Below you will find my recent Knowledge Knugget discussing the dangers of agents serving on boards.

I’m adding a new danger here, thanks to a discussion with one of my favorite agents in CA who noted a particular problem.

What happens if the agent has to make a claim against his insured, on whose board he sits?  There are not many circumstances under which this could happen, but it is a possibility.  How does he reconcile his duty of loyalty under those circumstances?  And I cannot imagine the befuddlement of the carrier that receives a claim on an insured where the agent who placed the business is the claimant.  And what if there’s no coverage, and the agent then gets sued by the client, yet he’s the claimant in the first place?  Theoretically, at that point, they would stop the insanity, consider the claims to be offsetting and dismiss the whole thing.  But maybe not.

The particular situation that brought this topic up had to do with a potential personal injury claim against an entity.   But I’ve also contemplated — what happens if an agent’s on the board of an entity, and the entity doesn’t pay its premium, and the agent needs to take action to recover the premium?  As you may know, defaults can be subject to a D&O policy if the Ds & Os knew they were misleading the creditor at the time credit was granted.

What if the agent director was kept in the dark and thus extended credit (ordering coverage bound, let’s say, on a policy with 25% minimum earned — like a non-standard condo HOA), and now is stuck with that 25% minimum earned because the insured’s check bounced.  How is he going to unravel that?  What if there’s an uncovered claim due to the policy being cancelled and they sue him, and he feels he must counter-claim against them to protect himself?  How do you explain that to the carriers you just bound the insured with, and your E&O carrier?  Weee, What a Predicament! (as John Travolta exclaims in Face-Off, one of my all time favorite movies).

Imagine how complex it could get if an agent sat on the board of the HOA where he lived and wrote all their coverages and had a property or GL claim.  Covered or uncovered.  Wow.

Anyway, chew on all that (yes, I know — I worry too much) while you read the below Knugget, and let me know your thoughts….

* * * * *

Twice last week I had occasion to discuss the topic of agents writing insurance for entities on whose boards they sit.  This is a common road to production for many agents, but let me share with you why it might not be an course of conduct in which you want to engage:

First problem –

If you’re sitting on a board, it is your duty to put loyalty to that entity above any loyalty to yourself.  If you are placing insurance for this entity, can you honestly say that you are doing the very best for this entity that can be done?  Do you have all the markets that are appropriate for its business?  Are you giving up your commission so as to procure the lowest possible pricing?  Are you doing what it takes to ensure the entity buys all needed insurance, even if you are not overly familiar with some lines of business?

Can you possibly ever avoid the inherent conflict of interest that comes with making money off of a service you provide the entity?

To complicate matters, what happens if you’re also on the board of your agency?  How can you reconcile those two entities’ needs?  You can’t.  You have to put loyalty to one above loyalty to the other, and therein lies the rub.

If the question ever arises as to whom you placed first, you will have very few defenses.

Solution?  Possibly, you could hand the account to someone else in your agency and act only as a referral resource.  Your agency would still make the revenue, and if you don’t profit personally from the placement, you will be at less risk.  Still, not completely free of risk because at the end of the day, your agency, and the coverages and pricing it can provide may not be deemed as the best possible for the entity.

Second problem –

Check your insurance agents E&O policy, and you may find that claims arising from your services rendered to any entity for which you are a director are excluded.  This is not an uncommon exclusion.  There is usually some form of exclusion that eliminates coverage at least for claims made by entities over which you exercise control (by ownership or by directorship), and sometimes the exclusion extends to all services rendered to, not just claims made by, those entities.  That means you may have no coverage even if a third party makes a claim against you, rare though that might be.

So if the worst case scenario occurs, and your entity has an uncovered claim, there will be no coverage simply because you sat on the board.  No coverage for you, and most of the time, no coverage for the agency.  How, then will you resolve that claim?  Out of your own pocket?  Scary stuff.  And again, what if you’re on the board of the agency?  How could you have exposed it to such financial harm?  Now you’ve violated your duty of loyalty and duty of care to the agency.  Not good.

My recommendation both from an agents E&O risk management perspective and from a D&O risk management perspective is that you should not place coverage for any entity on whose board you sit.

If sitting on boards is a large part of your networking and business-building process, use it for networking, and write every other board members’ coverage, and that of all their friends.  But when it comes to the entity’s coverage take the high road, and advise the board that you cannot write the entity’s coverage yourself without creating an inherent conflict and sacrificing the protection of your E&O policy, and refer them to another agent or three.  You’ll sleep better at night if you do.

I think most agents who write insurance under these circumstances have not thought through the ramifications.  It all looks so simple on the surface.  But it’s not.

Next week’s Knowledge Knugget will discuss this topic in more depth.  Sign up prior to 2/4/10 to receive the KK in your mailbox bright and early.  I’ll post it here sometime after its distribution to my mailing list.

We’ll kick off this year by discussing some quirks in PL placements, which become quickly apparent when an agent or insured expects the same responses from underwriters as they would enjoy from a GL carrier.

For this installment, we’ll review two specific quirks:  Additional Insureds and excess limits.

1.  Additional insureds

As you know, in the world of GL, if you want an Additional Insured added to coverage, you request it, identify the relationship, and you get an endorsement for x amount of money.  The carrier is then willing to notify the AI if coverage ceases and will defend claims against the AI.  Not so in the world of Professional Liability.

It’s rare for there to be Additional Insureds on a PL policy.  There are some exceptions, which I’ll save for a future Knugget.  Here are some reasons carriers will not provide Additional Insured status to Insureds’ clients.

a.  The policy exists to protect the professional — not his clients.
b.  An allegation of professional negligence is needed to trigger coverage, and the client is not the one rendering the covered professional service.  Therefore, tender of a claim against them would not trigger coverage under the insured’s policy.
c.  Defense is within the limits (generally) so providing defense to a third party would erode the insured’s limits.
d.  The Insured v. Insured exclusion in the policy will void coverage for any claim brought against the insured by the AI client.

An outgrowth of this overall reluctance to provide coverage to AIs is further demonstrated by the fact that even those carriers that will add an AI will absolutely decline to comply with an AI’s request to be notified of cancellation of a policy.

2.  Excess limits

In the world of GL, a 4mm xs 1mm limit is available broadly and for pennies on the dollar.  No one thinks twice about it, regardless of the size of the insured or why they want the higher limit.  It’s considered wise to always offer those additional limits to your insured.

In the PL world, carriers are more circumspect about putting up limits.  If you have an insured with, let’s say, 200k, or even 2mm in revenue, and you request a 5mm limit, you will not get it from most carriers.  If you place a 1mm limit, then seek a 4mm xs 1mm, you will likely not have much luck.  Here are some reasons carriers give for not putting up large limits:

a.  PL is a severity line, not a frequency line, so if a claim occurs, it may well exhaust the entire limit
b.  The carrier will not put up limits higher than the insured’s revenue
c.  The carrier will not put up limits higher than the insured’s assets
d.  The carrier cannot get enough rate for the limit
e.  The carrier does not want its policy to be the insured’s biggest asset
f.  There appears to be some correlation between limit availability and loss incurred, so carriers do not want a high limit to be an attraction to plaintiffs.
g.  The carrier will not provide an excess limit higher than the underlyer (i.e., if the primary is 1mm, the most they will put up is 1mm)

Pricing for PL excess limits is much heavier than that of GL.  For example, if a 1mm limit costs $10,000, a 5mm limit is likely to cost $24,000.  (5mm increased limit factors in PL often ranging from 2.30 to 2.45)  The 4mm xs 1mm costs an additional $14,400!   I’ve had agents fall out of their chairs with that kind of pricing because they were expecting a quote for a fraction of the 10k primary premium.  A 5mm xs 5mm limit will range from 40% – 70% of the underlying 5mm, depending on the line of business and the quality of the risk.

This pricing model, again, is largely driven by the fact that PL is a severity line.  In some lines with a tendency to more frequency and a lot of actuarial data, you might see the ratios come down a little.

There are some exceptions to the reluctance to provide higher limits, and in a future Knugget, I will touch on some tricks of the trade to persuading underwriters to put up the limits you need.
Chris Christian, CIC, RPLU
Vice President/Senior Broker
US Risk Brokers

760-415-4213 or for TN agents 615-273-3451

Knowledge Knuggets do not constitute legal advice, nor are they the opinion of US Risk.

Please feel free to suggest future Knowledge Knugget topics.

Visit www.pltidbits.com for archived Knowledge Knuggets and other Important Items regarding professional liability.

chrisc [at] usrisk [dot]com

I am accepting new agent appointments, so please give me a call or send submissions if you feel I can be of assistance with your complex risks.  Or, if you just like working with propellerheads – let’s chat.

Jeff, the speaker, talked about there being four components to an insured making a decision to do business with a particular agent:  Price, Coverage, Relationship, Service.  If we take Price off the table, we must sway the insured with the other three.  However, the prospect cannot experience our service until we are actually doing business, and there is only an incipient relationship, if any, and it certainly cannot compare to the relationship the insured has with the incumbent.

That brings us to coverage as being the preferred (and sometimes the only) way to persuade an insured to bind coverage with us, versus the incumbent, or other competitors.  Of course, if the insured has the primo policy of the world, written absolutely correctly, there’s not much we can do about that.  Jeff recommends then, that we walk away from the quoting process, and stay in touch with the insured for a future try.  Until the coverage situation changes and we can do something to improve their placement, we would not waste our time or our staff’s and carriers’ time, quoting something that we have no reason to believe will bind.

He does recommend that we acknowledge price as an issue and frame pricing as a component of value and commit to deliver value, versus cheap price.

Very interesting approach.  He cautions that our most important diminishing asset is our Time, and this approach will keep us from wasting it, allowing us to devote it to more productive opportunities.  Yes, every now and again we might bind a risk in this situation, but how often do we waste our time quoting risks have a very small chance of bringing us any revenue.

Imagine the level of professionalism and ever-better coverages insureds would enjoy if we all did business this way?  Wow.

I have paraphrased his content significantly, and unfortunately could not get ahold of a handout for the session.  So I offer this just as food for thought about how we frame our relationships with our clients.

Click on Knowledge Knuggets Archives and check out the 10/8/09 Knugget for the inside scoop on why this is not a corner that can properly be cut.

***I am accepting new agency appointments, so if you have D&O, E&O, EPL or other professional business and would like to take advantage of my unique approach, please contact me at chrisc [at] usrisk [dot] com. *****

I’ve noticed that most, if not all, standard physicians companies offer the doctor a lifetime tail upon retirement.  Sometimes the tail is free, if the doc has been with that insurer long enough.  Other times it’s at a relatively reasonable premium.

I’ve seen this provision in an accountants’ policy or two.

However, I have not seen it extended on architects or engineers policies or in the handful of lawyers professional liability policies I have recently reviewed.

What’s up with that?

Notwithstanding the fact that many of these professionals work in a firm environment and don’t carry individual policies, they still have the issue of coming to retirement age with an incredibly long loss development horizon.  They frequently have no control over the ability to purchase tail on their own, having been just a cog in the wheel of the firm, yet they are personally liable for their professional errors in many jurisdictions.  If the firm does not maintain coverage, or somehow moves to a policy that does not include these hapless retirees, they are bare.

I would love to see the market respond to this issue by providing an individual tail trigger (and quite possibly limit) for professionals reaching retirement age.  Maybe in the next soft market, it will evolve.

One of the things the instructor did *not* touch on is:  Don’t lie to your insured about what’s covered and what isn’t.  You would think that would go without saying, wouldn’t you?

I just lost an order to bind on a piece of business due to the competing agent lying about the nature of the competing coverage.  I was competing against a carrier I represent, so I went to the carrier to confirm what they can and cannot offer in this line.  The underwriter confirmed my suspicions — the coverage the other agent said was provided is not available.  Ever.

I provided the written confirmation from my underwriter to my agent, so he can go back to the insured to enlighten them if he so chooses.  But the real question here is:

What is the insured’s motivation in accepting the warm, fuzzy lie from the one agent versus the cold, hard truth from the other?

Does an insured think things through and realize that if they get the “confirmation” of coverage from the one agent in writing, they can sue him later and recover damages when it turns out there’s no coverage in the form itself?  Or do they believe that ignorance is bliss?  Or does this competing agent seem somehow more trustworthy or more knowledgeable than mine?

In this case, mind, the insured actually paid 25% *more* for the fictitious coverage.  So they have been damaged not only by relying upon a representation of coverage that isn’t there, they have paid more premium for it.

How can this agent live with himself?  And what can my agent do to compete against such an under-handed approach?  I don’t know…yet.  I’m hoping to find out, and that the good guys will finish first.

I can’t even imagine the world in which I would intentionally mislead my insured as to coverages offered, or ignore the black-and-white words on the quote and rely upon a representation from someone else that said what I wanted to hear.  I hope I’m not a rare breed…..

If you would like the checklist in Word format, please email me.

We, as an industry, have to ask ourselves why we allow the 7/1 and 1/1 bottlenecks to occur.

Long ago, when I had my underwriting facility, it occurred to me that I couldn’t possibly do a good job of underwriting an overabundance of renewals at one time.  I decided to ask my agents if they and the insured wouldn’t mind moving the renewal date.  Amazingly, most all the insureds had no issues with moving their dates to a less hectic time, and the agents were relieved to spread their workload out a little bit.

For most lines of business, inception dates are completely random.  Certainly schools seem to cluster around the 7/1 date because that’s when their fiscal year starts, and they want their coverage to coincide with their year.

Back in the day, D&O used to incept along with the fiscal year start, but think about this — the most recent year end financials are one of the most critical underwriting elements.  When are they ready?  Certainly not two or three weeks prior to year end.  They are ready two months after.  So why not have your D&O inception be three months after year-end?  That way, the most recent financial information is easily provided to the underwriter in time for renewal.  And…if your year-end is 12/31, the farther away from that date you are, the less likely everyone will be tied up with vacations.

And speaking of vacations, I had a large, complex risk that used to be a 1/9 renewal.  The only thing worse than a 1/1 or 7/1 is a risk that renews the following week.  Underwriters don’t pay attention to it because it’s not a 1/1, but once 1/1 comes, it’s a holiday, and next thing you know, they’re looking at the risk for the first time on 1/4 with no ability to properly review.  And, the insured’s contact people were frequently on vacation.  So, we moved the inception date to 4/9 and have been much happier with the results and more effective in the management of the account.

Just food for thought about how to avoid the bulge in the snake’s belly.  Think about asking your insureds (or your agents) to consider moving an inception date so you can create a good balance of risks throughout various times of the year.

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