August 1, 2016 by The CIP Society - Insurance Institute of Canada
The CIP Society Ethics Series
A broker was seated at the same table as a long-time client while they were both attending a community charity function. After catching up on personal matters, the two stepped away from the table to briefly chat about business.
The client indicated he was aware that his commercial policy renewal was approaching. They compared calendars for an opportunity to meet in person to discuss the renewal further, but they were unable to find a date that worked for both of them.
The broker asked if the client still operated his business in the same way and at the same address that he had occupied for the past 12 years. The client confirmed that his address had not changed and it was “business as usual.”
The broker responded by saying that the client would be sent the renewal documents for a signature and the policy papers would be filed for another year. Both agreed that this would be acceptable.
However, a more thorough investigation on the broker’s part would have revealed that although the client had not intended to be deceitful, the current situation contained some very significant and material differences from the previous policy year. While the client’s address was the same, the business had purchased the adjacent building and knocked down the connecting wall.
In addition, although business volumes remained the same, the client now had more storage and office space. The electrical wiring and plumbing in the new space had not been well-maintained by the previous owners, and this type of risk would have an effect on the client’s insurance coverage.
If the client signs off on the renewal documents with the same details pertaining to the business’ policy as the previous year, who would be responsible for any uncovered claims in the event of faulty wiring, flooding or theft in the building’s newly acquired addition?
Given that the broker took the “client’s word” without investigating further, has the broker fulfilled his or her obligations to the client and to the insurance company, not to mention to the industry as a whole?
Christina Martin, CIP, CRM, C.A.I.B.
Sales and New Business
RRJ Insurance Group Limited
The client/broker relationship is extremely important in the insurance process. Servicing and handling a commercial lines renewal account warrants a thorough in-person meeting with the client.
However, as seen in this scenario, there are special circumstances in which the broker and client may be unable to meet in person.
No matter the renewal circumstance, it is the broker’s responsibility to send the client a complete summary of coverages detailing, among other things, the limits, conditions and exclusions on the client’s policy from the previous year.
The summary should also include all underwriting information that the broker has on the file, including COPE details, namely construction (including square footage), operations, protection and exposures to the risk.
The expectation is that the client thoroughly reviews these details and advises the broker immediately of any changes.
After the renewal documents are sent, a broker should arrange a post-renewal meeting with the client. This would confirm the information the client provided for the renewal and, in this case, the broker would see that there have been changes to the client’s business.
In this situation, the broker could then have the policy endorsed to make sure the client is properly covered for new coverages and limits on the policy, even after the policy renewal is complete.
The broker’s role is to analyze the client’s exposures and provide proper insurance coverages. The client relies on that expertise, not just at the inception of a policy, but over the life of that policy with the broker.
Brokers need to know their clients and take appropriate measures to ensure the insurance company is adequately notified in a timely fashion of changes to a policy and that the client is properly covered.
Even though the ultimate onus is on the broker to know the client’s exposures, a client must understand that if there are changes and he or she does not inform the broker, the insurance company could deny coverages due to material change in risk.
Nadine Austin, FCIP
Complaints and Investigations
Registered Insurance Brokers of Ontario
This scenario depicts an insurance broker who has failed to fulfill his professional duty to the client.
The perfunctory exchange of the insurance policy renewal that took place between the broker and client during the event was not comprehensive enough to be relied upon. A “brief chat” falls short of the insurer’s expectations that a broker is conducting a comprehensive survey of risk for a renewal policy.
The exchange was too casual and the question framed by the broker led the client to innocently misrepresent the state of his company as “business as usual.”
The broker had a duty to the client to exercise due diligence and complete a full review of the risk annually, prior to the renewal date, in accordance with the request of the insurer.
A broker must be available to the client, and convenience should not be a consideration. The contractual agreement between the broker and the insurer is founded on utmost good faith.
Therefore, it is unlikely a “brief chat” over renewal terms would guarantee the appropriate amount of information required to meet professional standards, apart from any legal obligation.
The client’s material change to risk demanded immediate contact with his broker. The purchase of the adjacent building not only increased the value of the sum insured, but it also broadened the liability exposure and increased the amount of on-premise inventory.
During the 12-year relationship, the broker should have impressed upon the client that any changes to the business and its property must be reported to the broker immediately.
If a loss occurred as a result of the newly acquired property, the policy would not respond for two reasons: firstly, the newly purchased property might not have been a risk that was acceptable to the insurer with the dated electrical and plumbing; and secondly, by signing off on the renewal document, the client gave his assurance that there were no changes from the previous year to either policy terms or coverage limits.
The broker and the client shared in the decision to sign off on the renewal document, which means that if an uninsured loss occurred, the client would look to the broker’s errors and omissions insurance policy for compensation, and the client could potentially sue the broker.
There can be no short cuts when providing service to a client. Failure to fulfill a professional duty does a disservice to the client, the client’s business and the insurance industry as a whole.
THE LAST WORD
In this situation, the broker could have met his or her professional obligations by completing a full review of the client’s risk annually, prior to the renewal date, in accordance with the request of the insurer. The broker’s reputation with the client as a trusted advisor means he or she must ensure the client understands the risks and has the appropriate coverage needed.
The broker’s reputation in the industry depends on fulfilling his or her duty to the insurer, which rightly will expect that the broker is conducting a comprehensive survey of risk for a renewal policy.
In this scenario, the broker has allowed the client to influence decision-making.
A people-based approach to solving such an ethical dilemma aims to maximize outcomes for all individual stakeholders involved in the situation. In this particular case, it is unclear if the “business as usual” comment by the client was an intentional or unintentional oversight that business is not, in fact, as it had been last year.
If the comment was an intentional omission, then the client is not acting in good faith, possibly hoping to benefit from the conversation and the renewal process (to save on premiums).
If the comment was an unintentional omission, then it would seem the client neither fully understands the significant change to risk of the new acquisition, nor the role of the broker. If the latter is the case, the broker needs to strengthen the relationship with the client, provide counsel on the business’ risk profile and emphasize the implications of changes to the insurance coverage.
In this scenario, there are additional situational issues that impact the broker’s decision-making as well. In ethical decision-making, applying the situation-based approach shifts the focus to final outcomes of the dilemma.
This situation demonstrated that the broker has not met his or her foremost responsibility – to ensure the client is protected from risk. This is a prime example that, regardless of demanding schedules, there can always be new risk that warrants in-person meetings.
Regardless of the perceived “familiarity” a broker may have with a long-standing client, this scenario is a reminder that a broker may not be up-to-date on the activities of a client’s business.
Therefore, a thorough, annual review of the business and the appropriate coverage is essential to not only meet due diligence and professional standards, but also to ensure the client has the coverage needed.
This scenario suggests that there are many more opportunities for the broker to have a better relationship with the client. Alternative methods like social media may enable the broker to follow a client’s business, staying up-to-date on successes and changes, while providing the potential to evolve from a once-a-year connection to more frequent connections over the course of the year.
Making use of rules-based, people-based and situation-based perspectives may help in identifying an ethical dilemma and providing guidance on what course of action to take in response.
The CIP Society represents more than 17,000 graduates of the Insurance Institute of Canada’s Fellow Chartered Insurance Professional (FCIP) and Chartered Insurance Professional (CIP) Programs. The CIP Society, through articles such as this, is working to bring ethical issues to the forefront and provide learning opportunities that enhance the professional ethics of all insurance professionals.