Life producers face a potential threat if they relied on a January 17 CAIFA description of its new errors and omissions plan. Actual exclusions are different from those shown then, opening the door to potential liability for brokers who had blindly followed the initial document.
Regulators will be taking a close look at the wording. Where policies don’t meet requirements, says Ellen Morin, Manager of Licensing and Administration at the Manitoba Insurance Council, brokers will need to go elsewhere for coverage. John Waugh, Director of Compliance at the Insurance Councils of Saskatchewan, is fine with the CAIFA policy, so long as the fraud exclusion is waived in that province. He adds the regulator is stepping up vigilance on the subject of E&O insurance.
The exclusion of “any claim based upon a loss or alleged loss sustained from fluctuations in the market value of any security, financial product, investment returns or tax consequences” is one worry. Critics question how the terms ‘financial product’ and ‘tax consequences’ might affect life brokers selling products like universal life (UL).
The association is now the named insurer, which it wasn’t in the former plan with St. Paul. That will give CAIFA the right to access all data for the plan, including claims experience.
Obtaining claims experience caused problems when former broker Barber, Stewart, Mcvittie and Wallace refused to divulge information to CAIFA on the basis that they were not the insured. Mr. Howard says the new structure allows the association to move from being a provider to being a sponsor.
Differences have also surfaced in terms of insurer Employers Reinsurance Corporation (ERC) E&O rates for CAIFA sponsored and individual plans. The rates for the individual plans are considerably lower (see table).
The Insurance Journal contacted Rich Kasyjanski, Marketing Leader for Specialty Insurance Segments at ERC, at the end of April. Surprisingly, he had no knowledge of many of the issues surrounding the CAIFA plan.
He said products sold by life insurers – even those with an investment aspect such as in UL insurance – are admissible, unless sold with misrepresentation. Where the error stems from characteristics ascribed by the insurer, the exclusion stands. The life insurer will be liable for the claim rather than ERC.
The difference between ERC’s CAIFA sponsored and individual policy rates is due to the poor claims experience at CAIFA, he said.
As for tax advice, brokers are not tax experts, said Mr. Kasyjanski, and should defer to professionals when tax advice is sought. Nonetheless, coverage will be provided for claims arising from the normal functions of a broker selling life insurance with a tax aspect, as with UL.
In addition, Mr. Kasyjanski only learned in late April that the CAIFA plan had only 3000 participants. The number was disappointing, and he began an investigation to find out where all the other previous plan participants have gone. Informed by The Insurance Journal that both CAIFA and AON already sent out letters to entice remaining applicants to pay up, he was surprised to learn that CAIFA also confirmed that 600 applicants had already gone elsewhere.
Mr. Kasyjanski was also surprised when told the policy was as yet unavailable online. CAIFA made a commitment to ERC in February to post the policy online. By late April, they had yet to do so. “We were told that they would take care of that,” he says.
Another surprise to Mr. Kasyjanski: ERC wasn’t notified of the proposed CAIFA/ CAFP merger. Asking for further information from CAIFA, he was told CAFP members would be asked to join the ERC-insured plan. ENCON is the current CAFP E&O insurer.
In the meantime, Steve Howard, CEO at CAIFA, noted an influx in April of about 100 new participants per week. He says the problem stemmed from ERC’s demand that information be restricted to participants. CAIFA was unable to come up with a way to do that online.
Mr. Howard says he is satisfied the association’s predictions for the E&O sector have come true. Rates throughout the industry have been rising, and exclusions have become more stringent, just as foreseen by the association when the new CAIFA plan first appeared.
There are a number of issues to be investigated in CAIFA’s handling of its E&O insurance coverage, said Mr. Kasyjanski. The insurer will continue with the plan, but if breeches of contract by CAIFA are large enough, it could lead to the plan being shut down.
Nonetheless, Mr. Kasyjanski views it all as “bumps in the road.” The insurer has no plans to revoke the policy. “We are going to try to make this work,” he says. “We are not giving up on it yet. If there is a breech in the contract they would have an opportunity to repair the breech. The question is ‘is the breech sufficient that we want to shut it all down or do we want to make it work?’”
Mr. Kasyjanski says unpaid applicants can still pay and get coverage, subject to underwriting.