November 2010
Volume 15, Number 6

The New Acord Certificate Forms

As John Eubank stated in a wonderful paper he wrote for the IIABA of Louisiana, "The changes to these forms comprise the single most dramatic revision in over thirty years." Considering that even before this change, E&O claims for certificates were increasing at a fast pace and combining that with these huge changes, agents are best served by gaining as much information, education and knowledge about these changes as possible.

Bill Wilson, the guru of certificates and the head of the IIABA's great Virtual University, sent me some insightful and beneficial information for agents. A great resource for a basic understanding of the new certificate forms is the following article: www.iiaba.net/VU/NonMember/WilsonCancellationNotice.htm.

As Bill noted, "It includes a 'one-pager' download at the end of the article that can be given to insureds or third parties that explains the problem. States including South Dakota, New Hampshire, New York, Iowa, Louisiana, Minnesota, Oregon, and others expressly prohibit a certificate that purports to provide a policy right not provided by the policy itself, an example being notice of cancellation. Here is a complete listing of states with similar insurance laws, regulations, or DOI directives (it's a public page so agents can send their insureds and certificate holders to it): www.iiaba.net/VU/NonMember/WilsonCertLawsRegs.htm."

Bill also provided the following great advice and insight:

"Many/most of the contracts that insureds enter into require 30 days notice of cancellation. Most insurers won't provide notice to anyone other than the First Named Insured. For those insurers who will add a cancellation notice endorsement, it almost always makes an exception for 10 days notice if cancellation is for nonpayment. The contract the insured signed most likely doesn't care about reasons…its simply requires 30 days notice for ANY reason.

"A further complication is that these contracts don't distinguish between cancellation by the insured or insurer. In many/most states, by statute, the insured can cancel immediately in writing for any reason. The policy is a contract between insured and insurer so, if one party (the insured) legally and unilaterally cancels a bilateral contract (the policy), how can the insurer legally keep that contract in force to the benefit of the certificate holder? The insured has just cancelled/terminated/voided the contract. I'm not an attorney but I don't know how the insurer can legally extend coverage to the certificate holder.

"The certificate holder and the insured can enter into any kind of contract they want to, but the agent and insurer are not bound by the terms of that contract. Certificate holders are using the threat of not giving someone a job or paying for a job already completed as a means of bludgeoning the agent or insurer into meeting the demands of a contract that they are not a party to. So, the bottom line in many/most states is that the certificate holder is asking the agent or insurer to do something that is impossible and/or illegal. It's just that simple."

This last point is critical. An agency may be faced with losing business because they will not provide a certificate that is not legal and ethical while another agency, through ignorance, incompetence, or unethical mores, is completely willing to provide such a certificate. To create a fair playing field, agents may want to work through their state associations who in turn may want to work with the state insurance departments to increase enforcement of situations in which wrongful certificates are being used.

One key item to consider is that not all states are the same relative to certificates, and especially the new certificate forms. I strongly encourage all readers to verify the appropriate processing of certificates per their state's laws and regulations.

Another issue that exists is that some agencies' agency management systems may not yet be capable of fully processing and integrating this new form, including an inability to print the historic form rather than the new form. This creates a huge E&O issue. Be extremely aware of how your system is processing certificates and put pressure, if necessary, on your vendor to fix any problems that exist ASAP. Meanwhile, if a problem does exist, absolutely make sure everyone in your agency knows what the problem is and create an appropriate fix so that any certificates mailed are correct.

This is a huge change in our industry. And while you may not like the change or all the extra work created, we have to make the best of it. Education is key and the Virtual University is an excellent source for this education.

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Great advice, but don't forget
the most important part: the execution!

The key point of a cover story in a major industry magazine was "Agencies need to become more efficient." Awesome! Why haven't agency owners figured this out all by themselves?

Advice like this is stating the obvious as if stating the obvious is important. Stating the obvious is easy. The hard part is execution. How about providing the reader with some detailed strategies about how to become more efficient? That's the hard part.

It's like telling an athletic team, "The key to success is winning!" Or telling people to "invest smarter." "Thanks for the tip, I'll stop trying to invest stupidly!" Or politicians saying, "Better take care of yourself so we can pay for the health plan." "Good idea, I'll stop trying to get sick!"

A country or a company that talks in platitudes has no where to go but down. I find it frustrating that publications and media even give these people a venue to voice themselves. But maybe that's more a factor of what the audience wants to hear and read. Perhaps these non-solutions are more palatable to most people because the reality is too hard to swallow. But for those who really want to succeed, let's try some real solutions.

In agencies, the most common situation of stating the obvious is when agency owners tell their producers, time after time, they need to just go out and sell. The producers know this (well, ok, not all of them do) but if they are not doing it, some factor is blocking them from making sales. If a producer has been struggling for a while, I rarely see producers greatly improve without something significant improving within the producer's job. In some cases, it is the realization they should not be producers. In some cases, it is the realization they need to find a way to sell that fits their personalities. Hopefully, this method dovetails with the agency's own personality, but if not, the agency and the producer may both be better off without each other.

Other situations require technical training or sales training. Sometimes the situation is improved by detailed monitoring of where sales are failing. In fact, one key executable suggestion is that agencies can greatly improve their future if they will minutely track every sale, from start to finish, for every producer. Track it from the lead source to the final result. Track the type of account, the size of account, the lead source, the competition, the carriers involved, the decision points, the point at which the sale was lost or made, and any other pertinent factor. Then look at the results. Almost no agency I have ever visited has any documentation recording why their producers succeed or do not succeed. This does not need to be a complex task, but it is critical IF an agency wants to improve its producers' success. They need to know where they need help, they need to know their strengths, and they need help refining the techniques that work best for them.

The opposite extreme of stating the obvious is telling others exactly what they should do, and this is rarely helpful either. For example, I hear agency owner after agency owner saying, "How stupid can carriers be for cutting rates so low! They have to know the loss ratios are going to skyrocket in just a short time!" I see many agencies doing their very best to save companies from themselves today by trying to protect their loss ratios, all to the deafening reply from companies, "Loss ratios don't matter, just grow the book!" By the way, this is a verbatim remark which has been repeated to me by multiple agents involving one particularly large carrier. These companies are simply not going to listen.

Life is simpler when we focus on what we can control and let the rest go by the wayside. The carriers that no longer care about loss ratios will have problems in the future without a doubt. What can an agency do about it? If the book is small with poor prospects, now is an awesome time to roll the book to a smarter carrier. There may be that one account that has no other home, but maybe that one account is no longer worth the pain or maybe another home is available for it. Now is a great time to market it. If the book is large and you need that carrier, it's time to hedge your bets. They are the same carrier that is going to be non-renewing more than their share of business when loss ratios rise. If the agency can minimize the re-underwriting activity, it will have more resources to dedicate to new sales when the time comes.

The questions to consider now include: How important are the accounts being placed with that carrier? Do I have a good secondary carrier when their appetite changes? Can I buy myself some time with better carriers letting them know my plans? What can I get now for growing the book knowing the agency's profit sharing will be hurt when loss ratios rise?

Maybe those thoughts are too far down the road to consider for some, but I encourage you to be planning now because I am certain those agencies that have the most proactive carrier strategies will realize much more success when the market turns hard.

It is frustrating when people tell us what we should or should not do when the statement is already obvious. When we turn the table and find ourselves making the same mistake, the truth is the speaker is failing to recognize their own limitations. So when you make these statements regarding producers and carriers, are you failing to recognize your own limitations? If so, what specific actions can you take to brighten your future?

The greatest executable step every reader can take is to consider your strengths and weaknesses relative to your producers and carriers. The second step is to create a plan to build on the strengths and minimize the weaknesses. This is an obvious suggestion, but few agency owners have an adequate plan, including strict owner accountability, for getting the job done. Future success depends on owner accountability, so get started today!

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What's the big deal about Written Procedures?

Developing written procedures is time consuming, costs money, and can be an aggravating process but the investment is absolutely worth it. Perhaps the biggest reason for developing procedures is personal accountability. When procedures are enforced, all employees, including owners, are required to follow them. This creates considerable personal accountability and a lot of agency owners do not want personal accountability. They do not want to follow rules, so the agency never develops or follows procedures.

But is the pain of following procedures and being personally accountable worth it to increase productivity, increase profits, improve the development of new people, increase revenue, and significantly decrease errors and omissions exposure? Agency owners simply can't have it both ways.

Consider what an agency jeopardizes without written procedures:

• Without written procedures: How can a new staff person know how to process and service accounts correctly? Sure, an experienced person can tell them. But without procedures, can you be sure they are told everything--and told everything correctly? What if different people do things differently? Who does the new person believe? This certainly makes learning and training much more difficult.

• Without written procedures: How can an agency defend against a plaintiff's argument that the agency is liable because they did not follow procedures? Some attorneys turn this argument around by suggesting agencies should not have procedures because they can be defended with the argument, "They have no procedures so how can they do anything wrong?" I understand this is a legal defense, but this also suggests the agency is incompetent. They have no rules and no standards so of course they messed up.

Reality is that if an agency has good procedures that are followed, the odds of a claim significantly decrease.

• Without written procedures: How do you manage your people? How can you prevent mistakes without procedures or rules? How can you define a mistake without rules?

• Without written procedures: How can you ever prove an employee is not doing his or her job if there is no job definition, if there is no instruction on how to do the job, no set of rules pertaining to the job, no consistency, and if no two people have the same standards?

So how do you get started? Here are a few tips for developing written procedures:

1. Don't do it all by yourself. Seek guidance from an expert. There are experts who specialize in procedures so you are less likely to miss something. More important, agencies that try to do it by themselves usually take far too long trying to get everything right. They get lost in the details and never finish. The few times I have seen agencies develop quality procedures manuals on their own, the person developing them had almost no insurance experience so they could focus on the end result without getting caught up in the details.

2. Do not buy boilerplated procedures manuals and try to customize them. Too often this is a waste of good intentions and money because the staff does not develop enough vested interest in the process.

I have, however, seen a couple of excellent and reasonably-priced boilerplate procedures manuals. Once an agency's procedures manual is complete, these boilerplate manuals make good investments as a final check to make sure the agency has not missed anything easy.

3. Involve the entire agency so that everyone has a vested interest. When employees develop procedures along with the help of an expert, they have enough vested interest to want to see them succeed. Additionally, they learn the procedures as the procedures are developed (so they do not have to read the procedures manual to learn it). Adults learn by doing.

4. Cut the process into small steps, but keep the project moving.

5. Consider two manuals. Develop one for basic procedures and one for the agency management system. One benefit of this approach is that the job is not so overwhelming. Another benefit is that basic procedures are partially unrelated to the agency's management system so there is room for flexibility. My experience is that when agencies upgrade their agency management system, they rarely update their procedures manual simply because upgrading the management system is itself overwhelming. With two different manuals, at least the procedures manual does not fall into disuse. When the shock of the system upgrade is over, the agency can return to the keystroke manual and upgrade it then.

6. Keep procedures up-to-date! Procedures manuals are living documents. They are never complete. So once a month, update a procedure. Also, teach a procedure once a month. Have different people do the teaching.

Finally, audit compliance:

• Procedures are worse than worthless if people do not follow them. The attorneys are right about this point. So it is important to audit compliance with procedures. The first go-around should be educational rather than pure auditing. Don't just audit staff compliance either--audit producer compliance as well. Too many agencies make the mistake of acting as though procedures only apply to staff.

• Pick 10 to 20 files a quarter per person and have your most knowledgeable and detailed person go through them to determine if procedures have been followed. If this does not work, audit everything. A complete audit is expensive and difficult, but some agencies learn they have no alternative. Typically, the agency has to hire a full-time auditor.

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Problems are so easy to see when they're someone else's!

Consider these examples:

• The agency owner who hires a producer who clearly has no selling ability. Everyone except the agency owner can see the person will go nowhere as a producer.
• The agency owner who signs contracts with carriers and vendors without even glancing at what is in the contracts.
• The serial acquirer who buys agencies without any due diligence.
• The agency that puts customers into a small account department with very limited services but promises all clients, per their brochure and web-site, the best coverages and professional advice.

I am willing to bet every reader can identify with how basic these mistakes are and how important it is to avoid them. Few agency owners would ever purposely make any of these mistakes but these types of mistakes occur every day. The good news is they can be easily corrected if the agency owner has the ability to see the problem for what it is when confronted with it. Seeing a problem is incredibly easy when the problem is not your own because no emotions are involved to cloud your vision. When the problem is yours, the key is to not let your emotions blind you.

Emotions are powerful. In fact, I have seen agency owners go completely blind even when confronted with a problem as basic as trust money. I've seen agency owners deny that being severely out of trust is a problem, even when the legality of the issue is clear and even when their attorney tells them it's a problem. They would absolutely see the issue if it was someone else's problem. But when it is theirs, they start to rationalize. They start believing it's okay because their carriers are being paid on time so no one will ever know. Emotions will trump the facts in decision making almost every time.

So when you examine your agency, how clearly are you really seeing it? Are you seeing your lack of growth for what it is? I know the market is soft and the economy is poor. Growth is tough and these factors are out of your control. But this is not where the thought process should end. Are you seeing both top and bottom line growth from your marketing expenditures? If not, why keep spending the money? Are your producers making enough calls? Opportunity is not going to knock on your door in this economy, you've got to be knocking on opportunity's door.

When you see producers that only have $100,000 commissions after five or even ten years, do you rationalize why it is okay for them to have such a small book? I have heard dozens of rationalizations, including:

• "When he started 20 years ago, we didn't tell him any different."
• "He can't sell but he works hard, so it's okay."
• "It's a tough market."
• "He was never trained."
• "We don't have the right companies."
• So on and so forth.

If you've heard yourself or partners make rationalizations, at least you are beginning to see the problem for what it is. Now can you see the solution for what it is and act upon it? This is one of those easier said than done situations. Now that you see what needs to be done, it's tough to do it. I have personally found it is easier to take the correct action sooner rather than later. The pain is going to be the same either way so why not get it over with? To my surprise and to the surprise of many clients, the tough action often has unexpected positive consequences because everyone else in the agency already knew the problem and the solution. They were just waiting on the owner to take the appropriate action. Even when a producer or CSR is fired, they are sometimes relieved because they knew they were failing. The result is everyone's vision of the future improves.

So here's the challenge: If you were someone else looking at your agency, what would you see and what would you recommend?

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NOTE:  The information provided in this newsletter is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.

Burand & Associates, LLC is an advocate of agencies which constructively manage and improve their contingency contracts by learning how to negotiate and use their contingency contracts more effectively.  We maintain that agents can achieve considerably better results without ever taking actions that are detrimental or disadvantageous to the insureds. We have never and would not ever recommend an agent or agency implement a policy or otherwise advocate increasing its contingency income ahead of the insureds' interests.

A complete understanding of the subjects covered in this newsletter may require broader and additional knowledge beyond the information presented. None of the materials in this newsletter should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this newsletter. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.

If you wish to be removed from this mailing, please e-mail AgencyAdviser@burand-associates.com. Copyright 1995 - 2010, Chris Burand