This topic created a lot of discussion on LinkedIn, and I thank all the participants. Great input!
Below you will find my recent Knowledge Knugget discussing the dangers of agents serving on boards.
I’m adding a new danger here, thanks to a discussion with one of my favorite agents in CA who noted a particular problem.
What happens if the agent has to make a claim against his insured, on whose board he sits? There are not many circumstances under which this could happen, but it is a possibility. How does he reconcile his duty of loyalty under those circumstances? And I cannot imagine the befuddlement of the carrier that receives a claim on an insured where the agent who placed the business is the claimant. And what if there’s no coverage, and the agent then gets sued by the client, yet he’s the claimant in the first place? Theoretically, at that point, they would stop the insanity, consider the claims to be offsetting and dismiss the whole thing. But maybe not.
The particular situation that brought this topic up had to do with a potential personal injury claim against an entity. But I’ve also contemplated — what happens if an agent’s on the board of an entity, and the entity doesn’t pay its premium, and the agent needs to take action to recover the premium? As you may know, defaults can be subject to a D&O policy if the Ds & Os knew they were misleading the creditor at the time credit was granted.
What if the agent director was kept in the dark and thus extended credit (ordering coverage bound, let’s say, on a policy with 25% minimum earned — like a non-standard condo HOA), and now is stuck with that 25% minimum earned because the insured’s check bounced. How is he going to unravel that? What if there’s an uncovered claim due to the policy being cancelled and they sue him, and he feels he must counter-claim against them to protect himself? How do you explain that to the carriers you just bound the insured with, and your E&O carrier? Weee, What a Predicament! (as John Travolta exclaims in Face-Off, one of my all time favorite movies).
Imagine how complex it could get if an agent sat on the board of the HOA where he lived and wrote all their coverages and had a property or GL claim. Covered or uncovered. Wow.
Anyway, chew on all that (yes, I know — I worry too much) while you read the below Knugget, and let me know your thoughts….
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Twice last week I had occasion to discuss the topic of agents writing insurance for entities on whose boards they sit. This is a common road to production for many agents, but let me share with you why it might not be an course of conduct in which you want to engage:
First problem –
If you’re sitting on a board, it is your duty to put loyalty to that entity above any loyalty to yourself. If you are placing insurance for this entity, can you honestly say that you are doing the very best for this entity that can be done? Do you have all the markets that are appropriate for its business? Are you giving up your commission so as to procure the lowest possible pricing? Are you doing what it takes to ensure the entity buys all needed insurance, even if you are not overly familiar with some lines of business?
Can you possibly ever avoid the inherent conflict of interest that comes with making money off of a service you provide the entity?
To complicate matters, what happens if you’re also on the board of your agency? How can you reconcile those two entities’ needs? You can’t. You have to put loyalty to one above loyalty to the other, and therein lies the rub.
If the question ever arises as to whom you placed first, you will have very few defenses.
Solution? Possibly, you could hand the account to someone else in your agency and act only as a referral resource. Your agency would still make the revenue, and if you don’t profit personally from the placement, you will be at less risk. Still, not completely free of risk because at the end of the day, your agency, and the coverages and pricing it can provide may not be deemed as the best possible for the entity.
Second problem –
Check your insurance agents E&O policy, and you may find that claims arising from your services rendered to any entity for which you are a director are excluded. This is not an uncommon exclusion. There is usually some form of exclusion that eliminates coverage at least for claims made by entities over which you exercise control (by ownership or by directorship), and sometimes the exclusion extends to all services rendered to, not just claims made by, those entities. That means you may have no coverage even if a third party makes a claim against you, rare though that might be.
So if the worst case scenario occurs, and your entity has an uncovered claim, there will be no coverage simply because you sat on the board. No coverage for you, and most of the time, no coverage for the agency. How, then will you resolve that claim? Out of your own pocket? Scary stuff. And again, what if you’re on the board of the agency? How could you have exposed it to such financial harm? Now you’ve violated your duty of loyalty and duty of care to the agency. Not good.
My recommendation both from an agents E&O risk management perspective and from a D&O risk management perspective is that you should not place coverage for any entity on whose board you sit.
If sitting on boards is a large part of your networking and business-building process, use it for networking, and write every other board members’ coverage, and that of all their friends. But when it comes to the entity’s coverage take the high road, and advise the board that you cannot write the entity’s coverage yourself without creating an inherent conflict and sacrificing the protection of your E&O policy, and refer them to another agent or three. You’ll sleep better at night if you do.
Tags: agents E&O, board, caution, condo association, conflict of interest, D&O, D&O policy, director, duty of care, duty of loyalty, exclusion, HOA, homeowner association, networking, risk management
Many agents serve on boards of directors, frequently non-profit, sometimes for-profit, and end up writing the entity’s insurance. From a D&O perspective, this creates an inherent conflict of interest, and from an Agents E&O perspective, often creates an uncovered cause of loss, should a claim arise.
I think most agents who write insurance under these circumstances have not thought through the ramifications. It all looks so simple on the surface. But it’s not.
Next week’s Knowledge Knugget will discuss this topic in more depth. Sign up prior to 2/4/10 to receive the KK in your mailbox bright and early. I’ll post it here sometime after its distribution to my mailing list.
Tags: agents E&O, conflict of interest, D&O, duty of care, duty of loyalty, Knowledge Knugget, uncovered claim
Happy New Year, and Welcome to 2010. I hope it’s a better year for all of us.
We’ll kick off this year by discussing some quirks in PL placements, which become quickly apparent when an agent or insured expects the same responses from underwriters as they would enjoy from a GL carrier.
For this installment, we’ll review two specific quirks: Additional Insureds and excess limits.
1. Additional insureds
As you know, in the world of GL, if you want an Additional Insured added to coverage, you request it, identify the relationship, and you get an endorsement for x amount of money. The carrier is then willing to notify the AI if coverage ceases and will defend claims against the AI. Not so in the world of Professional Liability.
It’s rare for there to be Additional Insureds on a PL policy. There are some exceptions, which I’ll save for a future Knugget. Here are some reasons carriers will not provide Additional Insured status to Insureds’ clients.
a. The policy exists to protect the professional — not his clients.
b. An allegation of professional negligence is needed to trigger coverage, and the client is not the one rendering the covered professional service. Therefore, tender of a claim against them would not trigger coverage under the insured’s policy.
c. Defense is within the limits (generally) so providing defense to a third party would erode the insured’s limits.
d. The Insured v. Insured exclusion in the policy will void coverage for any claim brought against the insured by the AI client.
An outgrowth of this overall reluctance to provide coverage to AIs is further demonstrated by the fact that even those carriers that will add an AI will absolutely decline to comply with an AI’s request to be notified of cancellation of a policy.
2. Excess limits
In the world of GL, a 4mm xs 1mm limit is available broadly and for pennies on the dollar. No one thinks twice about it, regardless of the size of the insured or why they want the higher limit. It’s considered wise to always offer those additional limits to your insured.
In the PL world, carriers are more circumspect about putting up limits. If you have an insured with, let’s say, 200k, or even 2mm in revenue, and you request a 5mm limit, you will not get it from most carriers. If you place a 1mm limit, then seek a 4mm xs 1mm, you will likely not have much luck. Here are some reasons carriers give for not putting up large limits:
a. PL is a severity line, not a frequency line, so if a claim occurs, it may well exhaust the entire limit
b. The carrier will not put up limits higher than the insured’s revenue
c. The carrier will not put up limits higher than the insured’s assets
d. The carrier cannot get enough rate for the limit
e. The carrier does not want its policy to be the insured’s biggest asset
f. There appears to be some correlation between limit availability and loss incurred, so carriers do not want a high limit to be an attraction to plaintiffs.
g. The carrier will not provide an excess limit higher than the underlyer (i.e., if the primary is 1mm, the most they will put up is 1mm)
Pricing for PL excess limits is much heavier than that of GL. For example, if a 1mm limit costs $10,000, a 5mm limit is likely to cost $24,000. (5mm increased limit factors in PL often ranging from 2.30 to 2.45) The 4mm xs 1mm costs an additional $14,400! I’ve had agents fall out of their chairs with that kind of pricing because they were expecting a quote for a fraction of the 10k primary premium. A 5mm xs 5mm limit will range from 40% – 70% of the underlying 5mm, depending on the line of business and the quality of the risk.
This pricing model, again, is largely driven by the fact that PL is a severity line. In some lines with a tendency to more frequency and a lot of actuarial data, you might see the ratios come down a little.
There are some exceptions to the reluctance to provide higher limits, and in a future Knugget, I will touch on some tricks of the trade to persuading underwriters to put up the limits you need.
Chris Christian, CIC, RPLU
Vice President/Senior Broker
US Risk Brokers
760-415-4213 or for TN agents 615-273-3451
Knowledge Knuggets do not constitute legal advice, nor are they the opinion of US Risk.
Please feel free to suggest future Knowledge Knugget topics.
Visit www.pltidbits.com for archived Knowledge Knuggets and other Important Items regarding professional liability.
chrisc [at] usrisk [dot]com
I am accepting new agent appointments, so please give me a call or send submissions if you feel I can be of assistance with your complex risks. Or, if you just like working with propellerheads – let’s chat.
Tags: Additional insured, AI, allegation, contract, defense within the limits, erode, excess limits, frequency, GL, insured v. insured, liability, limits, pricing, professional liability, professional liability wholesale broker, professional negligence, protect, severity, trigger
I attended a most interesting session today at the Insurors of TN convention. The speaker talked about what an agent must do to avoid getting trapped into selling on price. I would assume that most of us know why selling primarily on price is not good for our industry, carriers’ longevity, and in the long run the consumers, so I won’t detail those issues. Let’s just agree for the purposes of this post that selling primarily on price (or wholly on price) is not good.
Jeff, the speaker, talked about there being four components to an insured making a decision to do business with a particular agent: Price, Coverage, Relationship, Service. If we take Price off the table, we must sway the insured with the other three. However, the prospect cannot experience our service until we are actually doing business, and there is only an incipient relationship, if any, and it certainly cannot compare to the relationship the insured has with the incumbent.
That brings us to coverage as being the preferred (and sometimes the only) way to persuade an insured to bind coverage with us, versus the incumbent, or other competitors. Of course, if the insured has the primo policy of the world, written absolutely correctly, there’s not much we can do about that. Jeff recommends then, that we walk away from the quoting process, and stay in touch with the insured for a future try. Until the coverage situation changes and we can do something to improve their placement, we would not waste our time or our staff’s and carriers’ time, quoting something that we have no reason to believe will bind.
He does recommend that we acknowledge price as an issue and frame pricing as a component of value and commit to deliver value, versus cheap price.
Very interesting approach. He cautions that our most important diminishing asset is our Time, and this approach will keep us from wasting it, allowing us to devote it to more productive opportunities. Yes, every now and again we might bind a risk in this situation, but how often do we waste our time quoting risks have a very small chance of bringing us any revenue.
Imagine the level of professionalism and ever-better coverages insureds would enjoy if we all did business this way? Wow.
I have paraphrased his content significantly, and unfortunately could not get ahold of a handout for the session. So I offer this just as food for thought about how we frame our relationships with our clients.
Tags: Coverage, insureds, relationships, selling, service, wasting time
One of my new agents asked me why a consultant firm of hers would need E&O, given that their D&O policy covers the employees’ wrongful acts. Good question.
Click on Knowledge Knuggets Archives and check out the 10/8/09 Knugget for the inside scoop on why this is not a corner that can properly be cut.
***I am accepting new agency appointments, so if you have D&O, E&O, EPL or other professional business and would like to take advantage of my unique approach, please contact me at chrisc [at] usrisk [dot] com. *****
Tags: contract, D&O, E&O, exclusion, professional services, Wrongful Acts
