August Avoiding E&O
By Richard Mintzer, CLU, managing partner, Richard Mintzer Associates LLC, Boulder, Colo
Just like made-for-TV movies, this article is based on true stories. Very often skilled professional insurance producers get themselves into trouble by not selecting the right product for their client. Another variation on this theme is the mistaken belief that the only factor that really matters when soliciting an account is price. This problem exists across the entire spectrum of insurance contracts. It is true for the most basic homeowner’s policy as well as sophisticated and complex plans such as self-insured workers’ compensation. The following two examples demonstrate why bad things happen to good agents along the entire continuum of insurance coverage.
Take the unfortunate story of a successful commercial insurance producer who fell into the trap of believing that price was the only consideration when faced with the daunting task of replacing workers’ compensation insurance with a terrible loss history on his prized and perfect account. The client was a minority government contractor who enjoyed cost-plus contracts providing various services at military installations. Part of the requirements to satisfy the cost-plus contract was workers’ compensation insurance for the contractor’s employees.
The agent solicited coverage at a number of private insurance companies with absolutely no success. He then turned to various state insurance funds but decided on his own that this was not a viable option because of the elevated deposit premiums due to poor loss experience. Not finding satisfactory workers’ compensation insurance was not an option for the producer since this was his prized and largest account. He scoured the marketplace and finally came up with what he thought was the perfect solution: an industry safety group offering a self-insured workers’ compensation fund. The self-insured fund featured low deposit premiums, the possibility of future dividends and a cap on catastrophe losses because the fund had obtained aggregate loss protection.
The insurance producer studied the plan and made the decision that this was the right plan for the right client, then sent the client a blank application to sign. He enclosed a short letter extolling the virtues of the self-insured workers’ compensation fund. What he did not include was information that the plan was assessable, that the fund was relatively new and at the time, and that there were not sufficient employers enrolled to justify the funds premium and experience projections.
The next chapter in our true-life story is predictable: Dividends as projected were not declared and assessments were billed to the participating employers. Furthermore, because of poor experience, the plan could no longer obtain sufficient and cost-effective aggregate excess insurance limits, placing the fund on the verge of insolvency. Because it was an assessable plan, and assessments are not recoverable from the government, the contractor working on a cost-plus basis is required to personally pay the assessment.
Mr. Government Contractor was more than slightly upset when he was notified that his share of the assessment is in excess of $250,000. Before long, litigation began and my phone rang with an attorney asking my opinion regarding standard of care expected of insurance producers when selling insurance in similar situations. After reviewing the documents and depositions, certain facts become apparent. The producer had the insured sign a blank application, which the insured did because of his long-term relationship with the agent. In addition, the agent never explained to the insured that the fund was assessable. Finally, there was strong evidence that the insurance producer was aware that dividends as projected would probably not be paid and of the possible insolvency of the fund which he never shared with his client.
I can visualize many readers saying that this could never happen to them because they do not get involved in complex transactions. However, consider this, which actually happened to me. I was having lunch with a close friend, who informed me that he had purchased a house for his son and his future wife as a wedding present. He told me that he was keeping the house in his own name and that he had bought a homeowners policy covering the property. I asked why he had bought the house in his name rather than his son and he responded that he wanted to make sure that sufficient limits of property and liability insurance covered the property. When I pointed out that he needed to reside in the house to qualify for the homeowners program, he was visibly upset and angry with his insurance agent, who never asked him if he was going to live in the house.
Unlike made-for-television movies, neither of these stories has a successful conclusion. The agent’s E&O carrier settled the case, the government contractor got a new insurance representative, and my friend has switched agents. Successful marketing includes finding the right product for the right client and having the prospective new client agree with your recommendations. Certain courts are now finding that the product sold must be suitable for the client's insurance requirements. This theory was best summarized at a recent this settlement conference, stating that the insurance producer’s objective must not be to simply sell the products, but rather to sell the right product to the right client.
It has always been crucial for insurance producers to accurately assess each client's needs. This truism is now more applicable with the advent of Internet and telephone sales that do away with the one-on-one agent-client relationship. Web sites must be more than advertising blurbs and telemarketers must ask appropriate questions to enable an adequate risk assessment. Failure to do so can often result in litigation against the insurance producer.
Most products sold today have inherent safety devices. It is often said that the best safety device on an automobile is the rear-view mirror. For the insurance industry, it should be the motivation to avoid litigation and being held liable for an error or omission. As our industry becomes more complicated and sophisticated, merely staying out of trouble is no longer acceptable. Unfortunately, the definition of ethical and effective marketing leaves a lot to be desired and creates as many questions as it answers. Insurance commissions and court decisions define only minimum standards. One thing is certain: If you or your agency are involved in litigation, win or lose, you lose. If you want to avoid the angst and loss of time involved in litigation, you must do more than set a goal of “staying out of trouble.” A good place to start is by observing the various codes of ethics published by the professional societies and the Independent Insurance Agents and Brokers of America.
As a former principal of a successful regional property-casualty and life general agency, I have often asked myself whether our organization was just lucky to have never been involved in litigation, or if there an overriding philosophy of our agency that prevented "bad things from happening to good agents." Since I would rather be good than lucky, I believe it was our agency philosophy of gathering in-depth information from our clients. The basis for our thinking was a simple process, not requiring great technical expertise, with the ability to be used by the greenest producer in our office. I named this technique “back door-front door information gathering.” The idea is to identify exposures that come in the back door of the business or home that can be solved by insurance and thus go out the front door. There may be a better name for this process, but I can assure you that if you work at it, it works all the time.
Richard Mintzer Associates LLC
5551 Jewel Creek Court
Boulder, CO 80301
Telephone: 877-461-1656
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