The Customer's Duty to Read Their Policy
And Why Professional Agents Should Take Advantage of Amateur Agents
A recent Wall Street Journal article covered the disappointment, frustration, and resulting lawsuits pertaining to water damage claims that were incurred as a result of the deep freeze and energy debacle in Texas this past winter. The article did not address the latest black eye reputational damage to the industry and unfortunately, did not report a single good claim outcome. Interview after interview was conducted with many poor homeowners who had inadequate coverage. Some of their thoughts were seriously misguided resulting from a complete lack of knowledge about what their homeowners policies covered.
One person decried the fact that their water damage coverage was sub-limited. They seriously thought their $225,000 Coverage A applied to any and every loss. I can understand why a person without insurance knowledge would come to this conclusion. Moreover, the situation was made worse due to the shortage of contractors and building supplies which drove up the cost of repairs and resulted in insureds bumping up against sub-limits that would have otherwise been sufficient.
For the most part, the article focused on how Texas insurance law had changed 20 years or so ago to allow carriers to customize coverage because the previously mandated coverages were driving insurance carriers from the state. I do not think the article was as direct as the following statement, but it was basically asking, "Should the government protect people from themselves and from insurance companies by mandating certain coverages, even if this means insurance is more expensive and less available?"
I do not often agree with government regulators, but on this point I agree with those folks who believe more government intervention is necessary. No -- I do not agree that more government intervention is necessary, but I do agree with them relative to the reason they think it is necessary. They think it is necessary because they do not think people can make the appropriate insurance decisions because they do not trust people to read their insurance policies or compare coverages. That is the ONLY reason mandatory, government regulated homeowners insurance coverage for water damage would be promoted by people wanting more government intervention.
People do not read their policies AND I DON'T BLAME THEM! Consumers are caught in a bind. For years courts have ruled that, barring special circumstances, agents do not have a duty to verify that consumers have purchased the coverages they need. Consumers who go directly to the carrier do not have any opportunity to get quality advice. Many of the people working in insurance company service centers are not even licensed and so, by law, cannot offer any insurance advice. This is by the design of carriers to avoid E&O issues. "Dear valuable client -- you are on your own. Good luck reading and understanding a 20-page legal contract about which we do not trust our own service center people to provide advice."
Then, independent agents, who are the only people in a position to take the higher road and go to E&O classes are told to make sure not to create a situation in which the customer's duty to read their policy is negated. It is time for truly professional agents to make a name for themselves instead of hiding behind the defensive fortifications of the duty to read crenelated walls.
A professional agent is going to take the time to meet with clients and explain why nothing good comes from naming your own price and going to a direct carrier, except that you feel empowered to make decisions about which you are honestly incapable of making good choices. You simply do not have the knowledge (this is why a license is required to advise others on insurance coverages) and you do not have the energy to read and digest the insurance policy language.
A professional agent will take the time to understand your coverage needs and provide professional advice relative to those needs. A professional agent will explain the sub-limits and why those sub-limits are so often inadequate. A professional agent will not send you a renewal that states, "Here is your renewal. It is your duty to read this and let us know if you have any questions." Insureds need professional agents to advise them on the coverages they need.
A great example is how post-COVID homebuilding costs have skyrocketed while, simultaneously, people have made major improvements to their homes. All those people are now almost certainly materially under-insured (and absolutely no -- the guaranteed replacement costs endorsements do not cover these major home improvements). People love to share their home improvements with everyone but their agents. So, if you care about your clients, you will send them a letter asking if they have made any improvements to their property, and if so, recommend that a brand new replacement cost calculation be made. The automatic inflation factors alone are unlikely to adequately address the inflation in home rebuilding, which is another reason to evaluate the replacement cost again.
Of course, this is what a professional agent will do. Not an amateur. An amateur agent will pretend the assessment costs coverage for homes and condos in associations is always adequate. I am guessing that not a single condo owner in the recently collapsed building in Florida had adequate assessment coverage and I am guessing that in many cases, no one talked to them about buying additional assessment coverage. This is to be expected of amateurs who tell people it is their duty to read their policies.
A professional agent cannot do everything people may claim they should have done when the learn they are underinsured. For example, I saw a case where an insured claimed the agent should have searched the entire marketplace for the applicable coverage. A professional agent and an amateur agent will search the market differently, but zero agents can search the entire market. The mathematical permutations of such a search is humanly impossible -- even if -- all the data required to search the market was public, which it is not. As an example, a carrier advertised it had XYZ coverage. However, the agent was not appointed with that carrier, so they did not have this knowledge and possessed limited means by which to discover this coverage was offered as such advertisements are usually given to distributors only.
Additionally, just because a carrier says they offer a coverage, does not mean they actually offer it. I have seen this more than once. Furthermore, when a carrier says they offer a coverage, it does not necessarily mean they offer it in the insured’s state or at a price point that is affordable, and most importantly, it does not mean that within the fine print the exact coverage actually exists. There are around 1,000 P&C insurance companies in the U.S. and multiple forms exist for each coverage. I saw an estimate that 2,000 cyber forms have been filed, each different.
However, a professional agent will make a reasonable search, offer their best advice, and if the coverage is not a solid fit, advise the insured that it is not an exact fit. An exact fit may exist, but you cannot reasonably find it and then give the insured the option to search. Most amateur agents will pretend they have searched the entire market, that the coverage fits (usually because they are uneducated and have failed to ask the right questions so they will not know the coverage is not an exact fit), and that the insured has no need to search anywhere else because they are the best agent on earth.
It is time for professional agents to take more complete advantage of these amateurs. The sales models and even the agencies' business models are completely different. It begins with learning how to use checklists (I teach my clients to use exposure checklists rather than coverage checklists). Simultaneously, a requirement exists for producers to know the coverages they sell deeply, far deeper than I see most education provides. When I teach my proprietary education classes, we force muscle memory onto the participants. That is the key to our unique teaching. We teach people how to talk to insureds on a professional and a personal level that deepens the relationship.
And yes, the E&O standard of care does increase materially, but when you sell people the coverages they actually need a higher percentage of the time, E&O exposure decreases. Amateur agents get frightened when they think about the higher E&O standard of care, and they should be frightened because as amateurs they will fail to meet that higher standard. Professional agents understand they can meet that higher standard by selling their clients the coverages they need, but do not know they need, and that in doing so, their E&O exposures decrease, they make more money, and their clients give testimonials after claims rather than going to the newspaper with their truly sad stories of inadequate insurance coverage ruining their lives.
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.