Plaintiff Attorneys and Insurance Carriers

Have you ever seen a suspense movie with unexpected twists of who is on whose side? Or a spy movie where two enemy states find some reason to work together to destroy some other third party?

Well, that is sort of what happens between plaintiff firms and insurance companies. On the surface, they spend a ton of money convincing the public and courts that they are mortal enemies. However, both achieve greater success when plaintiff firms prevail, provided the wins are not so significant that a carrier becomes insolvent or faces financial difficulties.

The value to the plaintiff firm in winning is rather apparent. But what is the value to an insurance company? The losses cause the carrier to increase rates. When rates increase, especially when all key competitors face the same pressure, revenues increase. When revenues increase, the carrier executives look like they are great leaders. Sure, they have losses, but if they can increase rates slightly faster than losses, their profits increase too.

And indeed, carrier results follow this trend. Net premiums written have increased faster than consumer inflation and claims cost virtually every year since the credit crisis. I might expect really fast claims cost inflation, but the carriers are increasing rates even faster. Furthermore, an increase in GDP does not explain the difference because premiums are also increasing faster than GDP.

Carriers benefit from the plaintiff’s bar. The worst thing that could happen to insurance companies is the elimination of the plaintiff’s bar. If the threat of legal liability were eliminated, no one would need to buy liability coverage. The only issue is moderation.

This alignment between carriers and plaintiff firms may explain why insurance companies don’t pursue tort reform as vigorously as agents and other business lobbies do. Many carriers really couldn't care less about risk mitigation, loss control, tort reform (within limits), and so forth because all those activities decrease the need for insurance.

The only time insurance companies generally care about loss control and risk management is when they believe they can use it without other carriers successfully copying them, thereby enabling them to reduce their rates slightly below the market rate. This makes their offerings appealing to consumers, and the carrier retains the additional profits.

I find that the best agencies are 100% emotionally connected with their clients. While agents also benefit from increasing rates, I don’t know many who celebrate having to sell the sky-high rates. Maybe in some big shops the emotional attachment is diluted so they enjoy astronomical rates, but I find most traditional agencies do not. They are more than willing to take less commission if they can offer a lower rate and good coverages.

Agents’ lobbying groups also work hard, not always effectively, but they work hard to convince legislators of the need to promote tort reform and stronger building codes. Carriers also like stronger building codes, provided they are not forced to discount rates.

When agents’ interests are more closely aligned with consumers’ needs, a significant opportunity is created. Instead of focusing on insipid commercials advertising price (and there is no doubt that price is more important than ever), focus on and advertise that you, as an independent agent, can and will be the consumer advocate against insurance companies and the plaintiff bar.

Independent agents have this option, whereas other agents do not. This is because independent agents, by default, already work on behalf of the insureds, unless their carrier contracts override this option. Other agents work strictly for the companies they represent, so as an independent agent, you should consider making this point.

If agents really want to step it up, they can go further. I know all the E&O defense attorneys and most instructors and auditors will cringe (keep in mind, I’m an approved auditor, an authorized instructor, and have been an expert witness on these matters) at the idea of meeting the professional standard of care. Go the extra mile and truly be the advocate (within the boundaries of your carrier contracts).

This means identifying exposures and exploring options beyond buying an insurance contract that transfers part of the risk. It means potentially becoming adequately educated in alternative risk transfer so you can place your clients with low exposures and great risk management in these alternative markets. Become technically competent so when carriers deny coverage for claims that should be covered, you exhibit deep knowledge and you can articulate your point clearly and professionally.

Stop working for commissions while you are at it. If you go to fees, your E&O standard of care goes to an extremely high level. But in my experience, the best agents don’t need to worry about this because through their work, the odds of their clients incurring uncovered claims are materially lower. A high standard of care is only a threat to incompetent peddlers of insurance, especially to those who pretend they’re professional.

Fees done correctly, and every state permits fees when done correctly per that state’s rules, pay better than commissions. Furthermore, it demonstrates to clients you are on their side because you don’t receive higher compensation if premiums increase. We are back to the alignment of interests between the insured and the agent. This also fosters a stronger sense of teamwork when interests are aligned, especially when the team is opposing the large forces of insurance companies and plaintiff attorneys. Beyond the additional revenue, you fight fewer battles in this model. It is just a better path for the professional agent and their clients.

For more information on how to step it up, contact me at chris@burand-associates.com.

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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.