An Insurance Agent and an Attorney walked into a Bar
I read about an E&O case where an insured asked for complete auto coverage but failed to explicitly ask for collision coverage, so the agent only sold them comprehensive and liability coverages. Why the agent did not verify with the client that they did not want collision coverage is beyond me, but the agent did not ask. The insured had a collision, discovered they had no coverage, and sued the agent for E&O. The agent's defense was that the insured asked for complete coverage and not specifically collision and had a duty to read his policy. The agent won.
An insurance agent went to an attorney and asked for a producer contract. The attorney sent him a contract a month later accompanied by an invoice for $4,500. It was a lousy contract, but the agent got what they asked for, a producer contract. Turnabout is fair play.
The attorney fulfilled his duty. The agent did not know which clauses and conditions should be included in the contract any more than most insureds know what coverages to request, especially for commercial policies, but also for homeowners policies. The agent complained that the reason they asked the attorney for a contract was they did not know what to include in the contract and the attorney should have known what was needed. The insured thought the agent should have specifically offered collision coverage (I agree) because the insured did not know what to request. Ignorance was bliss for both the insured and the agent until the insured had an accident and a producer left the agency with their accounts. The judge held that the contract's restrictive provisions were invalid.
A different judge ruled that the agency did not fail the insured because the insured should have read the policy, understood all the provisions, terms, and requested the correct coverages. Did the attorney fail the agent any more than the agent failed the insured?
A small business owner went to an agent to buy a workers compensation policy and liability and property coverage. The agent asked how much liability coverage the insured wanted and the prospective client said that his client contracts required him to have $1 million in liability coverage. When asked how much property coverage was needed, the insured was not sure. The agent offered $100,000 and the insured thought that with depreciation, $100,000 would be adequate.
A few months ago, the insured's building caught fire which then spread to the rest of their $20 million building. They tried to replace their equipment only to discover the replacement cost was $500,000. They slept very little after learning they had no material coverage. Did their agent do their job? The agent provided what the insured requested. Should it have been obvious to the agent that the insured needed to be educated about the difference between depreciated costs and replacement costs? Obviously, but the standard of care for an order taker is generally to take orders and not offer advice or education.
Agents have a serious contradiction of purpose which has existed since the industry began and has always been an issue. Now, due to an insured's more complex needs, technology, regulation, and much more aggressive competition, the contradiction is creating more branding issues, sales choke points, compensation issues, and legal problems.
The purpose of insurance is to protect an insured's assets, or more precisely, reinstate an insured's balance sheet to the same numbers present immediately prior to their loss. If an insured is sued and loses $2 million and they have $2 million or more liability coverage, insurance pays for the suit and the insured's balance sheet is protected. Rather than having to write a $2 million check and seeing their balance sheet value decrease by $2 million, the insurance company writes the $2 million check thereby protecting the insured’s balance sheet. If the insured wins, a good policy pays for defense and the cash on their balance sheet also remains unchanged.
If an insured's building has a fire or burns to the ground, the building is rebuilt to the same status, sometimes better, as it was just prior to the fire and the value of the building on the balance sheet is restored. Restoring the balance sheet, thereby protecting the balance sheet, is the singular primary purpose of insurance. This rule is basic, hour one of an insurance education (at least a quality education).
Yet most of the agents and company people I encounter, including people with many designations, do not know or understand this important rule. Their ignorance contributes to the awful reputation of the insurance industry.
Protecting assets is the fundamental foundation of insurance--bar nothing. Yet agents depend on a standard of care, a legal standard whereby they often cannot be held accountable for deficiencies in coverage (coverage is the balance sheet protection offered, the coverages afforded) provided they sold to the insured what the insured ordered. Yet, nearly 100% of insureds do not know enough about insurance or even their assets, much less the ways in which their assets need to be covered, to place an order with an agent for $X property and $Y liability and leave with any confidence they have adequate coverage.
Why am I so confident nearly 100% of insureds, commercial insureds too, do not know what coverages they need? Because virtually 100% of agents do not know how to cover their clients adequately and they have a license. So why should we expect unlicensed people to know more about insurance than licensed people?
If the purpose of insurance is to protect assets and the distributors of insurance (agents and brokers) lack the knowledge and lack the standard of care to deliver such protection, a contradiction exists between purpose and execution. The result is a lousy reputation because alignment between the purpose and delivery is broken.
No one needs an attorney who offers a generic and useless contract. The fee is a complete waste of money. An insurance policy that does not provide coverage is wasted money.
Carriers have done a rather good job of providing coverage options, however, those options are useless if their distributors do not know how to use these coverages well. Why spend money developing options, if the agents cannot be bothered to offer those options to their clients who need them?
Several new insurance distributors have figured all this out. They have identified that traditional distributors, including large brokers, have failed to recognize the opportunity to provide clients with the coverages they really need. These new players see that most producers are superfluous to the process.
They see an opportunity to cut the charade of pretending to offer expert advice while hiding behind the "duty to read the policy and I'm just an order taker" defense. Distributors should be up front and not pretend that they are employing producers who are actually offering advice, but are just order takers--cheaper order takers. No pretense or wishful thinking by an agency is adding an iota of value, even though they are continuing to collect full commissions. Instead, cut the producers, negotiate a better filed rate with carriers, and gain a huge competitive advantage by being honest – that they are nothing more than order takers at a lower price.
Independent agents are paid more, in theory, because the sales brand and cost of building the brand's reputation lies with the agency, not the company, as opposed to direct writers where brand building lies with the carrier.
IA carriers are currently enjoying strong profits, no matter what they say, if they are having a problem, it is their problem. The smart ones see clouds looming and they see they are paying order taker agents too much. Progressive figured that out long ago.
The plethora of silly insurance commercials funded with billions of dollars is still far, far cheaper than paying order taker agents commissions commensurate with a professional. Order takers are not professionals and do not deserve professional levels of pay. There is this myth that no one in the IA world seems to check regarding the price of these advertisements. One myth is that for some reason, the price of the advertisements is otherwise excluded from their expense ratios--a nonsensical thought process.
But for those doubting me, GEICO's expense load is about 11%, less than the commission expense alone for traditional IA carriers.
These advertisements work so well that two such carriers combined are growing by about $10 billion NPW annually. These two carriers are eating away at other carriers' market share and their low expense ratios are a key reason why they succeed. The easiest savings is the elimination of agency commission for agents who do not perform any real value.
One component is brand representation. Think of a NASCAR driver. Their cars and fire suits have all kinds of logos on them because they are a brand representative. They sell the brand. How is an agent who does not know coverages represent a carrier? Well or ineptly? When that claim is not paid because the agent did not offer the right coverages, who usually gets blamed? How well is the agent actually representing the carrier? What happens in the social media world?
This is the new reality. Some of the private equity players have figured out that many producers are useless so they fired them and kept the profits while carriers keep paying full commissions. When will carriers quit paying excessive commissions to parties who do not offer adequate protection to insureds and have poor brand representation?
The time has long since passed to establish a two tier licensing system and for the insurance commissioners, if they really are for protecting consumers, to get behind a license for order takers and a separate license for professionals. Unfortunately, too many forces exist at every level protecting the status quo.
I can help build structures for agents and carriers desiring to be professionals or be a representative who is a professional which would offer much better compensation models for all involved. I can build the metrics and strategies for carriers before their more efficient competitors take a few hundred million, or billion, in market share. The race to offer pretend value at higher profit margins has been run and the winners declared. If you were not at the winner's circle, you are not the winner. Your opportunity now is to build back true value.
NOTE: The information provided herein 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.
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.