Myths, legends and lies are hard to dispel and correct, especially when doing so appears to financially harm the teller or believer. If the myth is true, the client (the teller/believer) does not need to purchase the coverage on which the lie is based; but if the information is false, the insured is forced to make a business decision not previously required.
Belief in and dependence on an insurance lie can financially harm the insured far more than the additional premium necessary to cover the exposure masked by the myth. But be warned, exposing these, or any, insurance lies leads to charges like, “You’re only trying to make more money off me.” Or, “Well that’s not what ‘so-and-so’ told me.”
Remember, “so-and-so” being quoted is not the insurance professional; further, the mere fact that a multitude of people believe in a lie or myth does not change or alter reality. The agent’s job is twofold: 1) ferret out and expose these lies to the client; and 2) be prepared with the factual data (policy language) and anecdotal evidence (court cases, etc.) necessary to convince the client of the truth. (Stories work best.)
Beyond the non-insurance “so-and-so’s” spreading these lies, there are also agents perpetuating some insurance myths. When insurance agents or other so-called “financial experts” put their seal on such harmful lies, correcting the problem is that much harder. Lack of knowledge or dependence on what the agent heard someone else say without checking the facts are the two main causes an agent might pass along false information.
Following is a short list of myths, legends and lies told by and believed by insurance clients. Some of these are the result of just plain ignorance (not stupidity, just lack of understanding); some are the result of an “expert’s” faulty advice; and a few are actually promulgated and spread by insurance professionals. The list is far from all-inclusive.
“If I don’t have anything, they (the plaintiff, lawyers and court) can’t get anything; you can’t get blood out of a turnip.”
Want to bet? The belief that an at-fault individual cannot be financially harmed because he doesn’t have much is one of the most insidious lies conceived by its originator. Future wages can be attached; possessions can have liens placed against them, etc. Many states don’t allow the court to take someone’s house in settlement, but the at-fault party will be unable to amass much beyond the house until the debt is satisfied. A lot of what can be done might be subject to state law, but the pound of flesh will somehow be exacted.
“There is no need to purchase liability limits higher than my net worth.”
A slightly smarter version of the above lie. A person’s net worth is the value of all they own minus all they owe; why should it be the magic number, that’s not all the attorney is going to ask the court to award. More than one individual with a net worth of $250,000 (for example) has lost a $1 million (or more) negligence suit. A key rule of risk management is, “don’t risk a lot for a little.” Umbrella and excess policies are very inexpensive, bordering on cheap, compared to the limits that can be purchased – invest the small amount of money in the large amount of protection.
“That’s why I buy insurance.”
The context of this statement indicates whether this is a problem. If the insured has done all he can reasonably do to avoid a loss or injury (to the point of maximum benefit without undue burden), then there is nothing intrinsically wrong with this statement. However, if this statement is made because the insured is unwilling to take any or very few steps necessary to reduce the potential for injury or damage to persons or property, then his attitude has morphed into a morale hazard. While this may not be a limits or coverage myth, it is a statement that should make the agent question whether or not this is an insured with whom she wants to do business. Additionally, claims submitted by such individuals may need to be viewed with an eye towards possible “irregularities.”
“Corporate status will protect me from liability; I’ll just declare bankruptcy and shut down.”
Courts can and do pierce the corporate veil in small, closely held corporations. Not being able to provide legal advice (which is a disclaimer agents should provide), this is not to be construed as legal advice; but do not let a statement such as this one go by unchallenged. Governance and tax considerations should drive the choice of a legal entity-type, not protection against personal liability. A one- or two-man corporation can very likely expect to see the veil of corporate protection removed if the injury or damage is severe enough. Many insureds use this myth to avoid purchasing an umbrella or excess policy. As stated above, don’t risk a lot for a little; find court cases where the veil has been pierced and the affect on the owners.
“Public adjusters are bad (or good).”
Agents and adjusters generally portray public adjusters as bad for one of two reasons: 1) agents don’t want their clients to think another party can do something for them they can’t; and 2) adjusters may not want to deal with someone who knows as much or more than him/her about the policy language and coverage.
Agents owe a specific contractual duty to the insurance carrier and can only go so far in helping the insured following a loss. Also, agencies likely do not have the manpower necessary to do all the work that a public adjuster does (the good ones anyway). Public adjusters can also devote more time to the claim than the agent. Helping an insured find a REPUTABLE public adjuster may actually be a good service. The key is reputable as there are a lot of public adjusters that, let’s be honest, fraudulently inflate claims and those that charge an unreasonable percentage of the settlement amount.
Adjusters and insurers who do a good job of helping the insured will not trigger the need for a public adjuster. But no adjuster doing a good job should be threatened by an ETHICAL public adjusting firm’s involvement. In fact, an ethical firm can make the adjuster’s job easier because they are thoroughly familiar with the process and can get the claim closed more quickly and efficiently. Unethical firms make an adjuster’s job harder and may actually push fraud on an unsuspecting insured.
Public adjusters are either good or bad depending on the ethics of the firm and the circumstances of the loss. An ethical firm will try to get the insured exactly what they are owed as per the policy provisions and limits. Unethical firms use teabags to stain walls and do other things to try to garner settlements higher than owed based on the original loss (editorial comment: unethical public adjusting firms should be exposed and run out of the business).
“Insurance is all the same.”
This myth is the hardest to overcome. GEICO, Progressive, Allstate and others have effectively convinced our clients that insurance is all about price. Even insurance agents have contributed to this lie. My first phone calls as an agent began with, “I’d like to see if I can save you money on your insurance.”
Insurance should be about the protection provided not the cost – a truism it took me a couple years to learn as an agent. That is not to say the cost should not be considered, but we must remove the idea from our client’s minds that insurance is all about price.
Agents must, somehow, remove cost from the equation and replace it with value. I recently challenged an agent saying I can ALWAYS build an insurance package at a lower price than anything he can offer; but my follow-up question was, “But will it provide all the necessary protection?” Overcoming this myth requires a similar challenge to the insured; remember the fear of loss is often greater than the desire for gain. A poorly designed insurance program (i.e. the cheapest policy) can cause a major loss in the insured’s bottom line (the one looked at and depended on most heavily). Show the insured how the program protects the bottom line, not how it lowers expenses.
“It’s better to pay small liability claims out-of-pocket rather than report them to the insurance carrier.”
Who gives this advice; lawyers, insurance agents or the guy down the street who feels like he got away with an accident without it affecting his insurance premiums? I myself was a party to one of these situations on my way to visit a client.
Traffic was stop-and-go and the guy in the truck behind me neglected to do the first part – stop – and he rear-ended my vehicle. Pulling off the road into a parking lot to avoid holding traffic up even more, we exited our vehicles to inspect the damage. The driver apologized and admitted he just wasn’t paying attention (first mistake); talking further he asked, “I wonder how much it’ll cost to fix your bumper?” As it happened, we had pulled into the parking lot of an auto body shop, so I said, “Let’s ask.” (This is absolutely true.)
I found a service tech, he made a phone call and said it would cost $565 for parts and labor. The guy who hit me said, “Let me go to the bank, I’ll get you the money.” Now, I had him give me his driver’s license to hold until he returned to assure he would come back (he offered me his son to hold, but I already have two kids and didn’t want to risk adding a third). Fifteen minutes later he returned with cash in hand, I had the body shop order the part and the bumper was expertly replaced and he has nothing on his insurance or driving record. I did advise him to let his agent know, and I’m sure he did so that same day – NOT.
This appeared to work to his benefit; but what if, after thinking about it for a day or two, I decided to make some money off this accident? Is there a chance I could have begun suffering from “non-specific soft tissue injury” and developed some pain that could have only been cured by a large cash settlement?
The answer is, yes. Once he received a letter from my attorney and tried to report the claim to his insurance carrier, could they have denied the claim? Based on personal and commercial auto policy provisions, yes the claim could be denied as prompt notice was not provided to the carrier as per the “Duties…” requirements.
Make sure your client notifies you. From there, it depends on the relationship between you as the agent and the insurance carrier. Business auto policies state that the insured must notify an “authorized representative.” Personal auto policies simple say “We must be notified.” It is not clear if “we” includes the agent – that question is answered in the agency/company contract.
“Statute does not require me to have workers’ compensation, thus you (a higher tier contractor) can’t require it either.”
Most states require an employer with one or more employees to purchase workers’ compensation. However, 13 states don’t require workers’ compensation until the number of employees surpasses a certain threshold (usually three, four or five).
Regardless, statute is the minimum requirement in a particular jurisdiction. A contract can place requirements on the parties to a contract more stringent than statute; contracts just cannot relieve parties of statutory duties (allow them to do less than is required by law). Thus, if a contract requires a subcontractor to provide workers’ compensation coverage, then work comp must be provided even if the subcontractor has less than the minimum number of employees required by statute.
“I pay him with a 1099. He’s an independent contractor, not an employee.”
IRS and insurance rules differ greatly regarding the definition of an “employee.” Paying someone with a 1099 might make the worker an independent contractor for tax purposes (it’s not that simple with the IRS either) but there are far more stringent requirements within workers’ compensation administrative procedures as to whether the person qualifies as an independent contractor or an employee. Anytime a client floats this potential lie (or misunderstanding), more questions are needed to ferret out the truth. Examples of questions include, but are not limited to:
- Does the employer/contracting party control the worker’s ways and means (i.e. does the employer tell the contractor when to show up, how to do the job and when to leave, or is the contractor free to perform the obligation and come and go as he pleases?);
- Are the tools and materials supplied by the employer/contracting party or the worker;
- Does the independent contractor work for anyone else or is his sole or major source of income the contracting party; and
- Does the “independent contractor” carry his own insurance?
The level of control is the deciding factor when deciding whether a worker is truly an independent contractor or a “de facto” employee (based on the totality of the control). Don’t allow the insured’s belief that a 1099 is sufficient to allow the employer/insured to avoid accepting responsibility for an injury to the worker.
(Information taken from, “The Insurance Professional’s Practical Guide to Workers’ Compensation: From History through Audit.”)
“If a workers’ compensation injury is less than a certain amount, I do not have to report it to the insurance company.”
Well-meaning agents may have been the creator and perpetuator of this myth. First Report of Injury laws in some states do not require the state to be notified of an injury unless it surpasses a certain threshold. The labor department in one state, for example, does not have to be notified of an injury unless it exceeds $2,000 in medical costs or results in one or more days of lost work.
Based on those requirements, it sounds reasonable for an agent to tell an employer not to notify the insurance carrier of a small claim (the worker needed a few stitches and was back to work that afternoon). However, the law says only that the STATE does not need to be notified unless the injury surpasses that threshold; nowhere does it relieve the employer of its duty to notify the insurer. In fact, the workers’ compensation policy specifically mandates the employer to notify the insurance carrier of all work related injuries, not just those that must be reported to the state. The reporting requirements before a state must be notified are those placed on the insurance company (or self-insured entity) not the employer. Employers must report all work related injuries “at once.”
Not only is this belief fallacious because of a misreading of the statute, it is also dangerous should an injury be worse than originally thought. Use the above employee as an example. He just cut his finger and had to get stitches, not problem. But suppose he develops blood poisoning leading to major complications later; the insurance carrier may hold a hard line and deny coverage for failing to comply with the policy provisions found in Part Four of the Policy (“Your Duties If Injury Occurs”). Belief in this lie could be very expensive.
(First Report of Injury requirements for all 50 states can be found in Appendix “E” of “The Insurance Professional’s Practical Guide to Workers’ Compensation.”)
“Flood insurance is only for those in ‘flood zones.'”
Every structure located in an NFIP-participating community is in a “flood zone;” the insured’s house or building just may not be in one of the more hazardous zones. The client is really trying to say, “I don’t need flood insurance because I’m not in a special flood hazard area (SFHA).” They just don’t know the correct terminology, but agents need and must know the correct terms when discussing flood coverage. Further, being located outside a SFHA does not guarantee safety from flood loss. Approximately 30 percent of all flood claims are to properties outside of “high hazard” areas (Special Flood Hazard Areas).
Agents must be on the lookout for these and many other insurance myths, legends and lies. Remember, insureds should not be expected to be insurance experts are even proficient in insurance – that’s the agent’s role. But a result of this lack of knowledge is belief in wrong information. Be ready and able to combat these misplaced beliefs with facts. The client may hold fast (no one wants to admit they are wrong), but have them sign that they heard the truth (and follow it up with a letter) and sleep well in the knowledge that you did all you could to help your client.