Top Three E&O Claim Causes

The vast majority of life and health insurance agents are ethical, compliant with industry regulations, and have meticulous business practices. But even the best agents make mistakes, and when this happens, lawsuits often follow.

What are the top three mistakes life and health insurance agents make? Let’s count them down. According to the National Association of Insurance and Financial Advisors (NAIFA), the most common errors that lead to E&O claims include:

  • Misrepresentation. For example, an agent claims a product has a feature it doesn’t actually have. For example, an advisor claims an elderly client can purchase an annuity but get all of his premium back at any time. This misrepresents the surrender-penalty provision, because the person would have to wait seven years to access his money without penalty.
  • Failure to provide. A host of issues might prevent an insured from receiving an expected benefit. For example, a customer requests a review of life insurance needs as part of comprehensive financial planning. While the advisor works on other issues, the client dies, leaving her spouse woefully uninsured. The spouse ends up suing the advisor because he expected to receive a large death benefit when his wife died.
  • Failure to explain. Here, an agent sells a policy or rider, but fails to adequately explain how it works. Case in point: a client likes the idea of combining life insurance and long-term care protection in one contract. So he decides to purchase a hybrid life/LTC policy that provides cash in the event he needs to enter a nursing home. The policy, in effect, pays an early “death benefit” if he can no longer care for himself. When the client develops a chronic, disabling illness and must enter a facility, he begins receiving benefits under the policy, but dies two years later. His wife files a death claim, but learns her payment will be much lower than expected because of the prior payments. She claims to never have heard of this and files suit against the insurer and advisor. This is a classic “failure to explain” situation, since the agent either failed to describe the policy’s features or explained them so poorly the wife had no idea what her husband purchased.

So there you have it: the top three most common E&O mistakes. But there are many other mistakes that trip up life/health agents, including:

  • Selling an unsuitable product to a prospect.
  • Botching a client’s policy-change request, resulting in lower or non-existent benefits.
  • Making clerical errors that result in lapsed coverage and non-payment of benefits at claim time.
  • Sloppily handling life insurance policy applications, resulting in medical conditions not being disclosed to the insurer (and benefits denied at claim time)
  • Advising a client to replace a life insurance policy without explaining that this will reset the two-year contestability period, which in turn results in claim denial similar to the prior scenario.

In short, the common theme behind most E&O insurance disputes is customers failing to receive the benefits they expected, either because the agent processed the business incorrectly, failed to explain contract features, or deliberately misrepresented contract features. Put another way, whenever there’s a gap between expectation and reality in a client’s mind, the risk of getting sued is high.

How E&O Insurance Protects You from Mistakes

As you can imagine, any one of the mistakes just discussed could lead to a five- or six-figure legal judgment. Based on your personal financial resources, losing in court could wipe you out financially, jeopardizing your ability to pay for your children’s education or adequately funding your own retirement.

Faced with such risks, many agents elect to put their heads in the sand. They figure they’ll never make a mistake or that if they do, their clients will forgive them. Clearly, this is flawed logic, since being human means you’re not perfect. Mistakes come with the territory. And since clients are also human, forgiveness may not come as naturally to them as vengeance does.

The better approach is to protect yourself with E&O insurance. But not just any E&O policy . . . one that’s:

  1. Affordable and comprehensive,
  2. Designed specifically for your license type,
  3. Provided by an A rated insurer, and
  4. Easy and convenient to buy from an online platform such as

In summary, life and health insurance agents should strive to avoid the most common E&O mistakes, but also prepare themselves should they end up making one. The best solution: purchase high-quality E&O insurance from a marketing firm, insurer, and administrator they trust. To get started, please visit today.

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