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.

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.

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. *****

The exception that’s weighing on my mind at the moment is D&O coverage.  Even when you write an entity form, the main purpose of the insurance is to cover the Directors and Officers for their personal (not corporate) liabilities.  However, you rarely get to speak with them en masse, explain coverages to them, and they frequently do not have a voice in the election or declination of coverage.

I have heard of occasions where brokers have insisted they meet with the board to get their collective decision, rather than taking the word of a single representative, such as the CFO, administrator, President or CEO.  There’s a lot to be said for that approach.

I have on my desk right now correspondence from an irate former Director of one of my former insureds who let their coverage lapse.  He has just turned in a claim, only to find that the policy is no longer in force, and no extended reporting period was purchased.

I do have one carrier that would extend the equivalent of occurrence coverage to him in this type of situation (he left the company long before the policy lapsed), but his company’s policy was not with that carrier.

I don’t know if his claim would be covered, regardless, due to its nature (pretty pure breach of contract), but the real question is — if you let an insured entity cancel, lapse or nonrenew a D&O policy without getting concurrence from the individual insureds, are you truly serving your client?  Or are you following the path of least resistance?

This ex-insured actually asked me if there had been a board resolution to discontinue the coverage.  I can only imagine the acrimonious discussions that are about to ensue — especially if the entity had an obligation to indemnify him and has breached that obligation by terminating coverage and not having other resources with which to meet the obligation.  Those issues are generally beyond the scope of what we ever know about how an insured is operating.  But perhaps it would be prudent to ask your insured entities if they have contracts with their Ds or Os that commit them to indemnification.  If so, that’s one more brick in the wall in the argument for them buying and keeping D&O coverage in place.

(5/7/09 Knowledge Knugget)

The ERP is priced at over 1omm, and the deductible is 2mm, so there’s a good chance that the individual attorneys protected by that policy would be unlikely to chip in the funds to pay for the tail.  However, since professional liability can rarely be passed off to a corporate entity or partnership, and individuals tend to remain liable, one would think that perhaps the individuals would like to at least make a choice about purchasing tail.   They would still have to pay the retention, should a claim arise, but at least there would be a carrier standing by ready to defend them, and they would have coverage for a catastrophic defense or outcome.

This week’s Knowledge Knugget (coming out Thursday a.m., 3/5) will explore this topic in more detail.

I have often heard that over 90 cents of every dollar an insurance company pays out is dedicated to defense expense across all professional liability lines.  This may well be an accurate number.

The topic of discussion made me think of one thing in particular: If all of our underwriters know and understand that defense expenses are the major part of loss, and they are within the limits — why do carriers focus on an insured’s assets or revenues as a benchmark for how much insurance is “enough”, or even allowable?

As brokers, we cannot ever say to an insured “you don’t need that much insurance”. But carriers can sure tell us that they don’t want to put up a certain limit.  We have generally accepted the asset level or revenue level benchmark, and the carrier’s argument that they don’t want the policy to be the biggest asset as valid.

Yet in the face of runaway defense costs, and a real issues with consent to settle, reputational harm and copycat suits, is it proper to cap an insured’s limit based on their assets (ostensibly the maximum probable loss that a plaintiff would aim to recover), instead of what it would cost to defend a claim seeking the maximum probable damages?