money is necessary, the client argues, to pay for damages they never expected and cannot afford.

And then might come the accusation: “You didn’t do your job. You are supposed to make sure that I have the right coverage to protect me from situations like this. Otherwise, why do I have insurance?”

The broker’s next call could be to his or her own insurer to inform the company that collecting on the broker’s errors and omissions (E&O) insurance might become a pending reality.

The staff at ENCON Group Inc. is getting more calls and emails along these lines. The managing general agency has seen an increase in the number of E&O claims it receives, says Marianne McKinnon, senior underwriter of E&O, at ENCON.

In 2015, 51% of those claims came from brokers who allegedly failed to provide adequate coverage based on clients’ needs.

“That can be anything from not even obtaining the necessary policy to obtaining the policy but with insufficient limits, or even obtaining the policy but maybe emitting certain other key coverages that may have attached to that policy,” explains McKinnon. “That has been pretty consistent since we started handling broker claims about 25 years ago.”

“As a broker, you can’t put your head in the sand. You need to be aware of what people are actually doing.”

Fourteen percent of claims to ENCON come from situations in which clients claim their brokers did not provide proper or sufficient advice about the coverage.

A duty of care

The problem with these cases is that they cut to the heart of a broker’s obligation to provide a duty of care, a legal standard applicable to any Canadian broker, regardless of jurisdiction.

Brokers owe a duty to customers to provide information about their insurance coverage, to further advise them as to what other forms of coverage are available, the associated costs with that coverage, and what might be required to meet the customers’ needs for coverage, says Kevin Lasko, a lawyer at Blouin, Dunn LLP.

If brokers are not asking enough questions of the client regarding their possible needs, they can’t possibly be in a position to offer proper coverage; and that could become an issue, he says.

Whether the discussed coverage is meant to protect customers from age-old issues or evolving risks that are changing the insurance game, brokers must remember to cover themselves. An informed understanding of available products and their customers’ needs will help prevent that run to collect E&O.

The role of insurance in protecting homeowners and business owners from damages caused by extreme weather is well known, but the frequency and magnitude of rain, hurricane and fire events in recent years has challenged the P&C industry.

Airbnb rates are
30–60%
cheaper than hotel rates worldwide.

Source: The Brookings Institution

In the case of flood-related events, the industry responded with an increase in the number of personal lines products that offer overland flood protection. Choice is good for the consumer and the broker, but with that choice, comes great responsibility, says Gord Enders, president of Direct-Line Insurance.

“The broker has to really research the products and make sure that they are advising the client of the right product,” Enders says. “There is a great deal of responsibility in making sure that we are asking the right questions and drilling down and making sure that clients are aware of those choices in front of them.”

Price-conscious customers may want to stick to basic coverage to keep premiums low, but brokers should be reminding them of how weather has become more unpredictable and drastic in recent years.

“People who thought that they would never ever have a loss for water are experiencing those losses. That’s up to us to really educate and have those real discussions with clients,” says Enders.

Brokers should also remember that asking probing questions about a client’s property may even result in some savings. For instance, a broker who is aware that a client’s home is made of weather-resistant materials may be able to find an insurance package with a reduced premium, according to George Hodgson, CEO of the Insurance Brokers Association of Alberta.

Commercial risks

On the large commercial accounts side, one pitfall for brokers is not keeping up with their clients, who generally experience more rapid changes to their circumstances than personal lines clients.

“[Commercial clients] may start manufacturing a new product or they may buy a new property where they are going to be doing something different from what they are currently doing, and so that needs to be taken into account,” says Chris Stephens, national product leader at Burns & Wilcox Canada’s Professional Liability Centre of Excellence. “[If] it’s a material change, the insurance company needs to be notified [and] the broker needs to be on top of that as well.”

Jason Cedrone, senior vice-president at JLT Canada, has a strategy to ensure he fully understands his clients’ business development plans and the potential risks that could ensue. It involves meeting with clients multiple times throughout the year to have those conversations in person. These meetings help Cedrone produce a comprehensive risk management plan, but also differentiate his level of service from others.

“Clients who only see their broker at renewal are usually a source of great opportunity [for brokers like myself to] demonstrate a different type of value-add. It’s not just keeping up with the changes; it’s more about how you engage with your clients,” says Cedrone.

“The broker has to really research the products and make sure that they are advising the client of the right product.”

Then there are the emerging risks that are relatively new but gaining traction every day, thanks to the rapid pace of technology. The example most cited by the professionals interviewed for this story? Cyber breach.

“Brokers are telling us that they’re having a hard time selling cyber coverage because a lot of the smaller businesses think that it’s a novelty coverage. They think that because they’re not the CIBCs or the Equifaxes or the Sonys of the world, they don’t have cyber exposure, but that’s not it at all,” says McKinnon.

Smaller commercial clients may not see the need for cyber insurance but that does not nullify the broker’s responsibility to be informed on the issue, understand the available cyber products and, at least, recommend the proper coverage.

Understanding the intricacies of the coverage is another way for brokers to protect themselves from a cyber-insured client’s wrath in the wake of a denied claim. Cyber policies are not necessarily an umbrella-type of coverage for any scam involving the use of technology.

Lasko is studying the interpretation of cyber policies in U.S.-based lawsuits in which policyholders are challenging their insurers’ rejection of a claim. He finds judges are interpreting the policies, including their exclusions, as they are written.

Fraud conducted by social engineering is an example of a possible exclusion within policies. If a nefarious party calls or emails the employee of a company, pretending to be a senior executive, and convinces that employee to send company funds to a non-verified source, that company may be unable to rely on its cyber policy to recoup that loss.

Lasko has reviewed cases in which similar events occurred and the courts have typically said that the duped employee should have taken additional steps to ensure that the communication was legitimate.

18%

of clients with professional services firms reported social engineering breaches in the first three quarters of 2017.

Source: Beazley

When is personal commercial?

Brokers should also be familiar with a concept that is a hot topic for consumers, media and various levels of government: the sharing economy.

As some Canadian municipal and provincial governments continue to try to get a handle on regulating issues such as shortterm apartment rentals and ride-hailing, the insurance industry has been working on products that could apply to more flexible uses of homes and personal vehicles.

The motor vehicle side of the insurance equation is starting to settle because most jurisdictions in which Uber is allowed to operate require there be some form of insurance available for drivers who participate in the service, says Jonathan Meadows, a partner at Harper Grey LLP.

Meadows believes the bigger risk right now is short-term apartment rentals, because insurance policies for this use are less common.

Just as brokers would ask clients whether they use their cars or homes for business use, they should specifically ask whether clients supplement their income with sharing economy activities. Clients may not provide this information, unless directly asked, because they don’t realize their personal lines policy likely will not cover this type of commercial activity.

“As a broker, you can’t put your head in the sand. You need to be aware of what people are actually doing. And that’s why the sharing economy issue or issues that are related to that are so critical because people are actually doing this on a huge scale,” says Meadows.

The possibility that Canada may see a case in which a policyholder sues his or her broker over a denied claim connected to a sharing economy activity is on Meadows’s radar.

“I can see that being a case at any time. You have a big loss out there and somebody is going to name the broker as a result of a denial on that basis,” he says. “It’s coming. It’s almost inevitable.”

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Copyright © 2017 Transcontinental Media G.P. This article first appeared in the December 2017 edition of Canadian Insurance Top Broker magazine

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