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Talk about a strained relationship! Insurers sue agents who play fast and loose with rules of business By Dennis H. Pillsbury
There was an axiom in the insurance business that insurance companies in the midst of a hard market would look to any avenue when claims payments came due. By the same token, when the market softened, that rule was in abeyance. No company would even consider going after its marketing force even if a member of that aforementioned force were responsible for putting the company on a risk that never would have been written if the underwriters had all the appropriate information. At least that’s how it was—with a strong emphasis on the past tense. “We thought we would see some subsidence (in companies suing agents), but it’s not subsiding,” notes Curtis M. Pearsall, CPCU, vice president, errors & omissions, Utica National Insurance Group, one of the largest writers of agents E&O. Speaking pre-Hurricanes Katrina and Rita, Curt says, “We haven’t seen a back-off with the softening of the market. In fact, it is escalating to the degree that it is more on the radar screen.” In general, Curt continues, agents have gotten better about managing their own risks. “Overall, we are seeing a significant reduction in claims. The frequency is the lowest it has been in 18 years. However, we still see cases that are a little frustrating where agents do a better job of providing risk management for clients than for themselves.” Virginia M. Bates, co-founder of VMB Associates, Inc., Melrose, Massachusetts, preaches that agents need to “run their agency like a business. I’m seeing quite a bit of cavalier cash management,” Virginia begins. “States do not require trust accounts for agency billed business, but it’s probably a good idea. Most agencies simply use the operating account and the problem occurs when a customer has not paid the agency and the agency pays the company with money out of the operating account. Technically, that amounts to rebating. “A related problem arises when the client doesn’t pay the agency after the agency has ‘advanced’ payment and the agency then tries to cancel the coverage. The insurance company will say, ‘No, we’ve been paid,’ and the agency is out of luck and has no recourse.” Virginia advises agencies to put all accounting matters in the hands of accounting people so these types of problems don’t emerge. “Too often,” she says, “agencies put collections in the hands of producers who will bend over backwards to keep a policy in force—whether the client is paying or not.” Virginia cites a number of other problems where agents have placed themselves in jeopardy. A manage-ment and technology consultant with 20-plus years of experience in managing insurance operations, she has consulted with countless agencies on reducing E&O exposures, among other things. She says, “I regularly see things in agencies that might lend themselves to E&O problems. They’re just sitting in harm’s way.” One key area involves unreported losses. “Often agencies hear about losses from their clients but don’t report those losses to the carriers in order to avoid an upcharge or nonrenewal,” Virginia says. The agency often advises the client that it makes more sense to pay the claim out of their own pocket because it would fall under the deductible or is just a little over the deductible and the upcharge would probably be more than the payment. “However, when the insurance company faces a big claim from the client, they will most likely check with the insured as to whether they informed the agent about any prior losses. If they find that the agency withheld information from them that could have led to a different underwriting decision on the policy, then they could, and often will, seek indemnification from the agency for the loss.” Virginia warns, “Agencies must not withhold information from their business partners during the term of the policy or when completing the application.” Virginia continues, “This situation is most apt to happen when agencies get more sales oriented and producers get more desperate to place business with carriers. Prior losses on the application are filled in with rose-tinted glasses,” Virginia reports. “CSRs tell me this happens all the time. There may have been a prior claim with another carrier that somehow gets overlooked. When the current carrier faces a claim and its adjuster talks to the previous company, it will come out. The current company may rescind coverage or pay the claim and then sue the agency for indemni-fication. This is especially true if the application is not signed. I go through T-files and find that numerous apps are not signed. The signature protects the agency,” she cautions. Another issue involves multiple policies for a client. Problems some-times occur when “agencies use different carriers for one package or even different departments of one carrier,” Virginia says. “The first policy arrives and the agency holds it, awaiting the still-to-be-issued policies. Then a loss happens on the first policy that would have been excluded. The insured says, ‘You, the carrier, cannot hold that limitation or exclusion against me because I never got my policy and didn’t know about the exclusion or limitation.’ The carrier ends up having to pay for the loss and then realizes that it had issued the policy plenty early. It was the agency that held up the policy and put the carrier in the position of having to pay for the loss. That leads to the carrier seeking indemnification from the agency.” For that reason, Virginia says, “We always advise agencies to send out policies as they are checked and ready to go with a cover letter that the rest of the policies will go out as soon as they are ready ‘because we always want you to have the most up-to-date information.’” Another problem area involves additional insureds where a policy “will provide coverage only if there is a written agreement between the insured and additional insureds,” Virginia says. “ I have seen cases where there is no written agree-ment between a contractor and a subcontractor.” Finally, Virginia describes a situation that she calls her “personal bugaboo. Less than 20% of well-automated agencies are doing proposals that are integrated,” she says. “Most agencies are providing stand-alone proposals that don’t match the applications. Everybody is operating in good faith, but when the customer gets something that is different than the proposal and coverage is disadvantageous, it can create problems.” She advises agencies to do all proposals out of the database so they match with the application. This assumes, she adds, “that the agency is diligent about following through when there are changes in the application and immediately incorporates the changes into the database. Don’t allow any discontinuity. If an insured selects optional coverage in a proposal, make certain the insured signs it and update the computer application and T-file. And keep a hard copy when there are signatures involved.” Curt reiterates Virginia’s call for agents to run their agency like a business and to treat the agency/company partnership as they would any other business relationship. “When a company issues binding guidelines, they expect agents to follow those guidelines. Don’t exceed your binding authority. Every agency should have someone on staff who is responsible to review the guidelines and update them whenever a company delivers new guidelines.” He adds that, even though an agency may be using company downloads, the agency “still needs to check the information to be certain that it is consistent with the company guidelines. If paper is not 100% accurate, and we know it’s not, then you should not expect downloads to be 100% accurate.” Perhaps most important, Curt concludes, is agencies should “be honest with your carriers. If one of your homeowners clients has a dog, for example, be honest about the breed. Be very forthright and honest with both your company and your client and you probably won’t experience any E&O problems.” * |
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