Tag Archives: e&o policy

Does Knowledge Really Matter for Agents?

What does an agency sell? The answer to this question will make or break many an agency.One might say an agency sells price. Fair enough. But what is it selling for price? An insurance policy? Any policy? Is whether the policy provides the coverages the insured needs secondary, to be discovered in court together?

Is an agency selling insurance I.D. cards and evidences of insurance for a price? That is all some insureds want, and it makes sense to only sell them what they want, right? Do these insureds then even need an agent? What value does an agent selling pure price really provide that software cannot?

Consumers do get two benefits. First, they benefit from the agency’s E&O policy when coverage proves inadequate. Second, they gain false comfort by believing agents know what they are doing.

Computer processing is so fast and powerful today that, when combined with massive advertising, the agent is often obviated. This is a fact. It is not an opinion, no matter how much many readers may protest.

The I.D. card portion of the insurance market is already lost. Agents obviously still write this business, but the future is dire.

The rest of the market can be saved if knowledge, rather than price, is sold. Computers can bring price faster and more cheaply than humans. The human value is knowledge. Fortunately, a great percentage of the market still cares about buying from a resource that offers personal knowledge.

Unfortunately, I see too many producers literally running away from knowledge. Here is the proof: When I ask producers why they do not use coverage checklists, they regularly tell me they’re afraid the customer will ask about a coverage for which they do not have knowledge! Think about this! They think the consumer values knowledge but refuse to gain the knowledge the consumer wants! Those producers should just find another career.

Think about this a different way. Do you want a doctor who, because he does not understand cardiac medicine, refuses to test or discuss cardiac issues?

Consumers want to buy from a professional who understands their needs and can match their needs to the prices and products available. At the moment, only professional independent agencies can do this. These people and businesses are the market. Do not run away! Embrace this market and gain the knowledge required to meet it.

A key difference between the younger generation and older generations in the industry is that knowledge used to be less important, because company underwriters knew much more, and producers could rely on their knowledge. Company underwriters today, as a rule, do not know coverages nearly as well. Deficiencies create opportunity, and this is a great opportunity because a majority of people never will expend enough effort to gain adequate technical knowledge. Those who do will have a competitive advantage that will endure.

Much to the disbelief of some, Google does not offer all the answers. Consumers cannot competently look up coverages and apply them correctly. Truly understanding coverages and forms requires a full context. This is what a large and important consumer segment and a huge proportion of the B2B segment clearly want from their agent, so why not give them what they want just like so many agents are willing to give I.D. card shoppers what they want?

The alternative is that if knowledge is not advertised and emphasized, the rest of the market will eventually turn into commodity seekers, too. Several new research studies suggest the small commercial market is already turning that direction. The small commercial market is the bread and butter of many agencies. Are you ready to lose those clients, too?

Technical insurance knowledge is a great asset. Sometimes, the people possessing the most are not the greatest salespeople, and sometimes the best salespeople are just not geared to possess considerable insurance knowledge. This is no reason to ignore the opportunity. In fact, ignore the opportunity at your peril because, if you do not provide the client knowledge, someone else eventually will.

Perhaps the best solution is to create a team that combines knowledge with sales skills. Creating a team may result in less commission to the producer but will gain the producer more sales, more than making up the difference.

Knowledge makes a difference. Gain and use knowledge, or let the competition take advantage of your ignorance.

NOTE:  None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules and regulations.

Many Agents Expose Themselves to Dangers

Many insurance agents are confused about their role, which brings about misplaced loyalties and greater E&O exposures.

Let’s start with a question: Does the agent owe the policyholder the common law duty of good faith and fair dealing? Most insurance agents would respond with a resounding “yes” – but they’re wrong.

The duty of good faith and fair dealing is a non-delegable duty that applies only between the parties to the contract, and the parties are the insurance company and the insured – not the agent. Put simply, the agent is not the agent of the policyholder. The duties of good faith and fair dealing belong to the insurance company, not the agent.

So what duties does an insurance agent owe to the policyholder/applicant? Under common law, there are really but two:

  • Use reasonable diligence in attempting to place the requested insurance.
  • Inform the client promptly if unable to do so.

That’s it!

Some states may provide for a “special relationship” to have been created, which may provide for some additional duties. However, such a relationship is state-specific, requires some acts of commission to create and is beyond the parameters of this article.

Under statutes, there is really only one duty: Refrain from deceptive trade practices.

Every agent knows that the insurance code has a lot of pages devoted to prohibited practices. However, a careful review of the NAIC model law (upon which all states base their deceptive trade practices code) finds that all deceptive trade practices applicable to an insurance agent involve commission of an act, not the omission of an act. Under the model law, doing something incorrect is worse than not doing anything. Insurance agents may assume some duties that are not imposed upon them by law, thinking that they have such duties. If duties are “assumed,” even through ignorance, the law will hold agents to a professional standard for those assumed duties. If you make yourself out to be a coverage expert, the law will hold you to that expert standard.

Some 90% of E&O suits against agencies could be prevented through careful attention to practices and procedures.

By contrast, the duties owed by the agent to the insurance company are many. As a fiduciary of the principal, the agent owes the company:

  • Loyalty
  • Utmost good faith
  • Candor/full disclosure
  • Refraining from self-dealing
  • Integrity, skill and care
  • Fair and honest dealing
  • Duty to follow instructions

Something many insurance agents may not have considered: Your responsibility to not breach your fiduciary duties to the insurance company are the largest part of your professional/ethical responsibilities as an agent.

(It is not a two-way street. The insurance company is NOT a fiduciary of the agent. In other words, an agent acts on behalf of the insurance company, but the insurance company does not act on behalf of the agent. Under common law, the insurance company only owes the agent: indemnification, payment of compensation and fair dealing.)

Some confusion may occur about agents’ responsibilities because of two issues: vicarious liability, which holds that a principal may be held liable for actions by its agent, and the legal maxim that a wrongdoer is ultimately responsible for his own wrongdoing. If an insurance company is held liable for the wrongdoing of its agent (vicarious liability), the insurance company can seek recovery from the agent, (holding the wrongdoer ultimately responsible).

If the insurance company is held vicariously liable for the agent’s wrongdoing, a decision to seek recovery from the agent may depend on:

  • What did the agent do wrong?
  • What recovery did the insured get?
  • What recovery is available to the principal (the insurance company)?
  • What was the agent’s thinking?

A common misconception is that all one has to do to avoid personal liability is to establish a corporation or limited liability entity. That is incorrect because:

  • Professional liability is personal liability.
  • Fiduciary liability is personal liability.

Summary

Insurance agents may assume many duties not imposed upon them by law. Assuming those duties holds the insurance agent to a professional standard not otherwise imposed.

The majority of an agent’s duties are owed to the insurance company, and it is the company’s vicarious liability for the actions of the agent that may ultimately get the agent sued. In other words, the biggest E&O exposure an agent may face is ultimately an action brought by the insurance company because of a wrong action or breach of fiduciary duties. Knowing this makes it all the more important that the agent fully understand and trust the insurance company before assuming the responsibilities and duties imposed upon agents.