Author: VU Faculty

If an agent is aware of a known hazard at an insured's business, is there an obligation to advise the insurance company? Does the agent or company have an obligation to advise the insured of what could be a life-threatening condition or major property loss exposure? Given the recent lawsuits arising out of the Warwick, RI nightclub fire, this could be a critical E&O question.

"Here is an ethical and possibly contractual issue that I would think you must have run into in the past. While a customer comes in to pay a bill for an HO policy, he mentions that his sidewalk is cracked, but that he doesn't intend to do anything about it at this point, as long as he is not forced to by the company. Now the producer has the dilemma to tell the company or not.
 
"He wonders whether his duty to inform the company encompasses this possible increase in hazard when acting as an agent, and if his duty differs when he is acting as a broker, as he then represents the insured. Could you enlighten me on this, as well as on some down-to-earth recommendations for the producer to deal with this situation without being disloyal to the client?"

If the agent is familiar with the underwriting standards of the carrier, would this circumstance cause the carrier to decline the account? Any physical inspection will most likely reveal some hazards, so the question is how significant must they be to warrant passing them on to the carrier? In general, since the agent represents the carrier, the carrier has the right to know all about the risk and is presumed to know as much as its agent. The agent has an ethical, perhaps contractual, and likely agency/principal legal requirement to share information about known hazards. We ran this by the VU faculty and got the comments below.


Notice to agent is notice to company. The "dual capacity" an insurance producer finds himself in does not override the contractual obligations of the agency/company contract. Most contracts include a provision of a duty to notify the insurer of exposures that are material. Now, the question is whether the sidewalk issue is material or not is debatable. The agent must use his or her best judgment.


First, it’s not a matter of being “disloyal to the client,” since as an agent, “client” includes the carrier. This may be true even in a brokerage situation, since any intermediary owes good faith to both parties. The main difference may be a legal one, as defined by an agent’s carrier contract, where the agent owes an affirmative action to tell a carrier any information bearing on the risk, while in a brokerage situation the duty may only encompass material information (that which would have a bearing on whether or not the policy would have been issued).

Given that, I still think an agent or broker should always treat the carrier fairly—meaning, when in doubt, disclose.

In this specific situation, it seems to me the question of disclosure turns on whether this information is critical to the carrier’s understanding of the hazard. Is it a minor or major crack? Does it increase significantly the chance of injury to those using the sidewalk? Is this the type of information the carrier routinely seeks out? For example, dog bites are clearly of increasing concern to carriers under homeowners liability. So should an agent notify the carrier if the insured gets a new dog?

I suggest if the dog was of a breed considered less vicious than some, the carrier would likely care less, so the disclosure is unnecessary. If the new dog is one considered dangerous, such as a pit bull or rotweiler, the carrier would no doubt like to be informed. Perhaps the classic ethics question is a good yardstick—if the carrier found out about the information from another source, how bad a situation would that place the agent in as regards his or her relationship with the carrier?

From a practical standpoint, I suggest consumer clients be told the agent is a legal representative of the carrier by contract, and so the client should assume anything the agent knows the carrier knows. As in one situation I am familiar with, the client told the agent a long story about a dangerous situation and possible developing claim, and asked if he should report it to the carrier. The proper response from the agent is “you just did.”


When the producer is acting as a broker, they are the representing the insured. When acting as an agent, the producer is the representative of the carrier. One of the primary "agent" responsibilities under the law of agency requires that the agent act for the benefit of the carrier. Therefore, an increase in hazard due to the insured's indifference to loss should be communicated to the carrier.

Having said that, in the example you have given, what kind of "crack" are we talking about? Is this a hairline crack or a cavernous hole? Is their failure to correct the problem a real increase in hazard? If it is an increase in hazard, the agent, as the representative of the carrier, must communicate to the client that the repairs need to be done.


Of course, since notice to him is notice to the company — if admitted — and the company has the right to know the risk is increased.


This is tough. Would the insurer care, or cancel, if they know of this change in condition? I doubt it, so if the agent wants to be on the safe side they can let the company know—but now where do you stop? The agent drives by the insured's home and sees a dead limb, an unrestrained dog in the yard (might be the insured's), knows the insured is a terrible golfer and almost hit someone with a golf shot last weekend, and that his wife was seen at a local AA meeting after getting a ticket for driving under the influence. The list is almost endless

Agency agreements I have read do not impose a duty on the agent to report underwriting hazards. So, it’s unlikely there’s a contractual responsibility. Most agents feel that they have an obligation to provide honest and accurate answers to the underwriting questions posed by the company, whether in an application or when the policy is being changed. It’s up to the company to determine what hazards they want to underwrite and the underwriter’s job to ensure that those hazards are evaluated. 

In the agency/principal relationship, the ‘agent’ should discharge their duty to their ‘principal’, the company, with the utmost good faith. But, the agent's duty, at least as described in the agency agreement, rarely involves responsibility for underwriting.


I don't think the agent has an obligation to notify the carrier of every single minor flaw in a risk, nor does the carrier want to know...particularly since we're talking about personal lines. It's just too unreasonable. If this were a commercial risk, heavily trafficked by the public, the carrier might want to know. Take, for example, the deadly fire at The Station, a nightclub in West Warwick, RI. According to news accounts, the proliferation of lawsuits now includes the insurer and an inspection service, claiming they failed to properly warn of known serious hazards.

A similar situation arose following the May 1977 Beverly Hills Supper Club fire in Southgate, KY. ISO added a disclaimer to virtually all of their policies. In commercial lines, it was to the Common Policy Conditions:

D. Inspections And Surveys

   1. We have the right to:

      a. Make inspections and surveys at any time;

      b. Give you reports on the conditions we find;
         and

      c. Recommend changes.

   2. We are not obligated to make any inspections,
      surveys, reports or recommendations and any
      such actions we do undertake relate only to
      insurability and the premiums to be charged.
      We do not make safety inspections. We do not
      undertake to perform the duty of any person or
      organization to provide for the health or
      safety of workers or the public. And we do not
      warrant that conditions:

      a. Are safe or healthful; or

      b. Comply with laws, regulations, codes or
         standards.

   3. Paragraphs 1. and 2. of this condition apply
      not only to us, but also to any rating,
      advisory, rate service or similar organization
      which makes insurance inspections, surveys,
      reports or recommendations.

   4. Paragraph 2. of this condition does not apply
      to any inspections, surveys, reports or
      recommendations we may make relative to
      certification, under state or municipal
      statutes, ordinances or regulations, of boilers,
      pressure vessels or elevators.

When major losses such as this occur, it is not only critical that known, major hazards be reported to the insurer, but also the owner or tenant of the property. Of course, that assumes that the agent is qualified to recognize such hazards.

Note:  As the West Warwick, RI lawsuit unfolds, we'll follow up as warranted with information here or elsewhere in the VU.