How not to handle E&O liability as a broker

Brokers obviously want to protect themselves from errors’ and omissions’ liability. So why not get a client to sign a hold harmless agreement?

In effect, a hold harmless agreement removes liability from one party in a business relationship (in this case the broker). But insureds should not be signing such documents, an American risk management consultant advised in a LinkedIn post earlier this month, after reporting a case where a broker required a client to sign such an agreement to bind coverage.

In Canada, two broker regulators and a lawyer told Canadian Underwriter that they not come across such a situation.

“RIBO has not received any complaints regarding this scenario,” Timothy Goff, director of complaints and investigations with the Registered Insurance Brokers of Ontario (RIBO), Ontario’s broker regulator, told Canadian Underwriter. “RIBO would entertain any complaints received in regards to this scenario. All RIBO brokers are subject to compliance with the Code of Conduct.”

A spokesperson for Quebec’s broker regulator, the Chambre de l’assurance de dommages (ChAD), said that, to its knowledge, using hold harmless agreements (tenir indemne in French) is not a common practice in the industry anymore. ChAD has not received any complaints from insureds on this issue, or complaints about brokers or agents using the practice.

Paul Tushinski, senior partner with Dutton Brock LLP in Toronto, said that he has also not heard of this type of situation. “Personally, I have never heard of a broker trying to insulate itself from liability to an insured in the placement of insurance as a condition of the placement,” he told Canadian Underwriter Jan. 9. “Not sure why any insured would agree to such. I would never place insurance through a broker who tried to shield himself from liability after screwing up the placement.”

The original LinkedIn post came from Jack Schwartz, a senior risk management consultant based in the New York City area, who said he encountered an insurance broker that required an insured to sign the broker’s proposal, which included a hold harmless agreement in favour of the broker, in order to bind coverage.

“Insureds should not be signing such documents,” Schwartz wrote in his “Insurance tip of the day” post. “A broker should be willing to stand behind the product they are selling.”

One Canadian insurance professional commented on the LinkedIn post, saying that “likely [the agreement] would be thrown out or nullified anyways, if such a thing – even if signed by the insured – goes to court.”

Other readers commented on everything from the legality of such an agreement to the ethics behind such a move. Said one commercial insurance and risk management consultant: the broker should be “reported to the appropriate agency with a very strong recommendation that the agency be audited. I’ve got to think that this violates insurance codes everywhere. Also, what about notifying the agency’s carriers?” he asked. “I’d bet that [would] result in carrier contract cancellations.” Another insurance consultant said to look at the wording of the contract to see if it says “something like, ‘This quote and coverage provided is based on the info the insured provided.'”

One reader even asked, “Is this for real?”

“No joke!” Schwartz responded. “And they were persistent in their insistence on having insured sign it and only relented when I put my foot down and questioned their confidence in their product.”