THE FLOGGINGS WILL CONTINUE
UNTIL MORALE IMPROVES

Relatively small changes can help to
avoid potential E&O problems

By Mary Belka, CPCU, ARM, ARe, RPLU, CIC, and Cheryl Koch, CPCU, ARM, AAI, ACSR, AFIS

We are sometimes accused of beating the proverbial dead horse when it comes to certain agency practices—and perhaps we are guilty of doing so—but unless and until those practices are no longer being performed in most independent agencies, we feel the need to continue to discuss them. Operational excellence requires that all agency procedures be carefully examined to determine if they are efficient, contribute to profitability, provide true value-added services to clients, and do not increase the probability that the agency becomes involved in an errors and omissions (E&O) situation. While it is important to dismantle out-of-date and inefficient processes, it is the avoidance of E&O claims that causes us, once again, to speak to these common agency practices.

1. Calling chronic-late-pay, direct bill clients. Decades ago, independent agents gave up a significant amount of income in exchange for insurance companies shouldering the burden of premium collection. The insurance contract, after all, is one between the insurer and the policyholder and the legal consideration for the insured is payment of the premium. Agents need play no role at all, yet we find that a majority of agencies still insert themselves into this process by calling, emailing, or otherwise notifying agency clients when their direct bill policies have not been paid by the due date established by the company. In addition to being a costly process, why is this an E&O exposure to the agency?
   E&O scenario #1. The insurance company notifies the agency when a client’s premium remains chronically unpaid. Each month, this “pending cancellation” notice is acted upon as the account manager provides a reminder and, sure enough, the premium is paid prior to the actual cancellation date. Except for one month, when the call is not made. The insurer cancels the policy for non-payment and the insured suffers a loss after the cancellation date. The client brings an action against the agency because they “never pay until the account manager calls,” which the agency’s file documentation bears out. This is not customer service—it’s enablement and it should be stopped, but only after notifying those clients who have been receiving these additional notifications that the agency will no longer contact them, and it is their responsibility to pay premiums on time.

2. Accepting cash or direct bill payments in the agency. Unfortunately, insureds might mistakenly think a payment to the agency is the same as payment to the insurance company on a direct bill policy. Too often, the payment is already late, and in the form of cash or a check made payable to the agency, which must be converted into something the insurer will accept. Even checks made payable to the company must be “swept” on behalf of the policyholder.
   E&O scenario #2. A customer drops off their direct bill payment, which was due at the insurance company several days ago, and asks that the agency “sweep” the payment for them (think about it—should they even know what that means?) The account manager accepts the payment on a Friday and indicates that it will be handled. He then receives an urgent phone call from another client and spends the remainder of the day on a project for them. The payment is not processed until the next week. Unfortunately, the policy cancels for nonpayment over the weekend. The insured subsequently suffers an uncovered loss and sues the agency because they have “always handled my payments” in the past and the file documentation bears this out—repeatedly.

Operational excellence requires that all agency procedures be carefully examined to determine if
they are efficient …and do not increase the probability that the agency becomes involved in an E&O situation.

3. Remarketing business at renewal based only on price. Many agencies create “alerts” in their management systems to indicate renewal policy premium increases over an arbitrary percentage, typically 10% or 15%. Rather than having a proactive conversation with the client prior to renewal about exposures, or even after the fact about the reason for an increase, the procedure is often to try to find an alternative market to avoid the increase. However, we all know insurance is not a commodity and that, similar to other products and services, one “gets what you pay for.” Even personal lines and small commercial policies are not identical.
   E&O scenario #3. The agency is notified that a client’s renewal policy has increased over 20%. Although the client has had no losses, the company has taken a substantial rate increase due to higher-than-anticipated loss ratios in the line of business. The account manager uses a comparative rater to determine that the agency can replace the coverage with another insurance company matching the expiring premium, to the delight of the client, who happily consents to changing to the new company. Two weeks later, the client advises the agency of a loss. Unfortunately, it is not covered by the current policy but would have been by the prior carrier. No comparative analysis was done by the agency to point out coverage differences between the old and new policy.

4. Working on new business with less than 60 days’ lead time. Let’s face it—for some producers, every opportunity to quote is perceived to be just that—an opportunity. But the real job of a producer in an independent agency is not to quote insurance—it’s to assist clients in managing the risks they face and the risk management process simply takes longer than just getting that mythical “apples to apples” quote. Account managers try to be accommodating and sometimes drop everything to provide a producer with a quote based on the prospect’s current policy. But is it ever a good idea to assume that the current agent has done his or her risk management due diligence and arranged proper coverage based on the insured’s financial objectives? The likelihood is small. Worse yet, when that last-minute, lower price is the primary deciding factor on the part of the buyer, we all know the best predictor of how an agency will lose an account is how they wrote it in the first place.
   E&O scenario #4. A producer asks an account manager for a “rush quote” on a new piece of call-in business for a prospect who is being non-renewed by their current carrier. The producer provides a copy of the current policy to the account manager and indicates that coverage will need to be effective in just a few days to avoid a lapse in coverage. She quickly reviews the policy and obtains a quote, providing it to the producer who lands the new account. Everything is fine until the new client calls the agency to report a loss that is not covered because the loss exposure was not identified by the producer or insured. This was not a new loss exposure, but rather one that should have been covered under the prior policy. Since the agency was in a hurry and anxious to write the new account, they simply duplicated the existing, inadequate coverage and did not discuss the client’s actual operations.

5. Quoting business that doesn’t qualify as a good prospect. We know that new business is the lifeblood of the independent agency. But is all new business created equal? We would argue that one of the most important things an agency can do is develop a profile of their ideal client in each department and then compare every new business opportunity to that template. This requires a great deal of discipline and the ability to say “no” when someone contacts the agency for a “quote.” Agencies that dabble and want to be all things to all people may spend a lot of time quoting, but not enough time selling. Hit ratios—the percentage of business written compared to the number of proposals presented—is a good measure of whether the agency has the focus and expertise needed to be truly successful. Carriers are now carefully scrutinizing agency hit ratios as they rein in their own expense ratios. They want agency partners who do not increase their operating expense.
   E&O scenario #5. A high hazard, call-in prospect is directed to a producer who takes down the necessary information and forwards it to an account manager to prepare a submission. Before completing the applications and assembling other underwriting information, the account manager makes a few calls to determine if the agency has a market for the business, which is not a fit for their primary standard markets. The account manager approaches a few surplus lines brokers and finds one that is willing to consider the submission. The account manager completes the submission and awaits the broker’s response. Upon receiving it, he prepares a proposal for the producer who presents it to the prospect and receives the order to bind coverage. Unfortunately, since this was a time-consuming process and the business has been quoted with a non-standard carrier, there will be a lapse in coverage by the time the new policy takes effect. In the meantime, the client has a loss that will not be covered by either policy and looks to the new agency for reimbursement.

Lessons learned, again

We wish these E&O scenarios were made up, but they are actual situations of which we are aware. We bring them up to illustrate how you can join that exclusive club of great agencies by making relatively small changes to your processes that could make all the difference. Experience proves that great agencies are able to find the discipline and commitment required to unwind these practices for good. Make the choice to avoid potential E&O problems and give your account managers and producers the time necessary to focus on the agency’s best prospects and customers.

The authors

Mary M. Belka is owner and CEO of Eisenhart Consulting Group, Inc., providing management and operations consulting to the insurance industry. She also is an endorsed agency E&O auditor for Swiss Re/Westport. A graduate of the University of Nebraska, Mary holds the CPCU, ARM, ARe, RPLU, CIC, and CPIW designations.

 Cheryl Koch is the owner of Agency Management Resource Group, a California firm providing training, education and consulting to producers, account managers and owners of independent agencies. She has a BA in Economics from UCLA and an MBA from Sacramento State University. She has also earned several insurance professional designations: CPCU, CIC, ARM, AAI, AAI-M, API, AIS, AAM, AIM, ARP, AINS, ACSR, AFIS, MLIS.