A Question of Ethics: Agent’s Dilemma When Client Understates Payroll

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 Indiana claims manager, in agreement with the Iowa agent, writes, "The agent should do his best to report as accurately as he can—to all parties—and to advise the prospect that he is doing so.  The agent is not ethically performing his job if he does not notify the insurer."

An agents' association executive also agrees: "Report actual premium bases to the proposed insurer and alert the prospect to this fact or at least secure his agreement.  Notify the current insurer because it is the right thing to do. All agents should fight against cheating by insureds and insurers."

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

From California comes these responses: "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."

A zone manager for an insurer focuses on the prospect. "You have an ethical duty to inform the prospect that you cannot get an accurate quote without using up-to-date and accurate payroll data. It is in the prospect's best interest to be accurate with both the current and prospective insurer."

Others responding also consider walking away as an option, but add that the ethical responsibility to the proposed insurer is to give full, complete and accurate payrolls.

• A residual market executive writes, "If you know the correct payroll, you should tell your potential client that you will use the correct information and not 'fudge' the numbers."

• An educator notes, "I believe the agent has a duty to provide an accurate payroll estimate and to facilitate accurate self audits."

• An attorney concludes, "This is a true no brainer. Accurate payroll must be reported in the application for the quote.  The agent cannot perpetuate the underreporting by the insured.  Courage to do the right thing often carries a price, but ethics is a form of insurance for the agency and the agent." 

An education executive believes the application should contain correct information and adds, "The agent should also inform the proposed insurer that past audits appear to be incorrect and ask the insurer to conduct a physical pre-audit." 

An executive from an insurer believes, "The duty to the proposed company is absolute and total honesty about all relevant underwriting information including the true values, receipts, losses, and payroll."

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."

"Further, by not reporting, I was denying the insured the natural consequences he might need to never drive under the influence again."

"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 Florida consultant, summarizing many of the points others made, writes: "You have an ethical obligation to advise the potential customer why compliance with self-audits, credible figures and business philosophy set the dynamics of the moral character of the business and the ramifications of a serious breach of contractual obligations between the insured and the insurer."

The education executive is stronger. "The producer should inform the client that insurance is a business transaction involving utmost good faith on the part of both parties," he says.

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."

Where respondents differ most is on the question of the agent's obligations to the current insurer. While many believe the current insurer should be told the truth, others saw no obligation to the current insurer.  Potential legal trouble heads the list of reasons for this latter group.

The former CEO writes, "There is no ethical requirement to notify the incumbent insurer and, arguably, doing so might create legal issues for the agent."

An Arizona commercial underwriter notes that legal obligations to the current insurer may differ if the incumbent producer is an agent or broker. A Minnesota agent warns that the new quoting agent cannot contact the current insurer as it would subject him to a lawsuit from the prospective client.

Confidentiality, closely associated with the legality arguments, was the second most common reason given for no ethical obligation to inform the current insurer. 

"Despite my wanting the producer to inform the current insurer, I am not sure the producer can say much without violating confidentiality duties to the prospective insured. Any information, such as payroll, could carry the expectation of confidentiality," says one respondent.

A senior vice president of operations writes, "While there is an obligation to the current insurer, there is also a conflict with the agent's obligation to maintain confidentiality of the client's information.  Use of the payroll information, beyond presenting it to another insurer for a quote, might breach that responsibility." 

The attorney believes, "The challenging issue is whether to report the issue to the incumbent insurer. If the agent does, he will lose the account, but that must not be a reason for or against this action. He advises that the action chosen may depend on the agency contract which could require the agent report all material information to the insurer.

"Does that requirement apply to accounts not personally placed with this insurer," the attorney asks. "I conclude the agent can ethically transmit or not transmit the information to the incumbent—either course of action could be ethical depending on the facts," the lawyer continues.

Other interesting comments include this one from a Florida agent who writes: "I'm not sure it is ethical to butt into other's business, especially when I may not have all the information. But I might inquire to the current insurer about its stance on physical audits and suggest a policy of physical audits every three years or so."

A home-office employee, while agreeing the insured's ethics were wrong, places an ethical onus on the insurer: "To my mind, the real ethical dilemma here is the use of the self-audit reporting form." 

The Arizona underwriter gives the prospective agent a pass for a similar reason: "The incumbent carrier had the capability, through the contract, to get this information through an audit."

The residual market executive wants some response from the prospective agent. "I would want the agent to give our audit department an anonymous phone call (from a pay phone if desired) alerting them of the discrepancy and urging a full-blown audit."

In summary, all responding to the ethical duty to a prospective insurer agreed it should be given accurate and complete information. Similarly, the prospective insured needs to be counseled about the possible ramifications of underreporting, most agree. 

As to the current insurer, the group was split with a majority believing the payroll discrepancy should be, in some manner, reported.  A significant minority disagreed.  Almost all, in one way or another, realized that "walking away" from this type of client was an important ethical option.