Recently in a class that I had the honor of teaching, I was asked a very unique question…actually one that I had not previously been asked. At the time, we were discussing the vital importance of being honest with the carriers / wholesalers that agents are dealing with. Unfortunately, this is an issue that when not adhered to, is causing a significant number of E&O claims. The question was essentially the following:
“If the agent has authority to bind a Homeowners account for $400,000 and they bind the Homeowners account for $450,000 and a problem develops, what is the agent’s liability? Is it the $50,000 amount ($450K – $400K) that they exceeded their authority or is the full $450,000?”
I responded with my thoughts but then agreed to “bounce this question” off of a couple of E&O carriers. The consensus of the carriers was that the degree of agent liability would probably be based on the carrier involved and the specific facts of the case but that there was certainly the possibility of the agent being responsible for the entire $450,000.
There is the definite possibility that the carrier would argue, bottom line, that the agent acted outside the scope of their authority when they bound the carrier to the $450k risk. The carrier would likely try to place the blame on the agent and look to recoup the amount of the loss. Another option might involve the carrier rescinding the policy, returning any premium dollars. In either case, the agent is in a very difficult position, one that they should make every effort to avoid.
If the agent was sued, their E&O carrier would probably look to assert the argument that had the agent brought the risk to the specific carrier’s attention, the carrier would probably would have written the coverage. I have seen these cases over the years and they are often difficult and fact intensive arguments and due to this high level of “intensity”, the litigation costs can be significant. Typically, the discovery involves a review of the carrier’s files and underwriting guidelines, depositions of underwriting staff, etc. The E&O carrier’s objective would be to develop evidence to prove that the carrier would have written the $450k risk had they been asked to.
So the answer to the question is that the agent could most definitely be “on the hook” for the entire $450,000. The best advice was well stated by the claims manager of one of the preeminent E&O carriers,
“bottomline, don’t exceed your authority.”