Agency Duties — Legal vs. Ethical

While I’m not an insurance agent, I recently received an email from a commercial insured after he read one of my columns. In the column, I explained how the importance of insurance is being diluted because deductibles are so high, and how insureds have become de facto, but unknowing, insurance companies themselves as a result.

His email thanked me for explaining what was happening. Neither his agent nor his carrier had explained that his firm was now an insurance company when they raised the deductible. He advised that he was not an insurance expert and did not understand what it meant for his deductible to be increased to a material percentage. He admitted he did not understand the total insurable value (TIV) to which the deductible would be applied. His business has absolutely nothing to do with insurance, building values, or understanding coverages. In fact, he runs a non-profit and is not a businessperson. His deductible had gone from $5,000 to $350,000 in 24 months with no explanation, no conversation, and no options from his agent. This does not include the major change in terms, which he also did not understand.

In my article, I asked why someone should buy insurance at all in this kind of situation. This non-profit could not afford a claim with a $350,000 deductible, so what difference does it make if they have insurance? I have been busy lately teaching top agents how to do the math on this so they can advise their clients. A great many properties really don’t need insurance given these terms and conditions. It’s better to take the risk, especially since insurance companies are indicating that their “sophisticated” models tell them not to take on risks requiring these deductibles.

His email was gratifying to me in the sense that I had helped someone make sense of what I’d argue was an unacceptable omission by his agent. In that state, the agent standard of care dictates it is the insured’s responsibility to “read and understand” their coverage. That is too high a standard.

Further discovery showed the problems were more significant. Neither the agent nor the carrier had ever updated coverages due to building changes, never asked, never advised, but always took his money. Legal? If the insured wants to sue for E&O, the judge will rule whether it was legal. Was it ethical? Nope. Not by my ethics.

What I truly hope occurs with AI is that commissions go to 8% for order takers who have such low ethical standards and provide no real value to insureds. AI will be able to place insurance for 8%. All the junk agents say they provide great service but don’t, and then they stand behind low standards of care, dictating insureds must read and understand their coverage when challenged, which will hopefully be eradicated by AI.

Another recent case in Georgia (a person really must love the Georgia courts’ ability to extend coverage to the deepest, and now any, pockets) found that agents had better be offering every available coverage. The articles I read included agents’ associations and defense attorneys advising that agents face doom, since E&O carriers will not offer coverage in such a toxic environment.

This is an overreaction to protect agents who are nothing but order takers, and who do not want to be held accountable for offering clients the coverages they need. I’ve been an E&O auditor for 30-plus years. The solution is incredibly simple. No AI is required. Walk clients through a coverage checklist. An E&O claim is less likely if clients have the coverages they need, and the best way for clients to obtain those coverages is to offer them. Will they buy them all? No, they will not. But then have them sign off.

To destroy the common argument, “But what if I miss one coverage? Then I’m really screwed!” This just highlights incompetent math skills. What are the odds of missing a coverage when the agent does not offer 50 coverages versus not offering one coverage?

In 30+ years of teaching E&O, doing E&O audits, and serving as an E&O expert witness and expert consultant, I’ve only had one client ever lose an E&O claim that had used a coverage checklist well, and that was because the defense counsel was inadequate. The plaintiff’s attorney found a prominent person who lied on the stand, and the defense counsel did not do the work to prove the lie.

Instead, almost 100% of my clients accused of missing a coverage when using a coverage checklist had their claims dropped before the insured even contacted an attorney. A checklist should also address deductibles. Furthermore, when changes as significant as the deductibles noted earlier occur, an agent owes the insured–ethically if not legally–an explanation of what that means.

Agents really need to assess their ethics. The CE ethics classes seem to be a total waste from what I see in the real world. Insurance is the most important financial protection tool, but insurance is complex. Order taker agents are what give the industry a bad name. Look at your heart and decide whether you have an ethical duty to advise your clients regardless of your state’s legal standard of care.

The opportunity to elevate is great. Furthermore, the opportunity to increase revenues by accepting and adapting to the higher standard is significant. My clients who do all have better profit margins, better protected clients, and happier relationships. Another great advantage when done well is less dependence on insurance companies, especially carriers that don’t seem to want to take risk but keep charging high premiums.

Burand is the founder and owner of Burand & Associates LLC based in Mountainair, New Mexico. Phone: 719-485-3868. E-mail: chris@burand-associates.com.