Every insurance client weighs the cost of buying a particular coverage versus the benefit it might provide. The insurance agent may believe the client needs that coverage, but the ultimate purchase decision is the buyer’s. Whatever that decision may be, the agent should record the fact that the discussion occurred and the discussion’s outcome.
An agency in Alabama won the business of a successful mattress business in 2009. The business had several stores, a warehouse and a factory. The producer visited the factory and discussed coverage options with the company’s principal owner. The owner later testified that the producer told him that business income coverage was “pretty expensive” and “hard to get because you’ve got to come up with a lot of records to verify whatever you’re claiming … I don’t think you need it.”
The producer’s memory differed. He testified that he both believed the client needed business income coverage and advised him to that effect. However, he admitted he did not “have anything in writing on that.” He still provided two quotes to the owner, with and without the coverage. He testified that the owner objected to the cost and declined to purchase it.
The producer and owner met each of the next three years before renewal to discuss the company’s insurance program. According to the producer, he advised the owner every year to buy business income coverage, but the owner rejected it because of the cost. The owner testified that he could not recall any discussions about the coverage other than the one in 2009. The renewal quotes for those years did not include the coverage.
An April 2013 fire rendered the factory a total loss, causing the insured to relocate operations to Mississippi. The business did not survive the loss and closed two years later. The producer said that even after the fire and before the closure, the owner refused to buy business income coverage because of the expense. The owner maintained that he based his decisions about the coverage on the 2009 discussion and not on further advice.
The insured eventually sued the agency and producer for negligence in allegedly not recommending the purchase of business income coverage. They claimed an uninsured loss of $2 million or more. The agency argued that it was not obligated to advise the client to buy more insurance, but the insured claimed that the agency voluntarily assumed that obligation.
The trial court ruled in favor of the agency and producer, and the insured appealed.
The appellate court also ruled in the agency’s and producer’s favor. Noting that the producer testified that he had recommended buying business income coverage and the insured did not recall that recommendation, the court wrote, “Not remembering a conversation does not constitute evidence indicating that what the opposing party contends was relayed in that conversation did not occur.”
Renewal quotes that omitted the coverage were not the same as recommending against buying it, the court said. Regardless, the court found that the agency had no obligation to advise the insured to buy the coverage and had not voluntarily assumed that obligation.
The producer’s mistake here was not creating a written record of the insured’s rejection of business income coverage. The case might never have gotten past an initial hearing if the agency had an email or letter documenting the insured’s decision. A simple message saying, “We suggested you purchase business income coverage; however, you declined to do so” might have saved much time and expense.
Documentation, particularly regarding coverages an insured rejects, can be vital to protecting an agency against errors and omissions liability claims. For their own defense, every agency should make documenting these decisions a regular business practice.