CAIB 1 Chapter 7 Slides PDF

 What do you remember? Students have three minutes to write 3-4 sentences about what they remember from last class. If you can give an example, that is even better! Remember the Forgetting Curve! Insurance Graphic Organizer Theft is a major cause of loss. Please give two examples...

 What do you remember? Students have three minutes to write 3-4 sentences about what they remember from last class. If you can give an example, that is even better! Remember the Forgetting Curve! Insurance Graphic Organizer Theft is a major cause of loss. Please give two examples that describe when, where, and who are involved in common theft situations. The following slides contain the information needed to answer this question.  Theft: Major Cause of Loss 2009 Losses: $400 million ○ 108,000+ vehicles stolen (Canada) ○ Approx 25% were recovered Mid-1980’s study (Quebec) discovered info about auto thefts possibly useful to brokers to discuss with clients ○ When/Where Thefts Occur 6:00pm-Midnights Thursdays Approx 27% of vehicles stolen in front of homes 23% stolen from shopping centre lots 33% Hospital/commercial parking lots Commonly stolen: sports cars, imports, popular family cars  Theft: Major Cause of Loss Cont’d When/Where Thefts Occur Common type auto theft: ○ Joyriding: borrow car, joyride/commit another crime ○ Police: 55% of vehicle thefts ○ Take advantage of owner negligence/take first vehicle they can find/abandon ○ Usually found within 10 days ○ Usually vandalized Thieves may work in organized rings: ○ (Steal vehicles for resale/stripping of parts) ○ Vehicles rarely found ○ Highly organized: steal, strip, distribute parts in hours ○ Cars usually altered/shipped to US in days  Theft: Major Cause of Loss Cont’d When/Where Thefts Occur Some theft rings steal “to order” ○ Make/model of cars is scouted/stolen for a shop ○ May take a few minutes ○ Resold immediately/very low price ○ Rings often steal vehicle again, re-sell to another party, or police seizes it ○ Chop shops strip cars/sell components to legitimate, unaware businesses ○ Millions a year  Theft is a major cause of loss. Please give two examples that describe when, where, and who are involved in common theft situations. Answer: Example: It was Thursday, August 21st, 2050, Nick had just finished work at 6:30pm and he had to stop by the mall to pick up a pair of work shoes. Nick carefully parked his import car at the back of the lot to make sure nobody would park next to him...  Chapter 7 - Building Towards Professionalism Section 1 - Regulation of Brokers Licensing: All segments of insurance industry subject to gov’t regulation 1) Administration Insurance = provincially run Admin of The Insurance Act is overseen by gov’t department in each province Insurance Councils takes care of: ○ Admin functions about licensing, complaints handling, discipline of brokers ○ Councils have to develop by-laws/codes regulating conduct, trade practices of all brokers ○ Council decisions may be appealed to Superintendent of Insurance Ontario-RIBO (Reg. Insurance Brokers of  Section 1 - Regulation of Brokers Licensing 2) Licensing Standards The Insurance Act: ○ Requires all parties (brokers) to be licensed ○ Some provinces: applicants must be sponsored by brokerage firm (who employs them) OR if self-employed must be sponsored by insurer they represent Obtain initial license, applicant must: ○ Good character/reputation ○ Pass approved exam: course of study/passing mark varies ○ Stakeholders (incl Insurance Brokers Association of Canada) support: Standard licensing course in all provinces  Section 1 - Regulation of Brokers Cont’d Licensing 2) Licensing Standards Licensing for insurance brokers CAIB 1 (Fundamentals) is required to get a license in several provinces Most provinces adopted CAIB for further study/offer as step licensing program ○ Level I - Broker is licensed for all lines under supervision CAIB 1 (Fundamentals) of Insurance required ○ Level II - Broker licensed for all lines without supervision, cannot own/manage brokerage. CAIB 2 & 3 required ○ Level III - Broker licensed for all lines of insurance, qualified to own manage a brokerage. CAIB 4 required  Section 1 - Regulation of Brokers Cont’d Licensing 3) License Term Usually valid for one year (not standard) Some provinces: valid for up to 5 years (usually subject to annual validation) 4) Class of License Brokers get All Classes (Other Than Life) license ○ PROHIBITED sell other classes of insurance unless licensed ○ Included in general license: Accident and Sickness license  Section 1 - Regulation of Brokers Cont’d Licensing 5) License Jurisdiction Brokers must be licensed in each province business is done in Offence: insurer to insure property in province UNLESS policy is countersigned by broker (licensed in the province) ○ Some part of commission is paid to cosigned broker ○ Some jurisdictions need countersigning broker to reside in province Before trying to place business: ○ Broker must check with appropriate regulatory body to see what’s permitted 6) License May Be Revoked Responsibilities are imposed on license holders  Standards of Ethics 1) The Insurance Acts MINIMAL ethical behaviour of insurance brokers Broker’s license might be revoked IF BROKER... a) Misrepresents/is fraudulent/is deceitful/is dishonest b) Contravenes The Insurance Act (or equivalent) ○ Some provinces: is an offence for broker to rebate/return part of premium to insured to obtain/retain business c) (Unreasonably) fails to pay to insurer premiums collected/retained beyond term outlined in The Agency Agreement ○ Some provinces: premiums collected MUST be deposited in trust account ○ Other provinces: premiums collected by  Standards of Ethics Cont’d 1) The Insurance Acts MINIMAL ethical behaviour of insurance brokers Broker’s license might be revoked IF BROKER… d) Places insurance with unlicensed insurers WITHOUT ○ Following legislation on unlicensed insurers e) Proves incompetent/untrustworthy to transact insurance agency business license is granted for ○ Provinces with Insurance Councils: By-laws when ID-ing specific activities = breach of ethical behaviour  Standards of Ethics Cont’d 2) Professional Associations Brokers’ associations (provincial & national levels) have codes of conduct: ○ Have higher ethical standards than what law requires Duty to Clients ○ Best coverage for client’s needs (regardless of premium) Don’t take advantage of client’s lack of experience/insurance knowledge ○ Hold strict confidence of client info UNLESS Authorized/required by law Necessary when negotiating coverage with underwriters on client’s behalf  Standards of Ethics Cont’d 2) Professional Associations Duty to Clients Cont’d ○ Be competent Keep current on changing market conditions Be sensitive to weakness in personal competence If necessary, act/advise client to seek another broker if they know more about the area ○ Service clients on their behalf: Conscientious, diligent, efficient  Important Terms So Far Students take two minutes to write down one important term that has been discussed so far in the course, in the chat window. Remember the Forgetting Curve!  Standards of Ethics Cont’d 2) Professional Associations Duty to Fellow Brokers ○ Use (fair) methods for competition when looking for new business Keep honor/dignity of profession Don’t offer payment/allowance/gift (rebate of part of commission) to convince prospects Don’t suggest policy cancellation from competitor unless it is good for client ○ Improve being a broker (co-operate to better the industry) ○ Treat fellow brokers/public with respect Don’t harm reputation of other brokers Integrity, personal respect, ideals of service, moral attributes  Professionalism Characteristics of ALL PROFESSIONS Commitment to (high) ethical standards Brokers associations foster standard behaviour/professionalism High standard of education with mandatory continuous education Practising brokers must have MIN level of education (every province) In order to practice, all brokers must study prescribed course/pass provincial licensing exams ○ Some provinces: annual continuing education requirements ○ Subscribe/read trade magazines ○ Seminars sponsored by insurance companies/insurance associations/others  Professionalism Cont’d Characteristics of ALL PROFESSIONS Formal association/society has regulating power over members Brokers’ right to regulate own affairs ○ Goal of provincial brokers’ associations Self-regulation: ○ Focus: Broker professionalism/consumer protection ○ Advantages (self-regulation) Set educational/ethical standards Establish disciplinary authority if members breach code of ethics Public views: Brokers accepted as professionals when... ○ Show ethical conduct ○ Keep current of latest developments in insurance business ○ Always acts in client’s best interest  Section 2 - Errors & Omissions Exposure Legal Duty Owed Analysis 1) Duty to Client Broker may become a defendant in lawsuit brought by client suffering uninsured/underinsured loss Courts view brokers as professionals (high standard of duty of care): “A professional insurance broker...has a degree of skill/knowledge...must exercise good faith, reasonable skill, care, diligence...types of policies, different terms, coverage in area...if neglects to procure insurance/policy is void/materially deficient/doesn’t provide coverage undertook to supply...because of failure to exercise skill/diligence...broker is liable to  Section 2 - Errors & Omissions Exposure Analysis Cont’d Legal Duty Owed 1) Duty to Client a) Insured told broker he/wife leaving country for 2 months, asked advice on cancelling existing auto policy: advised to cancel policy and use refund money for vacation. Insured followed broker’s advice and was hit by drunk/uninsured driver and seriously injured. ○ If policy still in effect, up to $1 million underinsured motorist protection coverage would’ve been available for injuries. ○ Sued broker for not advising benefits of coverage ○ Court’s decision: Broker chose to advise what insured wanted, and didn’t exercise  Legal Duty Owed 1) Duty to Client b) Fines Flowers Ltd. Vs. The General Accident Assurance Company of Canada Et al. (1978) 81 D.L.R. (3D) 139 (ONT. C.A.) ○ Insured (horticultural business) with stock susceptible to temperature changes. Insured followed broker’s advice for 44+ years. ○ Questioned broker about coverage, advised “was fully covered.” ○ Water pump failed, $42,000 loss to greenhouse stock ○ Civil action: court held broker negligent to warn of exposures there was no coverage for. Broker’s advise “fully covered” misled client ○ Boiler bodily = written but didn’t include water pump  Section 2 - Errors & Omissions Exposure Analysis Cont’d Legal Duty Owed 2) Duty to Insurer Insurer: right to action against broker when: ○ Required to pay for a loss it didn’t (intend) to insure. Causes of Errors/Omissions Claims 1) Inadequate Coverage ○ Largest cause of E&O claims (almost ½ all claims) ○ Inadequate Coverage CAUSES: ○ a) Failure to provide Proper Coverage Broker must know client’s individual loss exposures Ex. Brokers must point out potential sewer back-up loss when storing property in basements and recommend  Causes of Errors/Omissions Claims 1) Inadequate Coverage b) Failure to Advise Clients of: exclusions, exemptions, disadvantageous terms ○ Brokers may know a risk but recommended coverage might be inadequate because broker didn’t “see” an exclusion ○ Ex. Client requests $25,000 in “wind coverage” when constructing Quonset type steel building on the farm Building partially blown down by windstorm Insurer denied coverage (exclusion for windstorm) Insured sued insurer & broker, deemed negligent STEWART V. LANARK MUTUAL INSURANCE COMPANY (1988) 29 C.C.L.I 213 (ONT. DIST.  Causes of Errors/Omissions Claims Cont’d 1) Inadequate Coverage b) Failure to Advise Clients of: exclusions, exemptions, disadvantageous terms ○ Fines Flowers LTD: inadequate coverage Unlikely any insurance available anyway Broker said insurer was “fully covered” even though coverage was inadequate  Causes of Errors/Omissions Claims Cont’d 1) Inadequate Coverage c) Failure to place coverage ○ If broker doesn’t follow up on insurance application, may result in E&O suit: i) Recommend client NOT put coverage on the (incorrect) assumption that risk is already insured ii) Client is NOT advised that broker is NOT pursuing application iii) Clerical error leads to loss/misplacing client’s file d) Mistake in Coverage ○ Inadequate coverage: broker getting coverage on incorrect basis Ex. Coverage on replacement cost basis is requested BUT broker gets ACV basis coverage instead, broker may be liable for difference  Causes of Errors/Omissions Claims Cont’d 1) Inadequate Coverage e) Placing Coverage Too Late ○ Loss after application is taken, broker may be liable for loss amount if coverage hasn’t been placed yet for applicant f) Not Correctly Advising of Availability of Coverage ○ If broker doesn’t advise that coverage is available OR incorrectly advise it ISN’T available ○ More common in recent years  Causes of Errors/Omissions Claims Cont’d 2) Misrepresentation/Description Errors Almost ¼ of E&O claims are due to misrepresentation ○ Errors in risk description ○ Broker must properly describe risk to insurer New Forty-Four Mines Ltd. v. St. Paul Fire & Marine Insurance Co., (1985) 9., C.C.L.I. 91 (ALTA. Q.B.) ○ Client didn’t give broker instructions ○ Broker (incorrectly) portrayed inactive mine as insured. ○ Broker incorrectly advised insurer the mine was under 24-hour watch. ○ Warranty was incorporated into policy BUT insured wasn’t advised. ○ Loss occurred: insurer (successfully) denied coverage BUT broker was liable.  Causes of Errors/Omissions Claims Cont’d 2) Misrepresentation/Description Errors HORNBERG V. TOOLE PEET & CO. LTD. (1981) I.L.R. 1-1309 (ALTA. Q.B.) ○ Court determined broker should have known client would ONLY use property insured on seasonal/casual basis ○ Info was not disclosed to insurer ○ Insurer voided policy ○ Broker liable for loss to property. Brokers liable to indemnify insurers if misrepresentations didn’t void coverage ○ Court’s order for brokers to make payments when there is evidence that: Insurer would NOT have accepted risk Insurer WOULD have accepted risk with conditions  Causes of Errors/Omissions Claims Cont’d 3) Cancellation/Renewal Errors Approx 10% of E&O claims are mishandled policy renewals/cancellations a) Renewals (Most claims = mishandled renewals) i) Not Renewing (at all): WILCOX V. NORBERT & WIGGINS INSURANCE AGENCIES LTD. (1979) 10 C.C.L.I. 101 (B.C.s.C) Insured-broker worked together (years) and relied on broker to automatically renew policies/generally take care of insurance needs Insurer refused to renew coverage, broker didn’t replace insurance No contract/undertaking of contract, NO DUTY ON BROKER to automatically renew coverage BUT broker was negligent for loss due to :  Causes of Errors/Omissions Claims Cont’d 3) Cancellation/Renewal Errors a) Renewals ii) Not renewing adequate amounts Broker must ensure that when coverage is renewed, it meets insured’s needs Changes restricting coverage: must notify insured If renewal is moved from competitor, no obligation see if insurance is adequate iii) Not warning of pending expiry Brokers should remind insureds of impending expiry To send renewal notice is (usually) enough to satisfy broker’s duty  Causes of Errors/Omissions Claims Cont’d 3) Cancellation/Renewal Errors b) Cancellation Improper cancellation may result in action against broker in case of loss ENGEL V. JANZEN ○ No warning (to insured) about consequences of cancelling insurance may result in big financial impacts on brokerage  Causes of Errors/Omissions Claims Cont’d 4) Policy Change Errors Brokers tread carefully when requesting policy changes Ensure what is asked to be done is required to be done ○ Ex. Auto policy might insure multiple vehicles During policy, possible to have additions/deletions of vehicles/changes of coverage Mistakes/human error: Incorrect vehicle is deleted OR Coverage deleted from incorrect vehicle  Causes of Errors/Omissions Claims Cont’d 5) Processing Delays Brokers must respond quickly to requests for coverage change The time brokers require to place coverages is related to time needed to place similar insurance in the past. ○ FRAZER VALLEY MUSHROOM GROWERS COOPERATIVE ASSOCIATION V. MCNAUGHTON & WARD LTD. (1985) 9 C.G.L.I 91 (ALTA. Q.B.) Broker ruled responsible for fire loss ($123,000 of straw) that started 10 minutes after broker agreed to arrange coverage Coverage not placed yet, BUT in two past situations, similar insurance was arranged by broker within 15 minutes of  Causes of Errors/Omissions Claims Cont’d 6) Agency Agreement Violations Written agreements (brokers-insurers) set limits of binding authority about ○ Types of risks brokers can bind ○ Insurance amount for risks When overage of limits/underwriting guidelines and loss occurs: ○ Brokers usually responsible for paying loss  Section 2 - The Errors/Omissions Exposure Analysis Preventing/Controlling Against Errors/Omissions Claims Preventing/controlling E&O Categories: ○ 1) Measures to prevent losses from happening ○ 2) Measures assisting in defending against E&O if/when it happens 1) Preventing Errors/Omissions Claims a) Brokers must act within their scope/level of competence (scope) ○ Some risks require higher level of insurance experience/expertise ○ If brokers doubt their level of competence for a specialization needed, should direct client to another broker  Preventing Errors/Omissions Claims 1) Preventing Errors/Omissions Claims b) Broker takes ALL precautions into account to determine client’s needs Brokers must learn as much as possible about client/client’s business: ○ Inspecting business premises (determine exposures) Brokers should research types of losses risks are susceptible to c) Broker should advise (instead of decide) for clients Broker must present all coverage options If broker becomes a decider, broker runs risk of being incorrect All options must be offered regardless of Broker’s feelings on possibility/probability of event is low OR may be too expensive for  Preventing Errors/Omissions Claims Cont’d 1) Preventing Errors/Omissions Claims d) Broker must know coverage and insurers Brokers must stay current with coverage changes ○ Educational courses, industry journals, seminars, other Brokers must ensure a coverage ISN’T available from ANY source before saying its not available ○ If later available, broker must advise insured ○ Broker must ensure a coverage IS available before saying it is available Broker must know quality of insurer ○ If insurer becomes insolvent, broker may be financially responsible for client if there is an uninsured loss  Preventing Errors/Omissions Claims Cont’d 1) Preventing Errors/Omissions Claims e) Broker must ensure time required to place coverage ○ Some coverages are difficult to place: must notify client that placing coverage may take longer than normal f) Broker must stay in confines of their binding authority ○ Brokers exceeding binding authority may be liable for losses/reimbursement to insurer g) Brokers wanting to avoid non-renewals: ○ Clearly outline office procedures to ensure all policy expirations are accounted for (timely manner)  Preventing Errors/Omissions Claims Cont’d 1) Preventing Errors/Omissions Claims h) Brokers should double check policy change requests ○ When requesting change from insurer ○ When receiving change of endorsement ○ Check wording of request/endorsement(s) i) Brokers must be certain that insureds know their insurance restrictions/limits ○ Especially homeowners, tenants, condo unit owners’ policies limiting coverage on types of personal property  Preventing Errors/Omissions Claims Cont’d 1) Preventing Errors/Omissions Claims j) Brokers must advise insured (written) of changes in policy coverages/conditions/limits from expiring policies k) Brokers must be clear with insureds that all risks doesn’t mean “all risks” ○ “All Risk” = false sense of security ○ Now insurers use the words “comprehensive” or “broad” to describe policies  Preventing Errors/Omissions Claims Cont’d 1) Preventing Errors/Omissions Claims l) Brokers should conduct a (periodic) file audit ○ Especially if in highly responsible position at brokerage ○ Helps to reduce E&O m) Brokers must handle claims in a reasonable amount of time/correctly ○ Business’ primary focus: Sell insurance ○ Brokers usually 1st point of contact in case of a loss ○ If handled correctly, claim can enhance broker-client relationship AND Promote positive public relations ○ If handled INCORRECTLY, may result in client leaving brokerage AND E&O claim against brokerage  Preventing Errors/Omissions Claims Cont’d 1) Preventing Errors/Omissions Claims Claims Procedure After insured has notified broker of claim, broker SHOULD: a) Report claim to insurer ASAP: ○ Sometimes brokerage has permission (of insured) to report claim to special adjustment firm b) Advise insureds they’ll be contacted by adjuster/remind insured of duties: 1. Protect property from any more damage 2. Keep damaged property for examination 3. Notify policy, if necessary 4. Do not admit liability ○ Advise insureds: if they don’t abide by all duties, claim may be rejected  Preventing Errors/Omissions Claims Cont’d 1) Preventing Errors/Omissions Claims Claims Procedure After insured has notified broker of claim, broker SHOULD: Cont’d c) NOT authorize insured to proceed (repair/replace) OR make statement committing insurer to a course of action (may result in broker paying the loss) ○ Includes telling a client that a loss is insured when broker isn’t 100% certain d) Inform insured if a loss isn’t covered ○ Sometimes brokers allow claims to be adjusted when it is known that the loss isn’t covered - may damage broker - client relationship  Preventing Errors/Omissions Claims Cont’d 1) Preventing Errors/Omissions Claims Claims Procedure After insured has notified broker of claim, broker SHOULD: Cont’d e) Follow-up to ensure settlement progression ○ Brokers may contact insured 10 days after first claim report and then every 20-30 days following ○ Policies may vary in allotted time for insureds to submit proof of loss Ex. Physical damage claims under auto policy: submitted in 90 days Sometimes, proofs of loss (other types property damage) usually need to be submitted as soon as “practicable” ○ Brokers must known Statutory Condition  Preventing Errors/Omissions Claims Cont’d 1) Preventing Errors/Omissions Claims Claims Procedure After insured has notified broker of claim, broker SHOULD: Cont’d f) Keep proper claims records (solution: a claims log) g) Help insureds/avoid interference in claim adjustment ○ If brokers think a claims negotiation isn’t proceeding accordingly are advised to bring concerns to adjuster/insurer’s claims department h) Maintain integrity/professionalism ○ Clients may ask broker for help in getting payment of claim even though they know there is no coverage (avoid!!!)  Preventing Errors/Omissions Claims Cont’d 2) Controlling Errors/Omissions Claims a) Documentation Documentation shows broker’s credibility Outcome of claim depends on broker’s word against insured OR ○ Insurer bringing suit Judge/jury likely to lean towards brokers providing documentation of conversations with insureds i) Conversation/Telephone Logs - Documentation must contain: ○ Date/time of discussion ○ Telephone or in-person discussion ○ Full name of individual ○ Who was a part of the discussion ○ Concise notes of: what was discussed, what is next  Preventing Errors/Omissions Claims Cont’d 2) Controlling Errors/Omissions Claims a) Documentation ii) Confirming Letters ○ ALL conversations re: change of insurance contract should be followed by letter to insured/underwriter confirming topics discussed Can’t depend/expect clients to remember everything Letter = a reminder/point of action for broker/client After endorsement, send a note/letter with endorsement with details ○ Brokers should send letters confirming that coverages were recommended but clients declined in case loss later occurs and there is no insurance Send confirmation letter when insured  Preventing Errors/Omissions Claims Cont’d 2) Controlling Errors/Omissions Claims b) Developing Consistent Sales Approach Brokers should be consistent in business practices Ex. Broker who always suggests more limits/review of limits at each renewal have more credibility in case faced with E&O claim in the future with inadequate limits on insurance  Need for Errors/Omissions Insurance The slides for “Need for Errors/Omissions Insurance,” have been moved to the CAIB 1 Chapter 7 Insurance Graphic Organizer (IGO) which can be accessed through your student portal. You can submit your IGO activity to your facilitator or ask questions in class. For an explanation of the slide information and an answer to the activity, please check out the “IGO Answers” videos in your student portal. Please ask questions if you need to!  Create a “How” question Students take two minutes to create a “How” question based on the concepts covered so far, in the chat window. No question is too simple! Remember the Forgetting Curve!