ACSR4 - Defining Agency E&O Basics
Error
(Error or Omission) A client notifies a customer service representative (CSR) that he has purchased a new car. The CSR thinks that the car is a replacement vehicle, rather than an additional vehicle, and cancels coverage on the existing vehicle without requesting a signature from the client.
Omission
(Error or Omission) An agency sells a Building and Personal Property Coverage Form to the owner of a toy store. The agent advises the client that he now has "complete coverage" in the event of a covered loss; however, the agent is referring to damage to the building and contents only—the agent did not add business interruption coverage to the policy. The client ultimately suffers a fire loss in late October, and the business must be shut down for repairs throughout the holiday shopping season. Because business interruption coverage was not included in the policy, the client is not covered for the resulting loss of income while the business is closed.
True (The definition of "transact" varies by state; however, most jurisdictions require individuals, including customer service representatives, to be licensed if they sell, solicit, or negotiate insurance.)
(T/F) Agents must be licensed in each state in which they transact business.
Broker
A ____ cannot bind coverage on behalf of an insurance company; he or she can only bind the insured to coverage negotiated with the company.
Broker
A ____ may also represent insurance companies seeking reinsurance coverage in the global market or risks that require coverage from multiple insurers due to the size and nature of the exposure. However, they can and do also represent individuals—particularly those who may need to seek coverage in the surplus lines market.
Broker
A ____ represents the customer; therefore, the ____'s principal is the insured, not the insurance company—the ____ is the agent of the insured.
Broker
A _____ may obtain coverage through an agent or directly with a company. Typically, they handle the insurance needs of large risks that may need to cover unique exposures and may need very high limits. They act to negotiate potentially complex insurance contracts on behalf of the insured.
Defamation
A false, malicious, or abusive written or oral communication that harms another's reputation or character.
Insurance agent
A legal representative of one or more insurers for which the representative has a contractual agreement to sell insurance.
Defamation
A licensed customer service representative falsely tells clients who are currently insured with another company that they should move their policies to Acme as soon as possible, as their current carrier is likely to soon be bankrupt.
Fiduciary
A person or entity that holds a position of trust, manages another person's or entity's affairs or funds, and has a duty to that person or entity to act in a trustworthy manner.
A. Drivers Privacy Protection Act (DPPA).
A producer who finds auto coverage sales leads by searching motor vehicle records may be in violation of the A. Drivers Privacy Protection Act (DPPA). B. Gramm-Leach-Bliley Act (GLB). C. Sarbanes-Oxley Act. D. CAN-SPAM Act.
Misrepresentation and/or False Advertising
A written or oral statement that does not accurately describe an insurance policy's coverage or benefits.
Insuring Agreement
All E&O policies feature an ____ ____; in an E&O policy, it states the insurer's obligations under the contract.
Insurance Agent; Fiduciary Duty
An ____ ____ is an individual who sells insurance on behalf of one or more insurance companies. This person strives to provide the best service possible to his or her insurance customers; however, they actually represents, and owes a ____ ____ to, the insurer.
Agent
An ____ can bind the principal by words or actions, provided two conditions are met: First, the agency relationship must truly exist; second, the agent must have the authority to act.
A. Paid by the agency.
An agency has an errors and omissions (E&O) policy that contains a consent-to-settle clause, and the insurer proposes a settlement in an E&O claim. If the agency refuses the settlement and the claimant wins more than the settlement offer, the judgment above the settlement is generally: A. Paid by the agency. B. Not paid by anyone. C. Paid by the insurer. D. Split between the agency and insurer.
C. $105,000.
An agency has an errors and omissions (E&O) policy that pays defense costs in addition to the policy limits. The limits of liability are $100,000 per claim, and the deductible is $5,000. A claimant is awarded $90,000 against the agency, and the insurer spent $20,000 defending the claim. If the insurer applies the deductible to claim payments and defense costs, the insurer will pay: A. $95,000. B. $100,000. C. $105,000. D. $110,000.
C. $100,000.
An agency has an errors and omissions (E&O) policy with a limit of $100,000 per claim. An E&O claim results in a $90,00 award against the agency. Excluding any deductibles, if the insurer spent $15,000 defending the claim and defense costs are covered within the limits of liability, the carrier will pay A. $15,000. B. $90,000. C. $100,000. D. $105,000.
Rebating
An agent advises a prospect that if he moves his business to Acme, the agent will share the first year's commission with him.
Churning
An agent convinces policyholders to cancel their current coverage and move their policies to Acme, even though some policyholders will be forfeiting longevity discounts and benefits with their current company.
A. Express authority.
An agent is appointed by an insurer that has given the agent written instructions to bind auto coverage for customers who meet certain criteria. This is an example of A. Express authority. B. Implied authority. C. Apparent authority. D. Draft authority.
A. This is an unfair trade practice predominately because it is harmful to the policyholder.
An agent is contacting existing policyholders and placing their coverage with a different carrier at renewal. The new coverage is not as protective to the policyholders as the previous coverage but the agent receives more commission for the sale. Which one of the following statements regarding this practice is true? A. This is an unfair trade practice predominately because it is harmful to the policyholder. B. This is a common agency practice that is allowed in most jurisdictions. C. This is an accepted practice as long as the agent discloses the commission to the client. D. This is an unfair trade practice predominately because the new insurer has an unfair advantage.
Omission
An agent or staff member may also fail to undertake an expected or required transaction. This failure to perform is an act of _____.
Exclusive (captive) agent
An agent who has a contract to sell insurance exclusively for one insurer or a group of related insurers
Employee agent
An agent who is an employee of a direct writer company
Independent agent
An agent who is an independent contractor, usually representing several unrelated insurers
Limited (special) agent
An agent whose authority is established and restricted by express agreement with an insurer with the power to perform specified acts only or acts limited to a particularly small, defined area
Actual; Apparent
An agent's authority to act on behalf of the insurer may be either ____ or ____.
Managing general agent
An authorized agent of the primary insurer who manages all or part of the primary insurer's insurance activities, usually in a specific geographic area
Broker
An independent producer who represents insurance customers.
Errors and omissions (E&O) liability policy
An insurance policy covering liability for the mistakes (errors) and failures to act (omissions) of professionals and businesspeople, including insurance producers.
Consent-to-settle clause
An insurance policy provision, usually found only in professional liability policies, that requires the insurer to obtain consent from the insured before settling a claim.
A. The express authority of the appointment gives the producer the implied authority to prospect.
An insurer appoints a producer to solicit applications for life insurance policies on behalf of the insurer. The producer subsequently calls prospects to schedule sales appointments. Which one of the following statements regarding this situation is true? A. The express authority of the appointment gives the producer the implied authority to prospect. B. Both the solicitation and the prospecting are examples of express authority. C. The producer only has the apparent authority to call prospects. D. The producer has acted outside the scope of his or her authority by calling prospects.
A. Apparent
An insurer revokes a producer's contract because of lack of production. The producer continues to give out business cards and wear shirts with the insurer's logo, and continues to solicit applications for coverage using the insurer's forms and brochures. From the customer's standpoint, which one of the following types of authority does the producer have to place coverage with the insurer? A. Apparent B. Implied C. Draft D. Express
Producer
Any of several kinds of insurance personnel who place insurance and surety business with insurers and who represent either insurers or insureds, or both.
A. Unfair trade practices.
Competition or advertising methods or procedures that tend to deprive customers of information necessary to make sound insurance decisions are collectively known as A. Unfair trade practices. B. Unjust insurance selling. C. Insurance fraud. D. False advertising.
E&O
Coverage provisions typical to an agent's ____ policy. - Coverage for claims arising out of negligence in the course of providing professional services - Coverage for defense costs - Coverage for claims arising out of the negligent actions of employees, temporary staff, and independent contractors within the course of providing professional services and under the direction of the agent or broker - Coverage for personal injury claims (libel, slander, or invasion of privacy) arising out of the course of providing professional services
Policyholders
E&O claims are most frequently made by ____; however, insurance companies and third parties may also bring action against an agency for damages alleged from wrongful actions.
Claims-Made
E&O policies are written on a ____-____ basis—meaning that coverage is triggered by a claim first made during the policy period and arising from the wrongful acts, errors, or omissions of the insured agent, broker, or agency staff.
B. Errors
From what do the vast majority of errors and omissions claims stem? A. Omissions B. Errors C. Liability D. Morale hazard
Consent-to-Settle
If the E&O policy includes a ____ clause, the policy generally includes a provision that limits the insurer's liability to the amount for which the claim could have been settled, should the insured choose to contest the claim. If the claimant ultimately wins more than the initial settlement amount, the agency will be responsible for any judgment above the insurer's settlement offer.
A. Not be paid because it is excluded.
In a typical errors and omissions (E&O) policy, a claim arising as a result of insurer insolvency would A. Not be paid because it is excluded. B. Be paid up to the policy limits. C. Not be paid because it is an exception. D. Be split with the insurer.
Sales Intermediaries
Individuals and businesses obtain insurance through ____ ____: agents or brokers who facilitate transferring risk from the individual or business to one or more insurance companies. These sellers of insurance may represent insurance companies, insurance customers, or both.
E&O Liability
Insurance agents purchase ____ ____ policies to protect themselves and their agencies from potential negligence claims—including claims that can run as high as millions of dollars.
A. Themselves and their agencies from negligence claims.
Insurance agents purchase errors and omissions (E&O) liability policies to protect A. Themselves and their agencies from negligence claims. B. The carrier from clients who may withhold material information. C. Themselves from liability if a carrier mishandles a claim. D. The carrier from claimants' fraudulent claims.
Agencies
Insurance is primarily regulated by the states. There are, however, numerous federal laws and regulations that may affect agency operations on a daily basis. ____ are, therefore, subject to both the authority of state insurance departments and various federal agencies that are responsible for oversight and compliance with federal laws and regulations.
Twisting
Misrepresenting the terms, conditions, or benefits of a policy for the purpose of persuading the policyholder to lapse, forfeit, surrender, retain, exchange, or convert any insurance policy.
Consent-to-Settle
Most E&O policies contain a ____ clause; however, some policies now permit the insurer to settle any claim without the insured's consent. Insurers frequently settle claims rather than fighting them in court in the interest of minimizing loss settlement costs. Sometimes, even when the insured ultimately prevails in a lawsuit for liability damages or when judgments are minimal, the cost of defending the claim can exceed the claim payment. However, in the case of professional liability policies, an out-of-court settlement may seem unacceptable to the insured because it might appear as though the professional is admitting to an error, and the settlement could damage that professional's reputation.
A. Some agencies have authority from the insurer to handle certain types of claims.
Most unfair claims settlement practices acts regulate insurers. Agencies can also be affected by these acts because A. Some agencies have authority from the insurer to handle certain types of claims. B. Agencies are vicariously liable for the acts of the insurers they represent. C. Most states require an agency to acknowledge a report of a claim within a certain time frame. D. Most states do not differentiate between the acts of an insurer and the acts of an agent.
Fiduciary
Premium handling regulations also directly affect agents. Agents may collect insurance premiums on the insurer's behalf and act as the insurer's ____ for these premiums.
A. CAN-SPAM Act.
Producers need to be careful sending e-mail correspondence that is an obvious advertisement for a new product that has not been previously discussed with the client. If not properly prepared, the producer sending such e-mail could be in violation of the A. CAN-SPAM Act. B. Telephone Consumer Protection Act (TCPA). C. Sarbanes-Oxley Act. D. Gramm-Leach-Bliley Act (GLB).
A. Protect consumers from unethical practices.
State regulation over the licensing and conduct of insurance agency staff is primarily intended to fulfill two goals: to assure that insurance sales representatives are qualified to sell insurance products and to A. Protect consumers from unethical practices. B. Maintain low insurance premiums. C. Encourage competition among insurers. D. Ensure covered claims are paid promptly.
1. To assure that insurance sales representatives are well trained and qualified to sell insurance products on behalf of the companies they represent. 2. To protect consumers from unethical practices that could result in financial harm.
State regulation over the licensing and conduct of insurance agents and agency staff primarily seeks to fulfill two goals:
A. Sets rates, coverage limits, and eligibility requirements for flood insurance.
The Federal Emergency Management Agency (FEMA) is responsible for preparing the nation for hazards and for managing recovery efforts after a disaster. FEMA activities affect insurance agencies because FEMA A. Sets rates, coverage limits, and eligibility requirements for flood insurance. B. Requires insurance agencies to submit emergency response plans for their customers. C. Pays covered disaster insurance claims following insurer insolvency. D. Creates and updates the standard disaster insurance policy forms.
A. Reveal their identities and the purpose of the call.
The Telemarketing and Consumer Fraud and Abuse Prevention Act prohibits repeated calls or prolonged conversation, limits calls to certain times of day, and requires telemarketers to A. Reveal their identities and the purpose of the call. B. Register with the federal telemarketing database. C. Obtain the prospect's permission before calling. D. Avoid names on the do-not-call registry.
A. They specify financial responsibility limits for motor carriers.
The U.S. Department of Transportation (DOT) does not regulate insurance but DOT regulations affect insurance because: A. They specify financial responsibility limits for motor carriers. B. They require producers to report their business mileage to the DOT. C. They require each state to track individual motorists' driving records. D. They restrict the credit terms insurers may offer customers.
Boycott, Coercion, or Intimidation
The act of compelling an insurance consumer to purchase from a particular producer or insurer.
Rebating (Rebating is permitted in some states under certain conditions.)
The act of providing the buyer of an insurance policy a portion of the amount of the policy premium he or she paid (or the producers' commission) or anything of significant tangible value in return for purchasing the policy.
Express authority
The authority that the principal specifically grants to the agent.
Fiduciary duty
The duty to act in the best interests of another.
FEMA (Federal Emergency Management Agency)
The purpose of ____ is to prepare the nation for hazards that can potentially cause major loss of life and property and to effectively manage federal response and recovery efforts after a disaster.
A. Both the principal and the agent must agree to the relationship.
The term "agency" is used to describe the legal relationship that exists when one party acts on behalf of another. To create an agency A. Both the principal and the agent must agree to the relationship. B. The principal and the agent must file a notice of intent with the insurance department. C. The agent must sign off on the principal's written terms and conditions. D. The agent must conduct at least one business transaction that benefits the principal.
Agency; Agency Law
The term ____ is used to describe the legal relationship that exists when one party acts on behalf of another. ____ ____ covers the legal rights and liabilities of that relationship.
Churning
The unethical act of persuading a policyholder to cancel or replace a policy solely to sell another policy, without regard to possible negative consequences to the policyholder.
Errors
The vast majority of E&O claims stem from (errors or omissions).
A. Their fax advertisements include an opt-out option.
To keep from violating the Telephone Consumer Protection Act (TCPA) producers should make sure A. Their fax advertisements include an opt-out option. B. They avoid numbers on the do-not-call registry. C. Their telemarketing hours are limited to 8 a.m. to 9 p.m. D. They reveal their identities in the call.
Apparent
Unlike actual authority, a principal does not give ____ authority to the agent. Nor does the agent ever create this authority. This authority includes all the authority that a reasonable person, acquainted with the customs and nature of the business, could reasonably assume the agent has
Changes in products Customer relationships Company relationships Litigation to seek payment Coverage expectations Insufficient documentation
What are the six most common causes of E&O claims?
A. An agency may collect insurance premiums from clients on the insurer's behalf.
Which one of the following describes an agent acting in a fiduciary capacity? A. An agency may collect insurance premiums from clients on the insurer's behalf. B. An agency may have authority to settle and pay certain types of claims directly. C. An agency may provide loss control services to its clients. D. An agency may collect inventory reports from clients and submit them to insurers.
A. An agent agrees to give part of his commission to a prospect in exchange for purchasing a policy.
Which one of the following describes an unfair trade practice? A. An agent agrees to give part of his commission to a prospect in exchange for purchasing a policy. B. An insured has coverage through one agent but asks a new agent to provide competitive quotes. C. An agent provides a quote to a prospect that already has coverage through a different agency. D. An insured pays small claims directly instead of submitting the claims to the insurer.
A. Sarbanes-Oxley Act
Which one of the following federal regulations is intended to ensure corporate accountability by requiring accounting transparency and holding company executives responsible for wrongdoing? A. Sarbanes-Oxley Act B. Gramm-Leach-Bliley Act (GLB) C. CAN-SPAM Act D. Telephone Consumer Protection Act (TCPA)
A. Gramm-Leach-Bliley Act (GLB)
Which one of the following federal regulations promotes affiliation and diversification in the nation's banks, insurers, and brokerages and protects consumers' personal financial information held by financial institutions? A. Gramm-Leach-Bliley Act (GLB) B. Sarbanes-Oxley Act C. Fair Credit Reporting Act (FCRA) D. CAN-SPAM Act
A. Broker
Which one of the following is the agent of the insured? A. Broker B. Agent C. Principal D. Insurer
A. Insuring agreement and coverage
Which one of the following sections of a typical errors and omissions (E&O) policy states the insurer's obligations under the contract? A. Insuring agreement and coverage B. Limits and defense cost C. Endorsements D. Exclusions
A. An agent replaces a policy, does not inform the insured that the new policy has lower limits, and the insured has a loss that is only partly covered.
Which one of the following situations would likely result in a successful errors and omissions (E&O) claim against the agency? A. An agent replaces a policy, does not inform the insured that the new policy has lower limits, and the insured has a loss that is only partly covered. B. A carrier changes its policy endorsements upon renewal, the agent informs the insured of the change, and the insured agrees to the policy. C. A customer slips in a store and makes a liability claim. The insured pays the claimant and later discovers that the slip was staged. D. An insured leaves a message requesting additional coverage on an agent's voicemail. The agent does not receive the message before the insured's loss.
A. A broker's principal is the insured.
Which one of the following statements regarding brokers is true? A. A broker's principal is the insured. B. Brokers must obtain coverage through agents. C. Brokers do not represent individuals. D. A broker's agent is the insurer.
A. Most E&O claims come from errors rather than from omissions.
Which one of the following statements regarding errors and omissions (E&O) is true? A. Most E&O claims come from errors rather than from omissions. B. There is no E&O liability if the agent did not intend to make an error. C. In E&O coverage an error is the failure to take an expected or required action. D. Agencies do not need E&O coverage for claims made by insurers.
A. An insurance agent represents, and owes a fiduciary duty to, the insurer.
Which one of the following statements regarding insurance agents is true? A. An insurance agent represents, and owes a fiduciary duty to, the insurer. B. An exclusive agent is an independent contractor and usually represents several insurers. C. The relationship between agent and insurer begins when the agent binds the first policy. D. An insurance agent represents the customer, and the agent's principal is the insured.
A. Producers are intermediaries between insured and insurer and produce the business for the insurer.
Which one of the following statements regarding insurance producers is true? A. Producers are intermediaries between insured and insurer and produce the business for the insurer. B. Agents must be licensed to sell insurance but there is no licensing requirement for producers. C. Agents are considered to be producers, but brokers are considered to be consultants. D. "Producer" is a narrowly defined term for the person who makes the final insurance decision.
A. Policies placed with unauthorized insurers are not void, so agents can be held responsible for claims if the unauthorized insurer fails to pay.
Which one of the following statements regarding selection of suitable insurers is true? A. Policies placed with unauthorized insurers are not void, so agents can be held responsible for claims if the unauthorized insurer fails to pay. B. Transacting business with an unauthorized insurer is not allowed, and the penalty for doing so is generally a letter from the insurance department. C. Agents may not transact business with an insurer unless that insurer is licensed or admitted to do business in the agent's state. D. It is the insurer's duty to prove to the agent that the insurer is admitted to do business in the state, and failure to do so is the fault of the insurer.
A. Most states require individuals who sell, solicit, or negotiate insurance to be licensed.
Which one of the following statements regarding state licensing laws is true? A. Most states require individuals who sell, solicit, or negotiate insurance to be licensed. B. Customer service representatives do not have to be licensed because they are not producers. C. Most states will allow relevant job experience to take the place of a producer's license. D. Licensees in most states pay annual fees and do not have to meet annual education
B. The McCarran-Ferguson Act
Which one of these federal acts affirmed that state regulation of insurance was in the public interest? A. The Gramm-Leach-Bliley Act B. The McCarran-Ferguson Act C. The Sarbanes-Oxley Act D. The CAN-SPAM Act
B. Managing general agent
Which one of these terms describes an authorized agent of the primary insurer who manages all or part of the primary insurer's insurance activities, usually in a specific geographic area? A. Independent agent B. Managing general agent C. Limited agent D. Exclusive agent
B. Churning
Which one of these terms describes persuading a policyholder to cancel or replace a policy solely to sell another policy? A. Twisting B. Churning C. Rebating D. Coercion
CAN-SPAM Act
____ addresses the problem of unsolicited commercial e-mail (spam). The act applies to e-mail messages that are intended to advertise or promote a commercial product or service. The act makes an exception for messages sent to a firm's customers that facilitate, complete, or confirm a commercial transaction.
Sarbanes-Oxley Act
____ affects most insurers and a few large insurance agencies and brokerages. The act is intended to ensure corporate accountability and to combat corporate and accounting fraud by tightening internal accounting controls and holding company executives responsible for financial misdeeds.
Unfair Claims Settlement Practices Acts
____ are laws that deal specifically with claim settlements. The purpose of these laws is to protect insureds and claimants during the claim filing, investigation, and settlement process.
Unfair Trade Practices Acts
____ are laws that define and prohibit specific activities related to sales and service of insurance policies; most are methods of competition or advertising or procedures that tend to deprive the public of information needed to make informed insurance decisions.
Apparent
____ authority exists if circumstances lead third parties to reasonably believe that the agent has the authority to take action.
Implied
____ authority is actual authority implicitly conferred by custom, usage, or the principal's conduct indicating intention to confer such authority. Under the doctrine of said authority, the agent has authority to act for the principal even without express authorization or specific instructions.
Actual
____ authority is authority intentionally given by the principal to the agent; it may be express or implied.
Express
____ authority is the clearest indication of authority and is anything the principal specifically instructs the agent to do, along with acts that are incidental to carrying out the specified instructions. For example, this kind of authority may be given to an insurance agent in the form of written instructions, manuals, or verbal instructions.
E&O
____ claims can result from actions performed incorrectly or acts of omission.
TCPA (Telephone Consumer Protection Act)
____ deals with the issue of unsolicited advertisements sent to telephone facsimile machines, computers, or other devices. The act, enforced by the Federal Trade Commission (FTC), requires any message sent to a fax machine to display the identity of the sender, the date and time of transmission, and the telephone or fax number of the sender.
DOT (U.S. Department of Transportation)
____ does not regulate insurance producers; however, their regulations affect insurance because they specify financial responsibility limits for motor carriers. Agencies that insure commercial vehicles must be aware of said regulations to ensure that insurance limits comply with financial responsibility requirements.
Producer
____ is a broad term used to describe persons involved in the process of arranging to place insurance business with insurance companies. They are the intermediaries between insureds and the insurance companies, and they ultimately produce the business for the insurance company.
Insurance
____ is primarily regulated by the states, unlike the regulation of other forms of interstate commerce, which are regulated primarily at the federal level. This is largely the result of the McCarran-Ferguson Act (Public Law 15), a federal law passed in 1945. In passing the act, the United States Congress expressed the belief that continued state regulation of insurance was in the public interest.
FEMA (Federal Emergency Management Agency)
____ manages the National Flood Insurance Program (NFIP). In administering the NFIP, ____ sets the rates, coverage limits, and eligibility requirements for flood insurance.
E&O
____ policies also include coverage for defense costs, including attorney fees, even if the claim is groundless or if a court determines the insured not liable; some also cover defense costs within the limit of liability.
GLB (Gramm-Leach-Bliley Act)
____ promotes affiliation and diversification in the nation's banks, insurers, and brokerages, and it protects consumers' personal financial information held by financial institutions. This act requires all financial institutions, including insurance agencies, to establish policies on how to protect their customers' personal (nonpublic) information by establishing limitations on disclosure of such information.
FCRA (Fair Credit Reporting Act)
____ protects consumers from the disclosure of inaccurate and arbitrary personal information held by consumer reporting agencies and includes procedures for reporting and correcting credit record mistakes. The act requires an insurer to inform an insurance applicant in advance if it intends to order various consumer reports such as a credit or prior claim history. In some cases, a motor vehicle record may also be considered a consumer report.
DPPA (Drivers Privacy Protection Act)
____ restricts access to motor vehicle record information to those individuals or entities that have a permissible purpose, provided in the law, for receiving the information. The law was enacted following a highly publicized murder in which the killer obtained the address of the victim by requesting a motor vehicle record.
Telemarketing and Consumer Fraud and Abuse Prevention Act
____'s regulations include prohibiting repeated calls or prolonged conversation, limiting calls to between 8 a.m. and 9 p.m. daily, and requiring telemarketers to reveal their identities and the purpose of the call.
