Caution! — Agents on Boards – 2/4/10 Knowledge Knugget

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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.

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