By David Blake, Esq. and Kenneth R. Rothschild, Esq.
Golden, Rothschild, Spagnola, Lundell, Levitt & Boylan, P.C.

There must always be some balance of the increased risk of exposure to an E&O claim and the business practices that generally work to the advantage of an agency or brokerage and its clients.

Annual exposure questionnaires, for example, are useful for a number of purposes. Besides the prevention of errors and omissions claims, other benefits are improved relationships, getting clients to think about their insurance needs, and the potential of more revenue. However, exposure questionnaires also may create, or contribute to, what the law refers to as a “special relationship” between agent and client.

This article discusses the legal ramifications of the concept of “special relationship” as it might be impacted by exposure questionnaires. We present hypothetical scenarios involving an exposure questionnaire, and how these could factor into the legal analysis of an E&O claim.

Please note our article provides for only an overview of this issue. It is not intended to be a definitive analysis, or a complete legal opinion, about what every state or jurisdiction would conclude in the described circumstances.

Defined by Case Law
The term “special relationship” and its resulting legal attachment generally have been defined by case law, not by statute or regulation. An insurance agent’s basic obligation or duty is to procure and deliver the insurance the client requests within a reasonable time period. (Murphy v. Kuhn 90 N.Y.2d 266, 270 (1977); Damon’s Missouri, Inc. v. David, 63 Ohio St.3d 605, 609 fn2 (1992).) If the insurance is not available, then the obligation includes advising the client that the requested coverage cannot be obtained.

When a “special relationship” is deemed to be in effect, the obligation is extended and broadened. The additional duties can be any of a number of things, but the primary elements of finding there is a “special relationship” are taking on additional obligations to advise clients on their insurance needs and on the sufficiency of the coverage requested. A duty to advise changes the otherwise-existing relationship between agent/ broker and client to that of a “special relationship”.

A “special relationship” may arise in a number of ways. It might derive from a mutual understanding of the agent and the client. Providing insurance consulting services on a fee basis obviously will move the agent/ broker out of an “order taker” role and into a relationship subject to deeper court scrutiny. Therefore, agents or brokers who are paid for consulting in lieu of (or in addition to) commissions should be aware their obligations -- and E&O exposures -- are increased.

Additional duties also can be assumed by an agency even if it is not paid for a particular service. (Citta v. Camden Fire Insurance Assoc. Inc. 152 N.J. Super 76 (App. Div. 1977).) Agents who do not get a consulting fee, but essentially provide the same service as paid consultants, have to be keenly aware of the extra obligations such services impose on them.

Courts Afford Guidance
While there is no definitive test of when a “special relationship” will be held to apply, some courts have spoken on the subject. Unfortunately, even with court guidance, the issue remains broadly defined and subject to interpretation -- depending on the state, the court, the judge, and the facts. One court has stated a “special relationship” exists when:

“An interaction between the agent and the insured regarding specific questions of coverage, or course of dealing over an extended period of time, which would have put objectively reasonable insurance agents on notice that their advice was being sought and specifically relied on.” (Advent v. Allstate Insurance Company, 2006 WL 1495066 (Ohio App. 10 Dist.).)

For this article, we examined court guidance to evaluate whether using an exposure questionnaire can lead to the creation of a “special relationship”. But, the subjective nature of court decisions makes any one decision difficult to predict. While the descriptions of what occurred in these underlying situations look to be fairly consistent, the courts’ findings sometimes are surprising in their inconsistency. It can appear that courts render a decision based on what they perceive to be the proper and equitable result, and then look at the vague standards of “special relationship” to either find the claim has merit or is devoid of merit.

As a starting point, sending a questionnaire to a client, without doing anything more, would not seem to constitute a “special relationship”. However, because the content of exposure questionnaires varies from agency to agency, what is a “special relationship” becomes harder to discern if a filled-in questionnaire is sent back to the agency.

There are a couple of observations that are applicable. First, what’s in the exposure questionnaire can impose additional duties on the agent/ broker, even though a “special relationship” may not be created. Second, agent and client interaction with regard to the exposure questionnaire will be considered by the court in determining whether there is a “special relationship”.

The sample Personal Insurance Questionnaire from the PAR Property & Casualty Guide was examined as part of the scenarios presented below. A copy of the questionnaire (and its cover letter) can be seen here.

Questionnaire Is Not Returned . . . or Is Returned

Scenario One: Client Does Not Return the Questionnaire
If the exposure questionnaire is not sent back, it is unlikely a court would impose an obligation to give continual advice to the client. It appears to be clear the client is not seeking advice by virtue of rejecting the opportunity to communicate which is presented by the questionnaire. Even forwarding an exposure questionnaire each year should not create a “special relationship”. Based solely upon providing an annual questionnaire, and absent client conduct that seeks either coverage (other than a routine renewal) or advice, it is extremely doubtful a court could draw the conclusion that there is a “special relationship”.

Scenario Two: Client Returns the Questionnaire
This is where the content in the exposure questionnaire and the specific answers to it will have an effect on the agent’s or broker’s obligation. In the questionnaire reviewed for this article there are questions, answers to which could be construed as a request to procure coverage. As well, there are questions that incorporate advice. In certain circumstances, either of these could create an E&O exposure -- despite a court rejecting the assertion of a special relationship. For example, Question 18. inquires:

“18. Do you have a need for coverage of back-ups of sewers and drains into your home?”

If a client replies “Yes”, a court could see it as a client request for the coverage. While it also may be argued that a “Yes” answer is not an unequivocal coverage request, there are other questions which leave no room for doubt. Question 22. asks:

“22. Do you want your policy to provide full replacement cost coverage on your contents?”

A court is likely to construe an affirmative response to this question as a request for the coverage. And, it would need to be procured, if available, or the client must be advised it is not available. If the questionnaire comes back with a “Yes” answer to Question 22., but the coverage is not obtained, the agent/ broker probably will face an E&O claim for failure to secure asked-for coverage (should the carrier restrict contents claim payments to actual cash value).

It should be noted the obligation to get the insurance the client wants, due to an affirmative answer to Question 22., is not analogous to a finding that the broker has a “special” or fiduciary relationship. The duty to procure the coverage in this scenario would exist because the client has specifically requested the coverage. The point to be made here is that, if the exposure questionnaire is returned, the content of the questions and the other information on the form establish a custom and practice that ultimately could lead to a court determination of a “special” or fiduciary relationship.

Advice Within the Questionnaire
Besides answers that are, or may be seen as, coverage requests, the sample questionnaire also gives advice. For instance, Question 19. reads:

“19. Do you operate a business out of your home? (The standard homeowners policy may provide little or no coverage. Day-care coverage is excluded from the policy.)”

The parentheses after the question have advice about a limitation contained in a standard homeowners policy. A typical exposure questionnaire includes similar statements, all of which will be viewed as advice. Further, the scope of the questionnaire is broad and generally will be characterized as agent attempts to get clients to consider their exposures. In terms of an overall relationship and the agent’s objectives, this is appropriate, and a significant part of the agency/ brokerage business. But, the closer the relationship is, the higher the standard of care expected of the agent or broker.

If exposure questionnaires are returned and discussions take place with the affected clients about their answers, a precedent of offering insurance advice has been established. If this goes on for any length of time, it is likely a court would find the agent/ broker has assumed an obligation to advise the client concerning the sufficiency of his/ her insurance.

As the above illustrations reveal, an exposure questionnaire, while a valuable tool, can lead to additional legal duties that must be acknowledged and appreciated. Utilizing questionnaires each year enables agents to understand clients’ insurance requirements. A questionnaire can be worthwhile, not only for marketing, but for being able to deliver what clients want. However, using an exposure questionnaire can produce adverse consequences too -- if related procedures are not developed and maintained. These are:

The accuracy of the information within the exposure questionnaire is important. Updating the questionnaire regularly and making sure what’s in it is correct are necessities. Keeping track of returned questionnaires and following up on them are significant measures. Internal guidelines on how a returned exposure questionnaire should be handled reduce the potential for agency/ brokerage E&O exposure. Thinking of the exposure questionnaire as a marketing piece, similar to an advertising mailer, and that, therefore, no follow-up is required when it is returned, are mistakes. Such inaction turns the questionnaire into an important piece of adverse evidence, should an errors and omissions claim arise and there is an issue on the questionnaire which was ignored.

The Bottom Line
It should be kept in mind it is uncommon for an allegation of a “special relationship” to be the central point of an E&O claim. However, when a “special relationship” is said to be critical, it is because of the agent’s or broker’s conduct. The relatively few claims in the United States involving whether a particular relationship is “special” indicate courts rarely have been forced by case facts into this kind of analysis. Our law office has been handling E&O claims for more than 25 years and has had just two instances in which the issue of a “special relationship” was raised. And, in neither of them did the alleged “special relationship” decide the outcome.

Combined with other factors (e.g., how fees are paid, the length of the relationship, the scope of the coverage procured by the agent/ broker, the agent’s knowledge of the client’s business, and the extent of the advice provided on other policies), employing an exposure questionnaire could lead to a finding that a “special relationship” exists. And, in turn, this type of finding could mean that a higher standard of care, with a requirement to give proper advice, applies.

It certainly is not the intent of this article to dissuade agents or brokers from offering quality advice and service, such as sending out and responding to exposure questionnaires -- even if doing so creates a “special relationship”. Many PAR insureds already have what might well be considered a “special relationship” with their clients and recognize the advantages it brings in terms of client loyalty, sales opportunities, and service. This comes with a relatively minor cost: the increased risk of an E&O claim arising out of a failure to give quality, accurate advice and guidance which, in the absence of a “special relationship” may not legally be required.

It has been a difficult period for the economy -- including for the insurance industry. However, 2008 was an exceptionally good year for the Quality Management Program, as 23 firms qualified for a PAR Excellence Award!

The dedication to errors and omission loss prevention has never been more evident than it is with the current group of PAR insureds. 2008’s record number of Award winners, along with several additional firms poised to further swell the ranks of those earning the PAR Excellence Award, is a testament to this fact.

We especially wish to recognize the three first-time Award winners, Brooks Insurance Agency, Inc., GEM Insurance Agencies, L.P., and The Hartwell Corporation. These agencies, like those which have earned the PAR Excellence Award multiple times, take Quality Management very seriously and have worked hard at achieving their successful Quality Management Programs.

Twenty firms which are outstanding in Quality Management have deserved a PAR Excellence Award in multiple years. They are listed below, in alphabetical order. Included are the number of times each of the 20 has earned the Award: