“Are you aware of any case in any jurisdiction where an agent was found negligent for failure to advise or contact a customer of a cancellation? This relates to the practice of some agents who selectively contact some customers but not others related to direct bill cancellation notices. I understand the best practice, but do you know of any case law??
"For the last 20 years or so, our agency has routinely refrained from contacting an insured whenever we became aware of a pending cancellation for nonpayment or a pending expiration notice due to nonpayment of the renewal premium. The thought process was three-fold:
- The clients are already receiving written reminders directly from the carrier.
- We didn’t have the manpower to provide such a service to such a large customer book.
- There was an E&O concern that if we provided this service to ONE customer, we must provide this service to ALL customers. Furthermore, we must provide the service EVERY YEAR henceforth.
"Now we are finally getting to the point where our staffing is large enough that we might be able to contemplate providing this service. I think that it would help boost our retention rates. However, item #3 still concerns me greatly. Admittedly, every time I hear about this being an E&O concern, no one is able to provide any evidence or documentation that it is fact rather than just anecdotal fear.
"Can you provide some insight as to whether this is a recommended practice for agents and, if so, what are the potential E&O implications? I cannot guarantee to any client that we will call them every year to remind them about their renewal invoice. Furthermore, there will almost certainly be some clients who 'fall through the cracks.'
"We do currently contact clients when we receive a pending cancellation for Underwriting Reasons. I don’t know what, if any, impact this has on this discussion."
One of the issues here is invariable practice. Whatever procedure you elect to implement, you should strive to follow it “One Way, All the Time, By Everyone.” With that thought in mind, we ran this by the VU faculty and got the following observations.
"III. THE BROKERS WERE NOT NEGLIGENT IN FAILING TO PROVIDE A NOTICE OF CANCELLATION TO KOTLAR.”
“Kotlar cites no case holding an insurance broker owes a duty of care to a named insured to provide the named insured with notice of the insurer's intent to cancel the policy for nonpayment of premiums. Instead, he asks us to create such a duty. We decline to do so for several reasons.
“In light of our holding section 677.2 imposes a duty on the insurer to notify the named insureds of its intent to cancel the policy we see no purpose in judicially imposing such a duty on a broker.
“Furthermore, the relationship between an insurance broker and its client is not the kind which would logically give rise to such a duty. The duty of a broker, by and large, is to use reasonable care, diligence, and judgment in procuring the insurance requested by its client. (Kurtz, Richards, Wilson & Co. v. Insurance Communicators 251*251 Mktg. Corp. (1993) 12 Cal. App.4th 1249, 1257, 16 Cal.Rptr.2d 259.)"
"The purpose of a provision in an insurance policy providing that the insurer can cancel the policy after giving notice to the insured for a prescribed period is to enable the insured to obtain insurance elsewhere before he is subjected to risk without protection. See Graves v. Iowa Mutual Insurance Company, supra. See also, 29 Am.Jur. Insurance § 834. Notice of cancellation being a provision designed to secure and protect the insured's interest, the burden of proving cancellation in accordance with the policy provisions is in the party asserting it, in this case the Respondent. See 45 C.J.S. Insurance § 461a.
“Furthermore, when an insurer has failed to give personal notice to the insured, but seeks nevertheless to establish cancellation on the theory that it effected notice to the insured's agent, it is incumbent on the insurer to demonstrate that the scope of the agent's authority encompassed the authority to perform the act sought to be charged to the agent's principal. See Foye Tie & Timber Co. v. Jackson (Fla. 1923), 86 Fla. 97, 97 So. 517.
“In the present case we do not understand Respondent to contend that Hurst was expressly authorized by Petitioner to accept notice of cancellation. "
I have personally seen agencies win or lose E&O cases based on whether they could show they called no one, ever. The agents that could show they never called anyone have won every time that I’ve seen. The agents that could not provide this proof have lost. Whatever an agency decides to do, they need to do it invariably.
A huge mistake is made by some E&O experts, including attorneys, as to what constitutes invariable practice. These people make the mistake of assuming or saying that if you miss just one item, ever, the agency is toast. This is not true. I have again personally seen several “notification of late pay” cases won by both carriers and agencies who could not prove they did send notice (carrier) or do not call everyone (agency). What they could prove without doubt was that the statistical test used showed they had a 99%+ (or whatever the bar set by the court was) compliance rate with their procedures. Many and in my experience, most, courts understand that nothing is 100% perfect so if the agency can show a good faith effort and prove they are compliant at an extremely high, though maybe not perfect, level they will likely win.
Another point is the plaintiff’s attorney has to find that one single miss. With new software, finding that miss is getting ever easier but most plaintiff attorneys still are not going to search an entire agency’s database and a good defense attorney will not allow the plaintiff’s bar to search the entire database. They’ll get the court to agree to a sample search.
The problem I see with agencies regarding notifying on late pays is that when they start calling, they inevitably begin missing more than just one. Sooner or later they fail to call a dozen, and then three dozen, and then 100 different clients.
I tell people they have a business decision to make. If you intentionally start this practice, knowing that something could slip through the cracks or you intend only on doing this for certain insureds, at least modify your written agency procedures and make sure all staff are aware of this. Maybe you’ll only do it for customers who generate more than $X in premium volume or commission income such that it’s a value-added service that you believe is paid for by the increased commission income. I don’t know if it’ll make any difference, but I would think it would be a good idea to quantify that in your procedures then follow them with invariable practice.
Check your statutes and case law. The law in Louisiana changed in 2001 by amending the cancellation statute as follows:
"Notice of cancellation or non-renewal given by the insurer in accordance with this Chapter shall be deemed sufficient. The insurance producer, insurance agent, or insurance broker, shall not be required to give any separate or additional notice of cancellation or non-renewal." [22:877.H.]
I’ve seen case law in Tennessee that reached the same conclusion based on the contract, and the terms (e.g., cancellation) therein, being between the insurer and insured, not the agent. That being said, just because the law says the agency is not obligated to provide separate or additional cancellation notice, doesn’t mean they won’t be held liable if they voluntarily do so.
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Last Updated: August 28, 2015