CAIB 1: Chapter 7.1 & 7.2 - Textbook Questions

5 examples of decisions which brokers must frequently make which reflect on their ethical standards (there are 7)

brokers may not be acting ethically when they:

• sell more insurance than is needed

• sell higher priced coverage when equivalent coverage is available at a lower price

• recommend the policy with highest commission percentage

• consistently recommend least expensive coverage

• place quality business with insurers in order to each contingent commission, while using insurers who do not offer such bonus plans as a dumping ground 

• fail to recommend a client purchase coverage from a competitor when it is clear they are unable to place insurance

• undertake to insure a particular risk knowing it is less than desirable to the insurer 

3 characteristics of persons who hold themselves out to be professionals

• a commitment to a higher ethical standard

• a high standard of educational preparedness and training with mandatory continuing education 

• belong to a formal association or society with regulating power over its members 

standard duty of care owed by brokers to clients

while brokers are required to exercise ‘reasonable skill, care and diligence’ in their dealings with their clients, there have been a number of court decisions which have imposed upon brokers a standard of duty of care approaching perfection

standard duty of care owed by brokers to insurers

an insurer has a right of action against a broker when it has been required to pay a loss which it did not intend to insure 

3 most common causes of E&O claims

• inadequate coverage

• misrepresentation and description errors

• cancellation/renewal errors

4 examples of broker E&Os which can result in inadequate coverage (there are 6)

• failure to provide proper coverage

• failure to place coverage

• mistake in coverage

• placing coverage too late

• not correctly advising as to availability of coverage

• failure to advise clients of policy exclusions, exemptions and other disadvantageous terms

3 instances where the broker would be liable to the insurer for any amounts paid by it

brokers have been ordered to pay when the evidence was that the insurer:

• would not have accepted the risk

• might not have accepted the risk

• would have charged a higher premium had it been given the correct information

3 examples of broker E&Os regarding renewals

• not renewing at all

• not renewing adequate coverage

• not warning or pending expiry

example of E&O claim: Policy change errors

an automobile policy may insure several vehicles. during the policy term there are numerous additions and deletions of vehicles and/or changes in coverage. if care is not taken, it is possible that the wrong vehicle may be deleted, or coverage deleted on the wrong vehicle

example of E&O claim: processing delays

a broker was held responsible for a fire loss involving straw which started within 10 minutes of the broker agreeing to arrange the coverage. although the coverage had not yet been placed, there was evidence that on two other occasions, similar insurance had been arranged by the broker within 15 minutes of making a series of telephone calls

example of E&O claim: agency agreement violations

when limits or underwriting guidelines are exceeded and a loss occurs, brokers will usually be responsible for payment of the loss 

6 measures which can be taken to prevent E&O claims (there are 7)

• take all steps necessary to properly determine the clients needs

• ensure staff members are acting within the level of their competence

• be advisers rather than deciders for insureds

• know coverages and insurers

• keep within the bounds of binding authority

• to avoid non renewals, office procedures should be established to ensure that all policy expiries are accounted for on a timely basis

• double check requests for policy changes, both when requesting the change from the insurer and again when the change endorsement is received

5 procedures which can be used to prevent E&O claims arising from claims handling (there are 6)

• maintain proper claims records

• report the claim immediately to the insurer

• if certain the loss is not covered, inform the insured of this fact

• follow up periodically with the insured to ensure settlement is progressing

• inform the insurer they will be contacted by an adjuster and remind them of the duties imposed by the policy

• do not authorize the insured to proceed w repairs or replacement nor make any statement that would commit the insurer to a particular course of action

key source credibility in an E&O claim of broker?

documentation and record keeping

2 means of documentation which can be used in every brokerage to help defend against E&O claims

• conversation/telephone logs

• confirming letters 

basic Insuring Agreement contained in most E&O policies

coverage is provided for claims that arise from any negligent act, error or omission of the insured or any person for whose acts the insured is legally liable

types of losses for which coverage is not provided

they do not cover claims arising out of any dishonest, fraudulent, criminal or malicious acts, nor do they cover claims for the failure to collect, pay or return premiums