Most agency agreements between the insurance agent and the insurance company contain indemnity agreements where the agent is responsible for indemnifying the insurance company in the event that the insurance company becomes obligated to pay amounts not covered under a policy because of the actions of the agent. Typically, the agency agreements do not contain any indemnity protection for the agency itself.
Before signing an agency agreement, the agent may wish to consider an indemnity provision wherein the insurance company provides a defense to the agency whenever the agency is sued along with the insurance company. The indemnity agreement can also provide that the insurance company will pay any judgment rendered against the agency that are “joint and several” with the company. Also, the indemnity agreement can include a provision that the insurance company will indemnify and defend the agency in any lawsuit that is brought after a denial of an insurance claim. Obviously, it is to the agency’s benefit for the indemnity agreement to be as broad as possible. It is strongly suggested that an insurance attorney be retained to prepare the indemnity provision of any agency agreement that you enter into.
If there is a valid and enforceable indemnity agreement that benefits the agency, lawsuits can simply be “tendered” to the insurance company for defense and the agency’s E&O carrier does not have to be involved. However, it is still recommended that the E&O carrier be notified. This does not typically go against the agency when the E&O carrier is told that, even though is a claim against the agency, the insurance company itself has assumed the defense and will assume any indemnity. The E&O carrier may monitor the case and, at anytime, choose to become actively involved. If it does not have to become actively involved, the matter is typically recorded as a no loss/no expense claim.
Some agency E&O policies may provide coverage if there is a complaint made against the agency or one of its agents to the Texas Department of Insurance. This is an important and valuable item of coverage. Typically, a complaint to the Texas Department of Insurance is a warning that an E&O claim may be coming. Therefore, by defending the agent in the TDI proceedings, the insurance company may prevent a lawsuit. Regardless of whether there is TDI coverage, it is always advisable to notify your E&O carrier of any complaint made against the agency or one of its agents by the Texas Department of Insurance or any other governmental entity.
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it is important for insurance agencies to put procedures in place that will prevent mistakes. A discussion of those procedures is beyond the scope of this paper, but a few of the more common areas of agent malpractice will be mentioned.