Considerations in mounting a defense for life and health insurance agents.

• Author: Fagerberg, Richard E.
• Position: Health Care and the Law

THE health care crisis?

Whether you believe it exists or doesn't--whether you believe that it is widespread or not--no matter. You'll believe in the crisis when your client, an insurance agent, is caught in the middle of a situation where benefits are being denied by the insurance carrier and unpaid medical claims are resulting. When your client is the agent allegedly responsible for procuring the coverage, the crisis takes on a new meaning. Understanding the insurance distribution system and agents' roles within that system will be critical to providing an effective defense for agents.

DISTRIBUTION SYSTEM

Although there have been discussions about changing the health care distribution system and eliminating the agent from the insurance transaction, most recent discussions would indicate that the system will remain intact, with minor alterations. So it is important to understand the role of the agent within that system.

While some health care coverage is sold directly to the consumer by the carrier, most transactions occur with an agent acting as an intermediary. The agent's role is recommending and explaining coverages, taking the application and delivering the policy.

Some agents are captive--that is, they sell policies for only one company. Others are independent, and they market products for a number of different companies. Whether captive or independent, when selling a product and servicing the customer, the agent acts at times on behalf of the carrier and at times on behalf of the customer. Other times, the agent will owe a duty to both.

The agent's duty to the carrier is often embodied in a written agreement entered into at the beginning of the relationship. The contract gives the agent authority to act on the carrier's behalf. It sets out the extent of the agent's authorization and should be carefully examined in the event of a dispute with the carrier.

Typical agency agreements contain provisions that limit the authority of the agent. Often among others, these limitations state that the agent cannot:

* Alter or waive any terms or conditions of the policy.

* Deliver the policy without the insured being in good health.

* Bind the company.

* Misrepresent or omit important facts in any application.

COMMONLY MADE ERRORS

1. Sloppy Application Process

   The application process is the activity in which the agent engages that most frequently gives rise to litigation. Based on claims statistics for accident and health lines of errors and omissions claims received at Employers Reinsurance Corp. over the four-year period 1990-94, approximately one third of claims made against accident and health agents involved misrepresentations on the application.

   The application process generally comes at the time of the close of the sale, and both the agent and applicant tend to be anxious to conclude the transaction. The application is often several pages in length and varies from company to company in its wording. Agents have a limited amount of space in which to write and have to make some judgment decisions as to whether the answers received from their customers fall within the questions asked.

   When agents take it upon themselves to decide whether the information supplied is important enough to include on the application, they should err on the side of caution and record information if there is any possibility that it could be important to the carrier's decision. This caution should extend to including revealing information, even if it is not specifically addressed in the application, if they feel it might be important to underwriting the risk. It is not up to agents, however, to decide if a question is relevant. If the question is contained in the application, it is considered to be important by the carrier and should be asked.(1) Questions should be read verbatim and not paraphrased. The application is the only vehicle the insurer has on which to evaluate the nature of the risk.

   It is not uncommon for agents with an existing client to complete the application in part prior to meeting with the client. If the health history of the client has changed from information that was previously included in an old application, an agent who simply follows the previous information could be in trouble. The process is further complicated if the agent fails to...