An Apprenticeship

By | December 4, 2023

Recently, I spent a week learning about an entirely different industry than insurance. It was a great education. Along the way, I also learned about their insurance situation.

As is common, provably common, about insurance coverages for small and medium sized businesses, they were grossly underinsured. Our own industry states that 75% of small businesses are underinsured and more than 70% don’t even understand what business insurance covers, per a study by Hiscox published Oct. 16, 2023. To quote the famous Cool Hand Luke line, “What we have is a failure to communicate.” That’s the nice way of putting it.

These businesses may be small to insurance agencies and companies, but these are big businesses to the owners and frankly, these are high-dollar assets relative to what normal middle class, even upper middle class, people will accumulate. The industry talks down about these businesses too often and pays too little attention to them to the point they don’t even make an attempt to sell them the coverages they likely need, as my 30 years of E&O audits prove. Recently in an E&O audit, a producer even argued he should not offer all the coverages a client might need. How shortsighted is that argument?

Apprenticeship Lessons

My apprenticeship was with a firm with an asset value of probably $5 million; $5 million is a lot of money by most people’s standards. It is a family firm and everything the family has built is in that $5 million asset. Their business is complex with different owners of their different entities and operating in very different industries though in a concentrated geographic area. If they were to be sued (their physical infrastructure is minor compared to their liability exposures) successfully or even unsuccessfully, if their liability coverage is written incorrectly they could lose everything.

My goal was to learn about their business and forget about insurance for a while, but me being me, I had to quiz them on their insurance. It turns out, their agent has written their insurance horribly wrong on multiple levels. For example, their agent told the owner it was against state workers’ compensation rules for him to buy workers’ compensation on the owner himself. An agent giving that advice should have their license revoked, and yet I’ve heard many agents who once took a CE course tell me this is true.

A workers’ comp policy for an owner of a small to medium business is likely the most cost-efficient policy he/she can buy. It is a death policy, a disability policy, and an injury policy all wrapped in one premium. The benefits are strong and, in some situations, almost unlimited. If these business owners suffer an injury or death, the business may fail and in doing so, their family will suffer seriously.

For those seriously uninformed agents who advise, “Well, your health insurance will cover you.” Do you ever think why medical insurance claims ask where the injury happened? Have you read the health insurance policies that exclude coverage for injuries that could have been covered under other applicable insurance? In other words, if workers’ comp was available, even if the insured did not buy it, medical won’t cover the claim. And, medical insurance doesn’t cover death or disability.

Talk about a small business being underinsured! This small business owner had even asked to be covered for workers’ comp and the agent said it wasn’t available. That is a walking E&O claim on that agent’s entire book because I bet the agent has given all their small commercial clients the same incompetent advice.

Next, I asked about their vehicles to learn if the titles of the vehicles were insured under the correct policies. They have personally titled vehicles used almost exclusively for commercial purposes. That is a problem. They have vehicles titled under one entity but insured under another entity. There is no insurable interest here. In other words, the insured is paying premiums for arguably no insurance, other than the agent’s E&O insurance.

A producer recently grew rather furious with me for suggesting he needs to know whether the vehicles he’s insuring are titled to the company for whom he is writing the insurance. His initial response was, “How am I supposed to know?” Ask. He did not like that answer. His next response was, “That takes too much time!” It does take extra time to do your job correctly.

No one needs fake insurance, more legally known as illusory coverage. Every single person with an insurance license must decide for themselves whether they are going to sell insurance just to sell insurance, in other words be an order taker.

In auditing agencies, teaching classes, and doing due diligence on agencies for 30-plus years, I’ve found that order takers are dismissive to their clients in multiple demeaning ways but two in particular are galling.

The first is they sell illusory coverage. Like the firm where I did the apprenticeship, management does not know the importance of these issues and from what I gathered, the agent wrote policies creating illusory coverage. The second galling failure is not offering clients coverage they clearly should consider. I’ve tested agents for decades to even name the 15 or so common homeowners endorsements and no one has ever succeeded. How can a small business owner have all the knowledge required to “order” their insurance adequately? Ordering insurance is not akin to ordering a cheeseburger and fries (or cross-selling, “would you like a shake with that?”).

Offer What Clients Need

Before anyone should cross-sell, they should offer the coverages clients need. In fact, in my experience the few agents who do offer coverages clients truly need outsell the order-takers offering superficial cross-selling by around 10 to 1.

As an insurance agent, you have a responsibility to your clients to sell them the coverage they need. These small businesses are placing 100% of their trust in you to do this. They are putting their entire livelihood, their family’s future and their employees’ futures in your hands. It’s a big responsibility that deserves your attention rather than sending these policies to some service center. If you are not up to this responsibility, please consider getting out of the industry. I’ve yet to see a need for uncaring, incompetent agents.

Where I served my apprenticeship, the business was multi-generational going back nearly 100 years. They were indeed sued for a large sum for an incident for which they were not legally responsible and for an injury that has resemblance to a stage drama. Luckily for them, the court saw the reality of the case relatively quickly, so their legal defense cost was relatively small. Had it been large, their inside defense cost would have eroded their liability coverage. This is another deficiency — their agent failed to explain or offer a policy with outside limits.

These are three major strikes against the agent, and I did not even review the rest. I imagine their cyber liability has more holes than a net. I doubt they have umbrella policies correctly written. I imagine their pollution coverage is limited to a spilled gallon of paint. And business income? I doubt that is close to written correctly, if offered, based on what I could glean. And yet, this business owner wanted so much to believe the nice agents who had insured him for 20 years would certainly never make such mistakes.

Incompetent agents survive through luck and misplaced trust. I am hoping this person switches agents soon — before disaster strikes. I also hope agents are inspired to take the time to provide their clients the attention they deserve and offer the coverages they need.

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