Please also feel free to let us know about any issues or topics that you may want us to address in future issues of The E&O Report. Many of the topics we write about in The E&O Report originate from issues agents and brokers bring to our attention through telephone calls and emails. If you have any ideas in this regard, please reach out to Jim Keidel and let him know what you have in mind. From our experience, an issue that one New York insurance agent or broker is facing may actually be much larger and affect many other producers across the state.
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In 1975, I got my driver’s license. My father, bless him, surprised me with a Pontiac Firebird. When I started thinking about drafting a follow-up article on the issues of young drivers, I began to contemplate the substance of the conversation that might have occurred between my father and his insurance broker…..about getting a V-8 muscle car for a 17-year-old boy.
It is the type of discussion that you probably have every day with your clients, answering their questions in order to provide them with options and contemplating any potential errors and omissions exposure that might arise from such transactions. This brief article1 highlights some of the more thorny issues agents and brokers face when insuring young drivers.
Price
While price is often the bottom line for most customers at the end of the day, in this context, price is inextricably tied to coverages, including who is covered and on what or whose policy2. It is no secret that insurance companies charge high rates for younger drivers. So, many clients seek to reduce the cost of insuring their young driver by various means, which can lead to potential E&O claims if coverage is denied as the result of such decisions. You can work to lower the rate by taking advantage of various credits, like the Good Student Discount, Driver’s Education Credit and the Away at School Discount. In that light, we have also been advised that it is a standard practice during the rating process for an insurance company to assign the most expensive car to the youngest driver, enabling it to charge the largest possible amount of premium. While rating, an agent can advocate reassigning the drivers listed on a policy to other vehicles, resulting in a reduction in premium.
To Add or Not to Add
Related to price is the issue of adding a child to the parent’s policy or procuring a standalone policy for the young driver. Most parents are concerned about adding their children to their auto policy because of the higher rates. Accordingly, they often rely on the “permissive use” language in the policy to avoid adding the child and the commensurate increase, hoping such language provides coverage in the event of an accident. However, there may be application questions or other information that was conveyed in connection with the insurance placement whereby the parent made a representation that no children would be driving the insured cars. Such representation can negate coverage in the event of a claim. The lack of coverage can then lead to an E&O claim against the agency or brokerage by the customer. Additionally, some policy provisions only extend coverage to drivers that are specifically listed on the policy, which can lead to the same result: the denial of a claim by an insurance company.
By adding a child to the parent’s policy, it provides the first step for the child in establishing his/her own insurance history and usually saves all involved money. However, rates for young drivers are high and for good reason. Young drivers are easily distracted and inexperienced and, as such, statistics show they are susceptible to a higher percentage of accidents, as well as traffic infractions.
Those facts can raise rates significantly for the entire family. If the child can stay accident and infraction free for three years listed as a driver, families are in a much better position to secure a more affordable auto policy. The standalone policy would still come at a high cost, but it would be far less than what families would pay for a brand new driver with no experience under their own name. As to a separate policy for the children’s cars, often the purchase of such a policy could result in the loss of credits for a multi-policy discount and/or multi-car discount. Also, the family’s umbrella carriers might not be willing to schedule that policy as underlying insurance, leaving assets inadequately protected in the event of a major accident.
Given the ease insurers can access state DMV records, they can easily determine if there is a licensed, non-added, non-disclosed new driver in the family. Some insurance companies will send out renewal questionnaires or conduct telephone interviews to try and reveal these situations. This could lead to a denial and the assertion of various defenses against coverage in the event of an accident and claim on the policy.
Non-Traditional Families
One thing to keep in mind is that policy language is not always in step with non-traditional families or even taking into consideration the families of divorced parents. For instance, an automobile policy covers “resident relatives.” What happens in the situation where the parents are divorced, the child is living with the mother but the father provides the car? In such a situation, the child is not a “resident relative” of the father. Accordingly, there might be issues with coverage in the event of an accident. Since it is likely the agent/broker would be aware of the marital situation, a failure to address these issues could very well give rise to potential E&O exposure.
Limits
Traditionally, limits of any kind on an auto policy is where the greatest E&O litigation originates. While the Court of Appeals in Murphy v. Kuhn held that despite a long-standing relationship between the broker and the insured, the broker had no duty to advise the insured to procure higher or additional limits. However, in analogizing cases that held a broker used a replacement cost estimator to determine the RCV for a property policy, you could be held liable for a negligent failure to determine the correct amount if you had any input into the determination of the appropriate limit for the auto policy.
Conclusion
Believe it or not, my 1975 V-8 Firebird had less horsepower than a 2015 four-cylinder Toyota Prius. Cars now are faster and more powerful than ever before. Back then, other than my eight-track tape player, there was not a lot to distract me. Today’s young drivers are distracted by not only the radio. There are navigation systems, cell phone calls and texting. It is a brave and frightening new world for parents with young drivers. The growing risk for young drivers and their families is not just an accident but a serious, limit-exceeding accident. Full disclosure and the addition of a young driver to a policy with adequate limits are the best ways to protect the customer and avoid a potential E&O claim. Convincing the customer of the wisdom of full disclosure to the insurance company and paying the commensurate premium for the necessary coverage is the key to reducing potential E&O exposure.
As we have suggested in the past, the prudent insurance agent or broker should always offer the customer options concerning coverage and limits, making certain to document the decision made by the customer concerning what is ultimately chosen. Doing so will not only provide the customer with the information needed to make an informed decision, but it will also help protect the agency or brokerage against a potential E&O claim or lawsuit.
1 We do not address the issue of Permitted but not yet Licensed drivers.2 In these litigious times, never forget that many insureds view your E&O policy as supplemental coverage for them. They throw the dice choosing less coverage and the commensurate lower premium assuming that they can sue their broker or agent on a failure to procure claim if they have an uninsured loss. Remember the seminal broker case on the duty to advise, Murphy v. Kuhn, 90 N.Y.2d 266 (1997), concerned additional liability limits on an automobile insurance policy.
Submitted by
Howard Kronberg, Esq. and
James C. Keidel, Esq.
Keidel, Weldon & Cunningham, LLP