From the April 2012 issue of American Agent & Broker •Subscribe!

History’s Lesson

Experience teaches that underinsurance, lack of attention evoke E&O claims

A pendulum swings both ways. And just as a pendulum swings toward two opposites, a particular point of view may become so unbalanced  toward one side, and while swinging  back to its center, it often swings to the opposite position. It repeats, moving from one opposite to the other.

In the February issue of AA&B, Barry Zalma wrote an article titled “Valued Advice.” In the article Zalma writes:

“Insurance agents have a general duty of care and a duty to advise their clients. The general duty of care includes a duty to exercise reasonable care, skill and good faith diligence in obtaining insurance…The law is settled that an insured must demonstrate some type of special relationship for a duty to advise to exist.” 

As an insurance professional, I wish that Zalma’s opinion was incorrect, but in reality, he is accurate.

Related: Read a previous column by Richard Mintzer "what Defines an Expert?"

As an expert witness, I have been involved in more than 100 assignments and I would conservatively estimate that 75 to 80 percent of these included plaintiff allegations relating to improper advice and counsel by insurance producers. The complaints share common phrases: 

“I thought my agent took care of it,” “I didn’t know, why wasn’t I told?” and “I never hear from my agent except when it’s time to pay the bill.” 

As I have said often before: If you are involved in litigation, win or lose, you lose.

Swinging Pendulum

Recent legislation introduced in the Colorado legislature suggests that its pendulum is nearing its maximum arc and may soon move in the opposite direction. This new legislation, HB 1057, requires insurance producers to visit with their clients on a regular basis to review replacement values on their homes. 

This legislation is in reaction to events that occurred about 2 years ago. Two hundred homes were damaged or destroyed by a wildfire that occurred just outside of Boulder. In testimony presented before the legislation was introduced, one organization released a survey indicating that approximately 60 percent of the damaged homes were underinsured. Another person stated he had bought his homeowners’ policy several years ago and that the replacement values had never been revisited. This type of testimony does the worst possible damage to the image and competence rating of insurance professionals.

We shouldn’t be in danger of legislation to force insurance pros to do what they’re supposed to do. There is the obvious incentive of increased commissions and opportunities for cross selling, along with avoiding litigation and differentiating your agency.

Related: Read the article "What's in a Nme?" by Richard Mintzer.

As an expert witness for the last 10 years, I’ve learned that underinsurance and the lack of attention to proper insurance values is common. In the May 2010 issue of this magazine I wrote “Are You Paying Your Employees What You Owe Them?” and stated that if insurance producers fail to act responsibly, they can blame themselves for turning a valuable asset into a commodity. The article suggested that instead of fulfilling our task of managing our client’s insurance portfolio, we should ask clients how many pounds of insurance they need.

I already can hear the readers roaring: “Too busy,” “not worth my time,” “not required to do so,” “too expensive” and finally, “just another example of government overregulation.” Consider your agency’s benefits if clients select your agency  as a valuable member of their professional advisory teams. As a professional,  keep a promise you made to your client when you first took on the account, which was that you are interested in a long-term relationship and being a professional insurance advisor.

Revaluing insurance limits on an annual basis is an ideal way to support new producers or licensed customer service people who are looking to earn additional money. Of all the possible prospect lists in the world, there is no better prospect list than your own clients. Finally, if you turn your junior sales team and your customer service people loose to solicit your personal line clients, the rewards will be far greater than you can imagine. Give it a test and instruct your producers that every sales interview should end with this question: “Can you recommend three people who would value our unique revaluation services?” 

Related: Read the Richard Mintzer article "Protect Your Asets."

Colorado is not usually an insurance industry leader when it comes to insurance regulation. Generally speaking, it follows other states when considering insurance legislation. If Colorado considers HB 1057, other states may think about similar regulations. I think you’ll agree that the insurance industry is heavily regulated which means that exactly what we do not need is more regulation.

It takes many diverse personality traits to be a successful agency owner or manager; however, there are two traits common to most managers and owners: a big ego and the drive to succeed. If you fit that description, why aren’t you meeting your professional responsibility on your own instead of being forced to do it by government regulation? If the overall benefits to the agency don’t turn you on, imagine how great you are going to feel when your program is a huge success. 

In addition to being an insurance consultant and expert witness, I also counsel small businesses on risk management issues as a volunteer for SCORE, a national organization that supports small business startups and promoting continuing successful operations. SCORE counselors are not permitted to make specific recommendations, so I always ask the business owners if they have an insurance person whom they trust. Almost all say they don’t. Rate yourself on a scale of 1 to 10. Are you among the 60 percent of agencies who fail to meet their responsibilities or the 40 percent that do a great job keeping insurance values current? Just imagine in addition to all of the benefits the agency would receive by meeting its professional responsibilities your agency would be considered as an agency to be trusted.

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