Addressing the "order-taker"/"consultant" conundrum

Rough Notes, Oct 1999 by Malecki, Donald S

Risk management is a term that is used in a number of different disciplines. With respect to the discipline of insurance, this term is used in general to encompass the non-insurance techniques available to deal with the risk of financial loss such as contractual risk transfer and retention.

Since this column was introduced in 1987, it has been titled "Risk Management." Our aim has been to assist producers in sharpening their product knowledge and to help them to recognize potentially troublesome areas that could lead to allegations of errors or omissions, or foster allegations of accountability beyond the producer's traditional role of an "order taker."

Some producers want to be more than order takers in fulfilling the needs expressed by their clients. They also want to be consultants. In fact, the occasion may arise where the producer needs to wear two hats. However, producers need to understand that there are pitfalls associated with taking on the role of a consultant who, by tradition, delves into risk analysis, evaluates the risks identified and recommends ways to deal with the risks, with and without insurance.

It is no secret that some insurers in the market for agents and brokers errors and omissions insurance will not write the coverage for consultants and even will go so far as to advise producers against exceeding their roles as order takers. The problem is that it is not always easy to determine whether or not what a producer is doing on behalf of his/her client could be perceived as consulting and therefore subject to a higher standard of care.

Yet, there are some producers who, for competitive reasons, will go so far as to advertise that they serve as consultants. It needs to be made perfectly clear, however, that simply advertising that kind of service does not mean (and should not mean) that the producer can be automatically considered a consultant in every instance. Whether that allegation can stand must hinge on the facts.

For example, a large broker, that advertised its services as including insurance consulting, was sued by its insured for failing to obtain the coverage requested. Briefly, the insured, a large manufacturer with a risk management department, asked the broker to replace its expiring policy with the same or broader provisions. The broker obliged. When claims started rolling in, the insurer balked at providing coverage. It was at this point that the insured realized that the policy provisions were not as clear as they were thought to be.

The insured therefore sued its broker alleging that the broker was an expert and subject to a higher standard of conduct than simply an order taker. However, the broker, undoubtedly capable of providing consulting services, did nothing more in this particular case than find another insurer to replace the expiring policy. (The replacement policy was, in fact, broader in some areas.) The broker never made a risk analysis or recommended any form of coverage and, therefore, based on the facts of this case, was not held to the standard of conduct being alleged.

Nonetheless, the producer who wants to limit his/her services to filling coverage orders of clients rather than performing services that could be perceived as rising to the level of one who performs consulting still has to exercise care in getting to know his/her client, and the insurance product.

Getting to know the client

Sometimes producers really go out on a limb in getting to know their client by compiling their own questionnaire, rather than relying on an insurer's application. These producers reason that it is better to give underwriters one set of specifications for coverage (based on the questionnaire) rather than complete applications for each insurer.

This is precisely what one producer did in a recent case. He decided what client information was necessary to obtain certain forms of property and casualty coverage.

With that information obtained by querying the client, he proceeded to submit it to various insurers for the purpose of receiving coverage offers.

What the producer did not realize was that he was creating future problems with each underwriter who was willing to accept the producer's specifications as an alternative to requiring a completed application.

It is difficult to understand why an underwriter would forgo the requirement of a completed application and accept the specifications of a producer. After all, the producer does not know what an acceptable risk may be and what underwriting standards may apply.

On the other hand, in these situations where underwriters rely on what producers furnish instead of seeking the information about a prospect themselves, underwriters have the ideal defense when there is a problem over a coverage issue. By saying that they were not told about a given exposure, they leave the producer to face the consequences all alone.

This is what happened in the above case. The producer's good-deed gesture of supplying information about a client rather than completing the carrier's application gave the underwriter the opportunity to sidestep accountability. The underwriter maintained that he was not informed about a particular risk, based on the specifications that the producer submitted to the insurer.