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Part 3 of a 6 Part Series – Be certain to fully explain benefits and pitfalls of a policy!

errors and omissions coverageMeeting with a prospect that has already expressed an interest in needing life insurance is an exciting time for an insurance agent.  Once the prospect is aware of the need and has you as the agent they wish to use for securing insurance, it is extremely likely that the application will be completed and a sale will be made.  As a well-versed agent you are also likely to receive referrals from this client and should not hesitate to ask for them when delivering the policy.

Certain insurance products may come with provisions that are not easily explained if you are an inexperienced agent, nor are they fully understood by the client.  One of the basic rules to try to prevent an Errors & Omissions claim is to never to sell a product that you aren’t fully capable of explaining and have not taken the time to learn.

In the claim details provided below, you’ll see how this agent should have explained the ability to take loans against the policy and the impact those loans would have on future premiums, and how errors and omissions coverage benefited the agent.

Scenario 3

The agent recommended that the client buy a $1,000,000 universal life policy.  Documents provided to the client stated that he would only have to pay premiums on the policy for five years and, thereafter, earnings generated on the policy would be sufficient to sustain the death benefit without additional payments. The client took several loans against the policy’s earnings.

After being in effect for seven years, the client received a notice from insurer that additional premiums were required to prevent the policy from lapsing.  The client inquired about this situation with the insurer and agent, and was advised that the loans had reduced the policy’s cash value, which was no longer sufficient to pay premiums.

The client filed an action against the insurer and agent, wherein he asserted that they failed to disclose the true cost of the life insurance at issue. Discovery revealed that the agent supplied written materials prepared by insurer to the client, which explained how earnings and premiums were calculated.  These materials also disclosed the possible effect of loans on future earnings.

The client maintained that the agent made representations during meetings, wherein he advised that the policy was “best one on the market,” which would only require five years of premiums before becoming self-sustaining.  The agent also allegedly emphasized that loan features would allow the client to gain life time benefits from the policy.  During his deposition, the agent testified that he did not have a specific recollection of what was said during meetings with the client. He also testified that he was instructed by the insurer to promote the product with reference to its earnings and premium options. The agent admitted that he did not fully explain the impact of loans on funding the policy.

The agent and insurer then took contrary positions on which party was ultimately responsible for representations made to the client concerning the policy’s earnings and premium features.  The insurer eventually agreed to provide the client with a paid up policy, with a death benefit reduced to $750,000, in order to resolve the lawsuit. The agent contributed $150,000 toward the policy, in exchange for a release of all claims against him.

Loss Prevention Tips

An agent should never sell a product that they are unable to fully explain to their client.

Policy provisions that allow for loans to be taken against the policy should be put in writing at the time the policy is delivered especially when this ability can impact future premiums and benefit amounts.

Be sure to review some of our Errors and Omissions coverage options to see how E&O insurance can benefit you, or contact us to speak with a member of our expert team about your specific needs.

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