Avoiding E&O

D. James NewlandVice President and Corporate Counsel,

RGA International

Banff SchoolAugust 23, 2007

2

A Litigious Society

There has been a marked increase in litigation against professionals in recent years. Some of these cases are legitimate …… others are absurd.

An increasing burden

“...it is entirely appropriate to hold private insurance agents and advisors to a stringent duty to provide both information and advice to their customers. They are, after all, licensed professionals who specialize in helping clients with risk assessment and in tailoring insurance policies to fit the particular needs of their customers.” Madame Justice Wilson

Supreme Court of Canada, 1990

Claim Categories

1. Errors in taking applications2. Improperly filling out forms3. Improper advice concerning coverage4. Failure to secure coverage 5. Avoiding regulatory requirements6. Breach of duty to third parties7. Kanhoffen v. Martino8. Other potential claims

1. Errors in Taking Applications I

Facts: Business partners sought $100,000 key person coverage on each other

Advisor forgot application forms at his office, recited the questions from memory and took notes concerning answers

Advisor later filled out the application at his office and forged client signatures

Policies were issued standard

1. Errors in Taking Applications I

One of the partners died six months later of a drug overdose

A routine investigation revealed a long history of drug abuse not revealed on the application

Without a proper application, the source of the misrepresentation could not be identified

1. Errors in Taking Applications I

Since the surviving partner was clearly innocent, the company settled his claim and proceeded against the advisor

Result: Claim paid by advisor’s E&O

1. Errors in Taking Application II

Facts: Employer arranged for policies to be sold to his employees with premiums paid through payroll deduction

One of the insured employees died a few months after issue

Claim was declined based on misrepresentation regarding smoking

1. Errors in Taking Application II

Two other employees, whose applications had been taken the same day, deposed that the advisor had stated “the company will accept the application whether you smoke or not, but you will pay a higher premium if you say you smoke”Result: Claim paid by E&O Insurer

2. Improperly Filling Out Forms

McCullogh v. Mutual Life and Smith, 2001

Facts: Mrs. McCullogh controlled family finances, including life insurance

She decided to replace policies on the lives of her children, and contacted her advisor

No changes were to be made to policies on her own life, nor that of her husband

2. Improperly Filling Out Forms

Once the new policies were in place, she called the advisor to terminate the old ones

Advisor prepared the forms and took them to the house for signature

Neither the advisor nor the McCulloghs verified the policy numbers on the surrender form

2. Improperly Filling Out Forms

Several months later, Mrs. McCullogh was diagnosed with cancer, and reviewed her coverage

She found that she had surrendered the policies on her own life, and both sets of policies on her children were still in force

Upon her death, her family sued the advisor for negligence in filling out the forms

2. Improperly Filling Out Forms

Finding: “… having undertaken to insert the numbers of the policies into the cancellation form and to complete it for Mr. McCullogh’s signature, Mr. Smith owed a duty to him as the owner of the policies to use readily available information to confirm the policy numbers. All he had to do was walk over to his filing cabinet and check the numbers…”

Mr. Justice McDermid

2. Improperly Filling Out Forms

Result: Although “substantial” contributory negligence was attributed to Mr. & Mrs. McCollogh, the advisor was found liable for 33% of the value of the policy.

3. Improper Advice re: Coverage

Dale v. Metropolitan Life, 1991

Facts: Term policy issued to Mr. Dale in 1986, Mrs. Dale named beneficiary

Rider provided that pre-authorized chequing would be cancelled if one cheque was returned by the bank, but company practice was to only terminate it upon third incident

3. Improper Advice re: Coverage

After third cheque failed to clear, Metropolitan Life sent the Dales a letter telling them that PAC was cancelled

Advisor told them it would be reinstated

By the time the policy lapsed due to non-payment of premiums, Mr. Dale had become uninsurable

3. Improper Advice re: Coverage

Finding: “… the non-payment of premium for the policy … resulted from no fault of the Dales but rather because of the representation of the defendant’s agent to them that everything was in order and they need do nothing more.”

Mr. Justice MacFarland

4. Failure to Secure Coverage

Boa v. Crown Life, 1996

Facts: Siblings Boa and Woodman purchased $100,000 joint first to die policy as insurance on a mortgage in 1984

Two applications were completed, each with a different home address

Crown sent all notices only to Boa due to systems limitations

4. Failure to Secure Coverage

1988 - cheques began to bounce, but the policy was kept in force

1991 - Boa became terminal with cancer and partially incapacitated by chemotherapy

Advisor was aware that Boa was ill, but did nothing to ensure the policy remained in force

4. Failure to Secure Coverage

“KRG had a long standing professional relationship with both Woodman and Boa and was aware of their needs. Woodman reasonably expected that KRG would give her information and advice regarding the insurance policy. This reliance was reasonable. KRG either knew or ought to have known that Woodman would rely on it as a competent insurance agent to take an active interest in the status of the policy.”

4. Failure to Secure Coverage

“KRG did not exercise a reasonable degree of skill and care to service the policy as the circumstances required. KRG’s failure to advise Woodman of the missed premium payment deprived her of the opportunity to keep the policy alive.”

Mr. Justice Jarvis

5. Avoiding Regulatory Requirements

Facts: Client wished to replace a $50,000 term with a $100,000 whole life policy

Advisor had not sold the original policy

Advisor did not like replacement forms, as they are inconvenient and allow the original selling advisor the opportunity to preserve business

5. Avoiding Regulatory Requirements

…with a nod and a wink ...

“Let’s keep this simple and do it as an application for additional insurance. When the new policy is delivered you can decide what to do with the old one.”

5. Avoiding Regulatory Requirements

When the new policy was delivered, the clients cancelled the old one

The life insured committed suicide within a year

Without the warning on the replacement form concerning suicide and contestibility, the advisor had no defence against the widow’s claim

Result: Claim paid by E&O insurer

6. Duty to Third Parties

Mayer v. Nordstrom, 2003

Facts: November, 1996 - William Mayer purchased non-registered mutual fund upon maturity of a life insurance annuity through Nordstrom

Nordstrom entered the name Gary Mayer (son) in the beneficiary designation part of the form.

June, 1997 - the proceeds of the policy were paid to William Mayer’s estate, as the beneficiary designation is void at law.

6. Duty to Third Parties

Nordstrom claimed that he had advised Mayer of the necessity to deal with this issue in the will, and that the designation on the form “did no harm”. He also claimed to have suggested another life insurance product, or a jointly-owned product.

Mr. Justice Foley rejected Nordstrom’s evidence, in part because nothing was in writing.

6. Duty to Third Parties

The client, Mayer, and his estate, suffered no damages.

The son, however, received only half of what his father intended.

Disappointed beneficiary cases traditionally involved cases in which “a solicitor, on taking instructions for a will, can reasonably foresee the deprivation of an intended legacy if due care is not taken.”

The trial judge, however, held that “this principle is not a function merely of the defendant's occupation”

6. Duty to Third Parties

“Nordstrom was a professional who held himself out as possessing special skill, judgment and knowledge in financial planning. The advice and information provided to Mayer was provided in the course of Nordstrom's business. Nordstrom had a financial interest in the transaction and was cognizant of the fact that the realization of Mayer's intent to benefit Garry Mayer was dependent upon there being a valid beneficiary designation.”

Foley J. Saskatchewan Court of Queen’s Bench

6. Duty to Third Parties

Other potential examples:

Failure to re-designate upon conversion?

Delay in providing appropriate forms?

A minor beneficiary for whom no adult trustee has been named?

Failure to change a designation upon divorce?

7. Kanhoffen v. Martino

Facts: William Kanhoffen had two $100,000 policies in force for many years

Advisor worked with Kanhoffen as an orphan client, and eventually suggested that he replace the two policies with one $200,000 policy from NN

7. Kanhoffen v. Martino

Kanhoffen was diagnosed with pneumonia in 1990, but believed he had recovered

On the application, Kanhoffen answered a question relating to pneumonia “no”, but he clearly has no motivation to lie

7. Kanhoffen v. Martino

Advisor dated the surrender forms March 1 in order to save a month’s premiums

New policies were issued March 17

Mr. Kanhoffen had just been diagnosed with lung cancer

The old policies were terminated, the new one could not be delivered

7. Kanhoffen v. Martino

Finding: “...Martino breached his duty of care to Mr. and Mrs. Kanhoffen. His duty could be no less than to follow the advice explicit in the disclosure statement and implicit in the application and the policy itself. He should have waited until ten days after the delivery of the new policy … before he surrendered the existing policy … in the circumstances where he had not explained fully to them the risk that his attempt to avoid double premiums would create. He took complete ownership of the decision when to surrender the Imperial Life policy. To him belongs the responsibility that goes with that ownership.”

Madam Justice Huddard

7. Kanhoffen v. Martino

“Mr. Martino is not a careful listener. He answers questions before they are completed and sometimes lets himself be led into misstatement as a result. He is just the sort of person who might be careless about details.”

Madam Justice Huddard

8. Other Potential Claims

Failure to advise concerning policy terms (e.g.: vanishing premiums)

Recommending inappropriate products (e.g.: Universal Life as a short-term investment)

Failure to obtain proper instructions (e.g.: accepting instructions

from ex- wife of policyowner) Failure to secure proper coverage

(e.g.. Investment products vs. life coverage)

8. Other Potential Claims

Failure to handle in a timely manner Language barriers Breach of confidentiality Money Laundering Fraud and misappropriation

Protect Yourself

Understandyour clients

the products you sellthe state of the business

the state of the law

Protect Yourself

Communicatewith your clients

with the company

Protect Yourself

Documentconversations

recommendations to clientsinstructions from clients

Protect Yourself - Documentation

“Mayer cannot give his side of the conversation. When, as here, it is alleged that a deceased was the author of his own misfortune in ignoring advice and where the only evidence of the advice is from the advisor, there is an evidential onus upon that professional to demonstrate that the caution or advice was in fact given and ought reasonably to have been understood by the client. Nordstrom failed to satisfy that onus. Good reasonable practice would have been to at least make a note of the advice or, better still, confirm the advice in writing with the client.”

Foley J. Mayer v. Nordstrom

Ramgotra v. Royal Bank

A bankruptcy case - the definitive judicial statement concerning creditor protection for life insurance

While the Supreme Court of Canada decision defined the law, the facts were established by the trial judge

Ramgotra was not the ideal test case...

Dr. Ramgotra had invested in various financial products, came back to life insurance annuities shortly before bankruptcy

“The facts in this case are not strong ... Nor are they on first consideration particularly convincing.”

Mr. Justice Baynton Saskatchewan Court of Queen’s Bench

… but he had the perfect advisor.

“Dr. Ramgotra consulted Floyd Collins Sr., ... Mr. Collins is a Chartered Life Underwriter and a Chartered Financial Consultant … the material aspects of the transactions are corroborated by the affidavit of Mr. Collins, a professional financial advisor of long standing. There is nothing before me that would cast any doubt on his credibility or on his evidence.”

Mr. Justice Baynton

The advisor, through his professional qualifications and

unimpeachable reputation, was an invaluable asset to his

client and his industry.

An increasing asset

“...it is entirely appropriate to hold private insurance agents and advisors to a stringent duty to provide both information and advice to their customers. They are, after all, licensed professionals who specialize in helping clients with risk assessment and in tailoring insurance policies to fit the particular needs of their customers.” Madame Justice Wilson

Supreme Court of Canada, 1990

Avoiding E&O

D. James NewlandVice President and Corporate Counsel,

RGA International

Banff SchoolAugust 23, 2007