First of two parts

While preparing a proposal for a potential client, you notice that payroll has been consistently understated by the insured in both applications and self-audits. You regularly represent the insurer involved with the current policy but are seeking a quote in this case from a different one.

What are your ethical duties to the current insurer, the proposed insurer and the client for whom you are seeking a quote?

Readers responding to this question of ethics are in general agreement about the agent’s ethical duties to the proposed insurer and about the ethical duties to the insured.

(The only serious split involves an agent’s ethical duties to the current insurer, which we’ll cover in depth next week.)

A few agents have a single solution as to the ethical duties to all three—avoid the conflict.

For example, a Maryland agent writes, “Your first duty is to yourself. Walk away and spend your time with an ethical prospect.”

An Illinois agent notes this type of situation occurs frequently, especially on initial payroll estimates. “I would just walk away from this unethical customer. It is a total waste of time. Once I did try to inform the current insurer, which we represented.  They did not seem to care as the agent-of-record was a big agency. Walk away.”

An Ohio agent reports the loss of a good piece of business where a competing agent offered a much lower quote and the client could not understand why. “I thanked him for his past business and walked away,” the agent says.

“Three months later the client called and said to renew the business because the new agent had lied on the application for new insurance and underreported sales, inventory and the number of autos,” the agent continues. “This insured did what I would have done. Walk away if the one you are dealing with will not tell the truth.”

Walking away was not an option that an Iowa agent could consider. “Right is right is right. I would not walk away. I would tell the current insurer the truth and maybe the underwriter will become my friend. I would tell the proposed insurer the truth as they should not quote for me otherwise.”

In addition, the Iowa agent says, “I would tell the prospect what I did. The prospect may be angry and not give me the business, but he needs to know you cannot be a party to a lie. The only ethical thing is to tell everyone the truth and let the results be what they may.”

An agent from Massachusetts is blunt. “What the hell is the issue? Always tell everyone the truth.  Are you getting senile?”

From California comes this response: “If I represent the current insurer, I have an ethical and perhaps legal obligation to inform the insurer. I would discuss the payroll with the prospect as it is possible it was incorrectly reported out of ignorance, and I would discuss the possible consequences of underreporting payroll. I would prepare a quote request and proposal with the correct payroll.”

Others responding add that the ethical responsibility to the proposed insurer is to give full, complete and accurate payrolls.

One agent uses a different situation to demonstrate that relaying accurate information is vital no matter what line of business is involved. When he began in the business he would not report a DUI to the insurer because he was looking out for the client’s best interest, the agent says.

“When I got older and wiser I realized insurers were not hurt by my action. Rates are increased on ‘good customers’ without any DUIs. Not reporting shifted the increased risk to all my other clients with the same insurer. This was not fair. I informed all clients I would report all information, good or bad, to insurers, but that I would not abandon them and still seek the best available coverage and price.”

In terms of how to ethically deal with the proposed client, a number of approaches were suggested, including explaining the need for accurate information, the potential for a large additional premium when (not if) the discrepancy in payroll is determined, the fact that auditable policies generally do not have a “statute of limitations,” and that fraud may lead to a policy rescission.

A former CEO of an insurer, after examining options for educating the potential client, concludes: “The ethical question for this potential client is whether you would want to represent him in the first place. If the understatement is intentional, the client is dishonest and likely to be dishonest in other things, including his dealings with the agent and his business overall. This could be one of those accounts that provide several thousand dollars of commissions, but several hundred thousand dollars of grief.”