The purpose of employee
incentive compensation is clear: it is designed to encourage employees to
sell more insurance, which in turn generates more revenue. This creates a win/win situation as the
customer gets better coverage while the agency benefits from the additional
sales. Insurance agencies also
participate in incentive programs offered by carriers under which they receive
incentives depending on the amount of coverage the agency places through the
carrier or the loss ratio for the business the agency places through the
carrier. It is clear that incentive
compensation is deeply embedded in the insurance industry. What is not clear is whether incentive compensation leads to
a greater or lesser E&O risk for insurance agencies. Conventional wisdom tells us that attempts to
sell additional coverage or higher limits drive down E&O exposures because
either the customer winds up with better insurance or the agency winds up with
proof that the customer has declined better insurance – usually
because of price.
At the same time, when the primary focus is shifted from the
customer's needs to meeting agency targets or increasing business placed with a
particular carrier, the temptation to cut corners or take short-cuts
grows. Typical claim scenarios
include: applications taken over the
phone and not signed by the customer; proposals are not reviewed to see if they
provide what was requested in the application; policies are not reviewed to be
sure they cover what was requested by the agency customer in the first
place. These are often the allegations
made against insurance agents in E&O cases we defend.
While we cannot say for certain that employee incentive
compensation plans are the sole, or even the primary, reason for these
"errors", one thing is clear: anything that leads an insurance
professional to take shortcuts on essential processes – or worse: skip them
altogether – greatly increases the likelihood that an E&O claim will soon
follow.
What's more, when defending an insurance agent in an E&O
claim it is hard to downplay these errors.
While the agent will point to a letter sent with the proposal or policy
instructing the customer to review the coverage and make sure it meets with
their needs, the plaintiff will point out that the agent was getting paid a
commission to make sure the coverage requested was being placed. Remember, a jury will be made up of 12 insurance
customers, not 12 insurance agents. What
do you think the jurors expect from their insurance agents?
E&O claims are expensive for an insurance agency, even
if it carries E&O coverage. An
E&O claim may: cost the agency its deductible; lead to higher premiums at
renewal; eat up staff time and expense addressing the claim; and undermine the
agency's reputation. That may explain
why some agencies have taken employee incentive compensation one step
further. Employees reap the benefits of
selling more insurance through greater compensation, but they are also
responsible for the insurance agency's deductible if a claim is made against
the agency by one of the employee's customers.
While passing on the deductible cost to the employee responsible for the
alleged error in no way covers the agency's entire cost for the E&O claim,
it helps lessen the cost and hopefully reinforces better practices by the
employees of the agency.
One such practice all employees should adopt is to document
in the agency file the refusal of any customer to accept a coverage type or
limit recommended by the employee. While
this documentation takes time, it is crucial to prove that the correct coverage
or higher limits were offered and rejected by the customer. Westport Insurance feels so strongly about
this documentation that it reduces its insureds' deductible by 50% (up to
$12,500 on a $25,000 deductible) in any claim where the agency customer alleges
it should have had a type of coverage or higher limits -- but the agency has
contemporaneous, written documentation that such coverage or higher limits was
offered to, and rejected by, the agency customer.
Here at Westport we have found that this type of
documentation greatly assists in the defense of the insurance agency and
reduces the overall cost of the claim, thereby creating a win/win/win for the
insurance agency, the agency employee and Westport Insurance.
An example of how this documentation can be used occurred in
a class action case filed against a Westport insured. In this case the agency offered a specific
insurance product to home inspectors, which met the statutory requirement for
the state. However this product was the
bare minimum coverage required for a home inspector to obtain a license, it did
not include E&O coverage for items the inspector might miss.
In this case the home inspector missed extensive termite
damage to a home. The home owner later
discovered the damage and filed suit against the home inspector. The home inspector had purchased a
stand-alone E&O policy, which stepped and in settled the claim. The E&O carrier then filed a class action
suit against our insured's agency for selling coverage to home inspectors and
representing it to be complete coverage.
The agency was able to produce a Disclosure that explains
the product he offers meets the statutory minimum coverage required to obtain a
home inspector's license. The Disclosure
points out that there may be other coverages the applicant would want to
consider including E&O coverage.
These Disclosures were signed and dated by each of the agency's
customers when they applied for the home inspector's coverage. This Disclosure was the cornerstone of the
Summary Judgment Motion filed on behalf of the insurance agency and granted by
the court. The court found there was no
ambiguity in what the home inspectors were being sold by our insured.
Jim Redeker, Vice President and Claim Manager, Swiss Re
Corporate Solutions, Overland Park, Kansas.
