"We are coming across the need to have to tell clients that we no longer will be their agent, and that they need to move their coverage at renewal to another agency. Is there a formal procedure we should be following to avoid any litigation and comply with any legal requirements? Any language, amount of time for notice, etc.?
"This is new ground for us. Some of the clients will be those who sued us (for venue purposes or other reasons that we and or attorneys know to be frivolous) and some of the clients are too small and not meaningful relationship accounts that we can properly serve any longer."
Well, we can't give legal advice, but we can share some opinions from E&O and management perspectives:
Many agencies have a practice of "pruning" their book of business. There are times that it just does not make sense to continue writing coverage for certain clients. In fact, part of your renewal procedures (they should be in writing) should include the agency underwriting section. You are not obligated to retain clients for a lifetime. Set up standards on what you want your book to look like and then systematically follow those procedures, being careful of exceptions. So for instance, do you know each account's profitability? Establish a method of measuring what this requires. For example, how many times does the customer call? How many times has there been a late payment notice? What is the claims history? Have they been abusive to staff? Have they been non renewed by a carrier?
Using some of this criteria on an ongoing basis to measure account profitability allows you to make informed business decisions. I know of no laws that require an agent to represent a customer forever, but I'm not a lawyer. If they don't fit, send a form letter that advises them that their insurance needs would be better served elsewhere. When this letter is sent needs to be at the beginning of the time frame where you work your renewals. For example, many agencies pull an expiration list 90 to 120 days before the renewal date. Establish your profitability criteria and inform those that don't fit.
The problem is, at least here in Florida, it's almost impossible for an agency to "fire" an existing client. The insurance contract is a two-party contract, between the insurer and the insured. The agency is not party to that contract. About the best that an agency could do is to request the insurer non-renew the risk, but in my 21+ years I've never seen a non-renewal stating, "Non-renewed at agency request." Plus, we have a statute there that prohibits an agency from refusing to insure someone because they won't purchase another policy.
In my agency days I had a few customers I didn't want to keep. I simply told them, "I don't think I am meeting your needs and you might think about looking for another agent. But if push came to shove and they didn't leave, I really couldn't fire them.
Here are some thoughts:
Send a letter well in advance of renewal that states it is in the best interest of everyone to part ways.
Consider referring to another agency, but of course the agency is not obligated to do this.
Provide the insured with everything they need such as loss runs and schedule of policies.
Advise them that they can continue with the same carrier by obtaining an agent of record letter.
I think the issue of concern is more of discrimination or unfair practices. The E&O issue is one of having an uncovered client out there who can come back and sue. Documenting the file and starting the process early are two important issues agencies should consider.
Fire a Customer? More and more agencies are coming to the realization that they cannot be all things to all people and must allocate their agency resources more carefully, especially those agencies struggling with an increasingly softening market. But just how can you tell someone that you don’t want to do business with them? The first step should be to decide who deserves your resources and why. One agency I'm familiar with segments their clients into relationship clients and transaction clients, relationship clients being those who are interested in protection and service first, price second. Another agency segments their clients according to demand for services versus profit margin. Clients who consistently consume more agency resources than value they bring to the agency are identified for an eventual exit plan.
Struggling with the concept of firing a customer? Consider this: is it fair to customers who are committed to you to compete for resources with customers that are committed only to the lowest price? And consider those customers that everyone in the agency hates to deal with, wouldn’t it be more just to politely direct them to another agency which may be better equipped to serve them? Of course, it is easier to embrace such a philosophy than to execute it.
Try this three step process: (1) Develop the criteria used to qualify who you will serve, (2) go through your customer lists and identify them, and (3) create a letter that can be used to “refer” clients that don’t make the cut. The best approach is the honest approach. Here is some sample wording to give the flavor of such a communication: “ABC Agency appreciates having had the opportunity to serve you. However, in our desire to more efficiently allocate our agency resources in a challenging economy, we feel it is in your best interest to refer you to an agency that is more equipped to provide the service you deserve.”
Some cautionary considerations before you fire any customer. First, it costs 5 times more to acquire a new customer than to retain an existing one. Secondly, take along-term perspective when determining if a client is profitable or not. Lastly, consider the fallout from a customer who is unhappy about the separation. Is he/she influential in circles that you rely on for customers? Negative word-of mouth travels farther and louder than positive. For these reasons, it is always better to consider how you can make a an unprofitable customer profitable before terminating the relationship. If you must terminate, be sure to comply with all regulatory rules, laws and policy conditions.
Our Texas association provides the following:
An Agent's Right to Nonrenew
Ownership and control of expirations are the cornerstones of the independent agency system. This idea traditionally has included not only an agency's rights to select the customers it prefers and to place those customers with the insurance company it determines is most appropriate, but also the right to terminate the agency's relationship with a customer at any time. This latter right is being tested today as never before, as consumer groups advocate the position that agents and companies should "take all comers" and keep clients on the books until some serious underwriting flaw becomes evident.
The Independent Insurance Agents of Texas advocates the position that an independent agency controls its own business relationships and, therefore, has the right to terminate any client relationship, as long as the agency complies with prohibitions against illegal discrimination (based on race, religion, color or national origin) and with rules, laws and policy provisions regarding proper notice of cancellation and nonrenewal. According to a legal opinion from IIAA's general counsel, an agency's customer does not have a contractual right to the agency's services. An agency, therefore, does not need the company's permission to terminate the agency's relationship with the customer. IIAT believes that an agency has the right to request nonrenewal of a policy for its own reasons, which may have nothing to do with company underwriting guidelines. For example:
The agency may wish to target a particular market segment through minimum standards with regard to account size, limits of liability, or the purchase of optional coverages.
In an effort to maintain a profitable book of business and maximize its opportunity to benefit from company profit-sharing arrangements, the agency may impose underwriting guidelines that are more stringent than the company's guidelines.
An agency, particularly in a small town, may be aware of an insured's personal reputation or characteristics, such as heavy drinking, that could increase the exposure to loss.
The insured may display disruptive behavior in the agent's office or be discourteous or even abusive to agency employees.
A Company's Right to Nonrenew
Many phone calls from members to the IIAT office on this issue indicate that some companies are reluctant to issue nonrenewal notices at the agency's request because they don't want to run afoul of Texas' nonrenewal requirements and prohibitions. It may be helpful, therefore, to review the rules and laws that affect a company's right to nonrenew a policy. Each policy is different, but generally, the company has a right to nonrenew a policy within a specified period for any reason unless the right to use a particular reason is restricted by law, rule or policy provision.
Agents' and Companies' Responsibilities
Subject to these exceptions, and to prohibitions concerning illegal discrimination, a company may nonrenew for any other reason. Therefore, a company should accept an agency's nonrenewal request once the company is satisfied that the agency is not making the request based on a reason that is restricted by law or rule. The company must be willing to provide a written statement concerning the reason for nonrenewal. The statement must fully explain the agent's decision to nonrenew, giving the precise incident, circumstance or risk factor(s) involved in the decision. In addition, the insurer must state that the agent is the source of information relied on regarding the incident.
Notifying the Client
Despite the fact that an agency has a right to request termination of its relationship with the customer, an agency does not have independent authority to send a policyholder a nonrenewal notice. The insurance contract gives the insurer this authority. The policy is a two-party contract between the insurance company and the named insured, and the agency is not a party. The policy authorizes only the insurance company to send a nonrenewal notice, subject to certain stated exceptions. In any business transaction, however, an entity may authorize an agent to act on its behalf, whether that be an employee of the entity or an outside party. With specific authority granted by the company, as either an addendum to the agency agreement or a letter from the company for a particular policy, the agency can have the express authority to nonrenew a policy. It must use the company nonrenewal form in such cases, not the agency's letterhead. However, in light of the restrictions various laws, rules and policy provisions place on the nonrenewal right, a company may be reluctant to give an agency unlimited authority to issue nonrenewal notices.
If a Company Refuses to Nonrenew
What can an agency do if the company refuses to send nonrenewal notices at the agency's request or to grant specific authority for the agency to send notices? Nothing. Try having another talk with the insureds to convince them that it would be in their best interest to find another insurance agency to service their business. If they agree, get it in writing.
Here are some VU articles (also attached) related to this: