Agents Owe Buyers Quality Insurers

A California producer gave the most detailed examination of quality and ethics:

"There are many dimensions to quality. I would include: (1) financial position; (2) reputation for paying legitimate claims; (3) reputation for focusing on the insured; (4) scope of coverage offered; (5) willingness to develop employees professionally; and (6) commitment to continuous process improvement." This producer believes each dimension carries certain ethical responsibilities for producers.

Financial position generated not only the most but also the most widely divergent opinions. All agreed that no insured should be placed with an insurer with known financial troubles, unless it was (1) the only choice available; (2) the financial condition of the insurer was made known to the client; and (3) the client agreed to the placement despite the financial condition of the insurer.

Some, including the California producer, believe "producers have an ethical responsibility to do their due diligence on behalf of their customerseven though recent court decisions seem to shelter producers from this responsibility."

A nationally known risk manager responded: "A producer is duty-bound to consider financial viability when recommending an insurer." A Kentucky producer said: "We have to protect our insureds interests. We cannot hang them out to dry." And a Georgia producer believes: "We have to provide an insurer that, to the best of our knowledge, is financially secure."

The interests of the producer and the agency or brokerage were also noted. The Kentucky producer said her E&O insurer recently added a new endorsement that not only excludes coverage if the agency places business with an insurer that has a Best rating of "B-plus" or lower, but also excludes coverage if an unlicensed insurer is used. "Even if we ignore our ethical obligation to provide coverage with a financially secure insurer, we now expose ourselves to becoming the financially secure insurer in certain circumstances," the producer added.

An Illinois producer noted that this E&O insurer requires that a procedure be in place for notifying an insured when they are placed with an insurer rated below the "A" category.

At the other extreme, an Ohio producer has doubts about ethical obligations beyond dealing in good faith with the insured: "The problem is getting information. Any so-called rating is not only old by the time we get it, but also it is usually based on other than financial considerations for the insurer. Ratings can drop dramatically overnight. We can call insurance regulators and they will not tell us who is on a watch list. Many times employees of the insurer are in the dark about the true financial condition. In good faith we ethically cannot place an insured with an unsound insurer, and no producer would want to deal with an unsound insurer anyway."

Said another way in another producers response: "We are good at finding insurers to cover exposures, but we are not trained and have no resources to be financial examiners. In the end, we have to rely on rating services or rumor. They are less than perfect."

There was one other area of complete agreement with regard to financial condition of insurers. All who replied believed that if an insurers financial condition deteriorated during the term of coverage, producers have an ethical responsibility to contact clients, explain the situation, offer an alternative insurer (if possible) and obtain written instructions from the clients.

For example, the Illinois producer flatly stated: "A producer is ethically bound to notify the insured immediately of a drop in the rating."

The remaining dimensions of quality created less controversy. "An Internet search would allow a client to find some financial information about the insurer with a little work and without assistance by the producer. But there is almost no way the client could get a good feel for claims-paying reputation, scope of coverage and so forth. Here producers ethically should disclose the reputation of insurersbad, good or excellent."

The California producer would expand the concept of claims-paying reputation to include not only paying legitimate claims but also vigorously fighting fraudulent claims, while the risk manager was concerned with promptness of claims investigation and payments. (No matter how it was stated, the quality of claims handling was important for the client to know.)

Similarly, scope of coverage offered by insurers was an important part of insurer quality subject to ethical considerations.

Two producers highlighted the existing problems of certain contractors. With fewer "quality" insurers willing to write certain contractors, some producers have been forced to place clients with insurers that have severely restricted coverage. One producer called these "right-to-work insurers" in that they do provide an insurance contract that allows the contractor to have a certificate of insurance, but the coverage was so restrictive as to be an illusion.

The ethical consideration is that producers must be aware of the scope of coverage available for clients generally. All agreed the nature of the scope of coverage for a particular insurer ethically should be disclosed, again along the lines of "bad, good or excellent."

"This is one area where the producer adds value to the insurance purchased," said one producer.

Customer focus was also a quality consideration. The risk manager was interested in developing a long-term relationship with the insurer. He believes producers should be in a position to talk about how professionally the insurer handles dealings with risk managers, how responsive they are to endorsements, and how willing they are to become involved in an account.

The Georgia producer believes that insurers without a good claims philosophy, scope of coverage or long-term interest in the insured should not even be considered as a potential insurer. "I believe my clients should just assume claims will be paid on coverage for common exposures and that personnel of the insurer will recognize that the insured is vital to the long-run success of all parties. My only other ethical responsibility here is to tell the client if I have to deal with an insurer who does not meet these otherwise automatic standards."

All respondents implicitly noted that the quality of the employees of the insurer played a part in overall insurer quality, but only the California producer explicitly identified it as an ethical issue. He noted that education and professional development budgets are a primary target for some insurers during difficult times. "For others, their people and the ability to serve insureds and producers are so important they do not miss a beat and professional development line items are not touched. Which insurers do this is apparent to most producers. It should be at least a subject criterion in insurer selection," he continued.

The dimension of continuous process improvement was another implicit part of all responses. All respondents not only wanted insurers with a strong financial position, good claim service, customer focus, broad coverage and so forth, but also sought insurers that would improve in any areas that were deficient. None of the respondents, however, went so far as to say that a producer had an ethical responsibility to try to only use insurers who identify themselves as dedicated to continuous process improvement.

Applying the dimensions of insurer quality to ethical responsibilities was realistically qualified. "Producers ethically should try to" "Producers ethically should do their best due diligence," and so forth. Some may say this was equivocation in an attempt to avoid producer responsibility for examining the quality of insurers. However, their responses indicate that these producers recognize the vast boundaries of "quality" and that some dimensions of quality will be more important to some clients than to others.

An agent association executive summarized it best: "Agents often know in advance when they are going to have to play a more involved role in claims, underwriting or audits. Most try to avoid this, but all insurers are weak in some areas. Agents add value protecting clients from poor service."

The risk manager, in summarizing his opinions, wrote: "How much weight should be given to the quality issues is an informed decision that should be made between the client and the producer before the placement of coverage."

In other words, clients, as well as producers, have ethical responsibilities with regard to the quality of an insurer used to provide coverage. Clients should identify those issues they believe are important (if they are aware of them) so that producers can find the best fit with a "quality insurer."

Peter R. Kensicki is a professor of insurance at Eastern Kentucky University in Richmond, Ky., as well as a member of the Ethics Committee of the CPCU Society in Malvern, Pa.

NUs Next Question Of Ethics:

Agents and brokers are often sued after uncovered losses when the insured blames the producer for the gap in coverage. Eliminating the special situations where producers make extra commitments, what are the usual ethical responsibilities of a professional producer to the client in the procurement of insurance? How can these responsibilities be communicated to the client?

Please forward your responses to Peter R. Kensicki at ethics@eku.edu or Eastern Kentucky University, 107 Miller Hall, Richmond, Ky. 40475-3101. All responses will be kept confidential.

Ethical Words to Live By:

From an E&S broker recalling his ethics professors words: "If you have a question about the ethics of what you are about to do or say, stop and think. If it would embarrass your mother, it is probably unethical."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 17, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.