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Special relationships, fiduciary duties, the hard market and disasters, are areas of exposure that agencies need to watch over when it comes to agency E&O, the experts say. Here’s why.

Special Relationships

One area that is getting extra attention in agency E&O risk is determining the nature of an agency’s relationship with the client.

“Whether it is easy or difficult for a policyholder’s attorney to establish an agent/insured special relationship in your state, the key point is that, in all but four states, agents have a greater responsibility to special-relationship clients than to others. So it is important for agents to try to determine who those clients are,” Winans wrote in an article for IRMI nearly 10 years ago. Now, he says, agencies are facing more E&O allegations where the agent has been accused of having a special relationship with a client that required them to advise the client about coverages that they should have had but didn’t.

In most states, an insurance agent’s basic duty is to procure the coverage that the insured has specifically requested.

“The insurance agent may think that in order to be a good agent, you should be advising your insureds about what coverages they should purchase. They may say they should do that, but the law generally does not require them to do that,” Winans explained. Except when it comes to special relationships.

“The law generally says you are supposed to get the insured the coverage that they requested or tell them in a timely fashion if you cannot,” he said.

But some states are saying that an agent-client relationship, under certain circumstances, can be a “special relationship” and that opens the door to a greater duty of care for the agent.

“Obviously the insured was relying on your advice. The insured asked you for advice. You provided them with advice. So they came to trust you to be somebody they could count on to give them the advice they needed about their insurance. So, if you’re in that kind of a situation, agent, and you advise them on this, this, and this, but you did not tell them that they should have flood insurance, or you never offered to sell them a personal umbrella policy, even though you had a umbrella policy on their business — those kinds of things — Then, agent, you had a duty to advise them, and you failed in that duty,” he said. Now a plaintiff’s attorney is able to put forward and win the argument, he said, because there was a duty to advise. “That broadens the agent’s responsibility a great deal.”

What makes a special relationship? Winans says there’s no uniform list to determine a “special relationship,” but courts tend to seek evidence that shows the insured relied on the agent to be an adviser, not a salesperson.

Agencies need to think about which clients in their book of business might be considered as having a “special relationship” and manage that exposure. Winans said, “The opposing attorney might argue, ‘Obviously the insured was relying on your advice. They had all of their coverages with you for 20 years. The insured asked you for advice. You provided them with advice in many areas, as your emails show. So, they came to trust you to advise them on their insurance needs. But you never recommended that they buy a personal umbrella policy, even though you wrote an umbrella policy on their business,'” he said.

Whitney said another area that is related to special relationships and seems to be popping up recently in claims is a fiduciary duty allegation.

“We’ve seen this for a long time in lawyer’s claims, but we haven’t seen it so much in agents,” Whitney said. “Usually you have your negligence claim, but we’re seeing the plaintiff’s attorneys pick up more and more on this fiduciary duty allegation, which kind of ties in with an order taker state versus a more broader definition,” she said. “We’ve seen across the country courts are saying that if you have a special relationship, then you’re no longer just an order taker. You’ve done something to increase the duty.” Fiduciary allegations go hand in hand with that, she added. “Whenever there’s a fiduciary duty allegation, it just makes it a little harder to defend,” she said.

Disasters and Hard Market

Catastrophes, such as recent Hurricanes Helene and Milton, have always brought up agency E&O allegations. Add that to the longest hard market in recent history and there’s a bit of worry on the minds of underwriters.

There are always claims post catastrophe, Whitney said. “I’m less concerned about Milton because it did the normal hurricane thing and then went straight across Florida,” she said. “Florida agents are very in-tune to this exposure. There will be claims, there always are but less concerned with Milton in Florida than I am with Helene in North Carolina.”

As of late October, Hurricane Milton claims already were about twice as many as reported for Hurricane Helene, which made landfall on September 26. However, the storm surge and subsequent flooding that Milton delivered was nowhere near that of Helene.

“The flooding that occurred in Asheville and Western North Carolina was just horrific and those are places where I’m not sure that everybody was offering flood coverage,” she said, because it’s “not an area that usually gets hit by those sorts of storms.” That’s an event that agency E&O underwriters are watching very closely in the regions most heavily affected by flooding — western North Carolina, Eastern Tennessee, Northwestern, South Carolina, and Georgia — she said.

Amanda Juratovic, Big I’s Professional Liability AVP of E&O Operations, says inadequate limits are a key issue in preventing agency E&O allegations post-disaster.

“Post cat claims definitely rise, and that’s in large part due to inadequate limits being maintained, which becomes an issue when your house is destroyed,” she said. In recent years, this exposure has been compounded by inflation.

“You were insured at $500,000, but your house is now worth $700,000, so you’re typically underinsured just by inflation,” she said. “And then with a cat, that’s when it’s going to become apparent or really any E&O claim.”

Juratovic advises agencies to be proactive every time they’re renewing accounts. “Make sure that whatever limits they’ve offered are enough based on the new value of a home,” she said. “You cannot just operate in a vacuum and renew, renew, renew, renew every year. You need to be making sure those limits are adequate,” she said, especially now where flooding happens in locations that historically did not flood.

The hard market, too, “breeds” both frequency and severity in agency E&O claims, Juratovic says. “But there is a way to mitigate exposures,” she said, “and that just really goes back to documentation.” If the documentation is in the client file, signed that they were offered coverage but chose not to purchase, that’s usually enough to protect the agent.

The hard market can make things tough on agents when it comes to property coverage, Whitney noted. Agencies nationwide are facing the difficult task of remarketing property policies as carriers increase rates and re-evaluate underwriting criteria.

One way to manage the E&O risk when remarketing and moving policies is to make sure agencies are matching the right coverage by implementing a “match test,” advises John Burns, sales executive at PIA Northeast. “I had a policy here, now I’m shopping it, and the agent found a cheaper policy, but didn’t realize there wasn’t a certain endorsement on it,” he explained. So, the insured previously had coverage but moved the policy and now doesn’t have the same coverage. “Always make sure you are reading the policy because I hate to say this but sometimes there’s a reason another policy is cheaper,” he said.

Carrier insolvencies are a big concern in a hard market; make sure the agency is adequately disclosing the risks of placing business with a non-admitted carrier, Whitney said. “That is super, super important.”

It’s important, too, to ensure there is a strong, supportive agency culture. “People should feel like they have someone that they can talk to if it’s getting too much,” she said.

Topics Trends Claims Professional Liability