Ethical Dilemma #1
The Case of Who'll be "Broker"
"The market is the place set apart where men may deceive each other." -- Anacharsis (c. B.C. 600), Greek sage and inventor
A broker/agent projects that his client's renewal workers compensation experience mod will be 1.35. The worksheet is received from NCCI with a 0.95 mod, with several obvious errors that, if corrected, would increase the mod. The broker/agent explains the situation to the insured and advises that the error may or may not (probably not) be caught by NCCI or the carrier. The client asks, "What should we do?"
How should this be handled?
If you'd like to submit your opinion, email it to: Bill.Wilson@iiaba.net
The following are unedited responses to the ethical question above.
Grand Prize Winner...Jacquelin J. Lawrence, HDL Insurance, Inc., Foley, AL:
First of all, I personally would never tell a client that the mod sheet is incorrect and that the carrier may or may not realize/fix mistake. Once the mod sheet is received, I would review for accuracy and if any errors were found, I would report them to NCCI immediately. At that point in time, I would request a corrected/revised mod sheet to present to my client for his records. Our office has a standard policy that all renewals will be shopped with carriers for the best coverage and rate possible. I would then present the coverage offer to my client for his review and maintain the account for three reasons: My clients trust my knowledge, my clients know that I will always put their best interest first, and last, but not least, my clients will respect me because I would never mislead them or a carrier. If my client somehow knew that the mod sheet was incorrect, I would advise them that it needs to be corrected for proper rating and that with fewer loses, their mod would decrease in time. I would always explain that even if they did not want the correction done, it was my responsibility to the carrier that I place business with, to make sure that they are aware of the mistake.
Other responses:
I think the agent/broker should correct the mod to 1.35 undoing the mistakes made by the rating bureau. If the insured disagrees and requests that the lower, incorrect mod be used and maybe it will not be caught by the carrier or the NCCI, then the agent/broker should politely recuse himself from assisting the insured to use a mod that will not charge the correct premium. He would be condoning a lie.
The agent should have corrected it anyway and advised the insured of the consequences of not doing so.
I believe that NCCI should be notified and it corrected. It could still be changed in the future and the insured would still have to pay the increased risk when the carrier was notified. Paying for it over the term of the policy is much better than doing so after the fact.
I would tell the insured to "reserve" the additional funds required to pay the additional premium should the carrier discover the error. Next I would identify and fix any reasons for the mod being so high. Errors in favor of the insured I generally let slide which do not effect coverage. Correct the errors which are not in favor of the insured. I will assume the miscalculated mod will not effect coverage. Overall I am a believer that it all comes out in the wash. However some agents wash their clothes better than others. For every error in the insured's favor, there is a corresponding error against an insured. Kind of a physics theory, for every action there is a corresponding reaction.
We not only represent the insured but also the Insurance carrier. By not informing the carrier of their mistake we are misrepresenting the insured and ourselves. Also by telling the insured that the carrier may not catch their mistakes we can get a lower premium is telling the insured it's okay to rip off the insurance carrier their due premiums.
Tell the client that we will use the correct experience mod. Knowingly using the wrong one is only asking for trouble.
He should get it corrected with NCCI & the insurance company. Then they do not have to worry about ramifications in future years & keep a trusting relationship with the insurance company.
Report and correct.
"We have internal resources people who have determined that there are errors in your e-mod calculation. We certainly would approach NCCI if they were corrections in your favor and likewise feel the correct info should be used in the other direction. It will most likely get adjusted in the future anyway. Let us work with you to make sure your trends are reversed so that we get the e-mod back down to where it should be."
I do not tell NCCI of the error, unless the insured buys coverage elsewhere, in which case I will become outraged that NCCI messed up and let them have it with both barrels.
Agent/Broker says "that's your decision not mine" In order to help the customer he quotes the dollars involved.
Tell the insured you must submit the proper information to the company as in the long run it may come back to you and you may be audited.
I would explain to the client that, unfortunately, NCCI probably makes as many mistakes AGAINST the insured as they do IN FAVOR OF the insured (as they have in this client's case). The client must also understand that, in most jurisdictions, if a newer, more correct modifier is promulgated more than 90 days after the coverage effective date, and it results in a higher premium, the higher modifier can only be applied on a prospective basis (that is, going forward from the date that the newer, higher modification is endorsed onto the policy), and not retroactively. I will also point out that NCCI could probably have caught the errors if they had a actual person with some actual common sense examine each modifier before it is released. But, the client also has to understand the long range implications of an "artificially low" modifier. The account loss ratio based on the lower premium would become less attractive to an underwriter in today's difficult environment. And then I would explain that this is a decision for the client to make.
First of all the agent should have never made the statement to the insured that NCCI would probably not pick up the error. and Secondly I don't feel that the agent should hold back the information from the company stating that they had used the wrong mod. If once he contacts the company and they say no their mod (lower) is correct than fine , but the agent should make the company aware of their error.
We should go ahead and submit the differences to NCCI's statistical department and ask that they amend the mod as soon as practical so that the client isn't caught in an "arrears" premium situation when it's revised and updated next year. At least that's a way of doing the right thing and saving face with the customer at the same time.
I would have the mod corrected. Otherwise you are submitting an application to the company knowing that it contains misleading information. I would also let the client know that paying based on a mod that is lower than it should be could result in an even higher mod the next year, especially if this year's claims are significant. The likelihood of getting caught is not relevant. If a tree falls in the forest and no one is there to see it, it still ends up on the ground.
It appears the agent is the current agent for the account. The errors should be pointed out to the current insurance carrier so that the information can be corrected and the appropriate modification applied. To me, this is the ethical thing to do as the insured needs to pay premium based on their loss experience. If they pay less, they are penalizing the entire "pool" of insureds who are paying the correct amount of money for their losses. While it costs more money, you would hope the insured, as well, would have high ethical standards and want to pay their fair share.
I would advise the client that we should notify the bureau of the errors and have the modification corrected. It has been my experience in the past, that these things do not fall permanently between the cracks and this could come back at a very bad time when the client would not be expecting or planning for the additional premium charges.
First, if we assume the errors could hurt the insured, then the broker has a responsibility to tell the insured that there were errors made on the policy which could negatively affect the insured if he made a claim. So, it is the brokers responsibility to voice possible consequences so that the insured is protected properly. This communication, including attachments, is for the exclusive use of addressee and may contain proprietary, confidential or privileged information. If you are not the intended recipient, any use, copying, disclosure, dissemination or distribution is strictly prohibited. If you are not the intended recipient, please notify the sender immediately by return email and delete this communication and destroy all copies.
The Broker should leave it alone. If he tries to get it corrected NCCI will make a "federal" case of it. It is their responsibility and can correct it at any time or on audit. It is in the Insured's best interest to leave it alone, and our first responsibility is to him.
I would recommend to the client that NCCI be notified and inform them of what could happen if NCCI corrected their errors later rather than now. Leave the decision in the client's hands and get something in writing from them to proceed in either notifying NCCI or leaving the situation alone.
The agent should have the errors corrected - no doubt about it.
The erroneous Mod W/S should be brought to the attention of NCCI and corrected. If caught later, could ostensibly cause a lot of problems in correcting the policy premium and in collecting the additional from the insured. If not caught until just before audit, could create a nightmare scenario that no agent wants a part in as it usually involves attorneys and courts. The agent had already roughly figured the mod to be 1.35 and the agent should use this figure until the Mod W/S is corrected by NCCI.
It's a case of "pay now" or "pay later". The agent should never have suggested to the client to let it slide in hopes the carrier or NCCI might not catch it. This relays a message to the client that you just might let other things slide which may or may not be in clients best interest. I would tell the client to let me get the errors corrected and get a concrete mod so as not to come back and "bite" us in the future. Always deal straight forward and up front so you won't have to worry about covering your tracts.
I believe honesty is the best policy. The customer should be explained to that there were errors in rating that caused the policy to be issued less than quoted and that these errors are being fixed and the policy will be updated to reflect how it was quoted.
Many insureds don't trust insurance companies and think they are overcharged. Many insureds don't see getting a low rate, correct or not. as unethical. The agent's only really choice is to do what is right and point out to the customer the real facts and the probable outcome. I believe the producer is under an ethical responsibility to communicate the proper facts to the insurance company and keep the customer informed. The producer, if an agent of the insurance company, has that important principal/agent contractual relationship which requires loyalty to the principal.
The insured should be advised that in this situation like all those involvements the agent will have with him or her, correct coverage, correct claim payments, and correct premiums will be the standard. NCCI will be advised of the errors. We all make them.
I would advise the client to allow the agent to contact NCCI and work on getting it straightened out even though it may increase the exp mod but in turn would mean an increase in premium. Though if the agent does nothing and ignores the problem then later if it is caught it could cost the insured more possibly more and the agent would look stupid for not catching this. Explain that to the insured!
I believe that the NCCI either corrects the mod and notifies the agent, or sends back for misrepresentation, Also I would restrict the agent from submitting any more , also would audit his company to make sure this wasn't done in the past.
Advise NCCI of the error and get it corrected.
NCCI should be notified of the error.
I would not have told the client that it may or may not be caught by NCCI. Instead would have informed them that the renewal was issued incorrectly and that we have sent endorsement request asking that ex mod be corrected.
The agent should speak with the insured and advise that he/she will be contacting NCCI to discuss discrepancies in the experience modification factor calculations. It is to the insured's advantage to have the mod corrected immediately, rather than face the potential of a very large audit premium. The calculation errors would eventually been found, regardless of the agent's intervention.
Explain to client that it is better to pay a little more and have an accurate policy than pay for an "incorrect" policy that would be open to dispute later and could end up with unpaid claims and even higher costs later.
I would contact NCCI to discuss the quote which does not look correct. The agent should not have discussed quote with the insured until he was sure quote was correct.
Correct the errors.
As the broker/agent, I would explain to the insured that we must apply the 1.35 mod. This modification is applied due to the loss history, etc. If the insured complained, I would ask what if you were being shorted 42% of your revenue wouldn't you want someone to tell you?
Write a letter to the client advising them of the error and notifying them that if the error is corrected, they could receive a substantial bill for additional premium. This might also affect the processing of any claims should the additional premium not be paid in a timely manner.
The broker should be up front and honest with their client - don't assume that the company will not "pick up on it" - The broker should contact NCCI and have the worksheet corrected and see what the mod will be after that. The client should be able to trust his broker and "good news" gets out, but "bad news" spreads quicker.
The Broker/Agent should advise his insured that at some point, the company will discover the error and will petition NCCI for a revision which will back-up to the subject period. This will result in a "massive" additional premium being billed the insured at a time when it will be least expected. The Broker/Agent needs to advise NCCI and the company of the errors and request that they be corrected.
The ethical thing to do is to explain the discrepancy to the insured and notify the carrier not the NCCI. No duty is owed by the agent to the NCCI. The agent does represent the carrier and has a duty to notify them of what he reasonably believes is the error. This makes the error the insurer's monkey and not the agent's monkey. The problem than is no longer the insured's or the agent's. He can then wait to determine what the carrier does. Always keep in the agent has a duty of disclosure to his principal and his principal is the carrier not the insured.
A situation like this always puts an agent between a rock and a hard place. There is a great desire to do what is necessary to keep the account. The agent in this scenario should advise the client of the errors on the mod worksheet. In order to be ethically correct, NCCI should be contacted and also advised of the errors. At this point, NCCI should take a lead in making corrections. The agent should explain to the insured the consequences of writing the workers compensation coverage with an incorrect mod. Should the errors be discovered, the mod will be recalculated and the insured will receive a bill for the new premium. In the worst case scenario, NCCI could penalize the insured and agent for fraud. This may not happen, but the possibility exists. It is in the agent's best interest to advise his/her client to have corrections made to the mod and proceed with a workers compensation policy based on correct information.
Because the agent has already notified the client of the error from the NCCI, the agent now has the obligation to further advise the client that ethically the agent must make the corrections and re-submit it. I'm not sure why the agent notified the client of the erroneous quote from NCCI in the first place. It would have been better for the agent to just fix the situation with the NCCI, gotten the accurate quote then passed it on to the client. The bottom line is if the agent has notified the client of the error and then does nothing, the agent has then established a reputation of being a little "shady" to the client. Perhaps the client will get the idea that the agent will do something else "shady" for the client later!
My answer would be to re-submit and ask that it be looked at. I always advise it is better to be honest upfront, then pay thru the nose later.
The moral thing for the servicing carrier would have been to compensate the agent in some way. Legally however they are probably not obligated to the agent.
There is no substitute for the truth even if one thinks it won't get caught. Because it always will and the client will be livid when his policy is canceled for material misrepresentation or for having to pay a back-dated charge that he won't expect. Ka-ching! I see E&O as well as loss of personal credibility.
This is a tough one, but something like this comes up every once in a while. Not necessarily having to do with an experience mod error, but where we have to make a choice between the company and the insured. The problem is not just an ethical one, but a legal one as well. I am licensed and have a legal, binding contract with the carrier in which I agree to do certain things and act a certain way in return for the ability to place business with them. So, legally, I’m bound to the carrier. However, morally I personally have more of a bond with most of my clients and would, under many circumstances place his well being over that of the company. Since I would not be REQUIRED by my contract in this case to notify the carrier I think that I would probably tell the client to leave it as is but be prepared to pay more if the error is found. That may not be the right answer, but I’m afraid that is what I would do. I trust you’re not going to forward this to my carriers!!!!
This seems too simple. Honesty is always the best policy, in the long run if not the short. If the account is written at the lower mod, it will probably have a poor loss ratio at the end of the next year anyway, and will not be considered favorably by the underwriter, particularly with this hard market. Broker needs to explain importance of accurate rating/premiums to client, advise NCCI of its errors, and accept the anticipated higher premium.
Explain to the client that it is important that the policy be correct in all aspects and in order for coverage to be truly correct and for the situation to be fair to all parties, we need to notify the company and have the error corrected.
Although it would favor the client for the short term, the only ethical solution is to notify the NCCI about the mistake. First of all, if the agent has been doing his job his client already knows what the past loss history so a higher mod should not be a surprise. Secondly, and more importantly, the agent should not have put his client in the position of making a dishonest decision. This system only works when everyone plays by the rules!
To start with, this is a question/error that should not even be shown to the client! The answer should never be left up to the insured to decide! The insured has an obvious problem with losses, that need to be addressed NOW. By letting the error of the experience mod, stand, the agent is only delaying the loss control action that the insured needs, now. A projected 1.35 mod is a serious problem. You would hope that the client, presented with a projected 35% increase due their losses, would ask, "What should we do?" Which would open the door to a serious discussion of loss control in this area. Delay will only cost the insured more money in the long run. Thus the agent/broker is doing a disservice to the client, for even pointing out the error, and throwing the ball into their court.
More ethical dilemmas....
Copyright 1998-2002 by William C. Wilson, Jr. Used with permission.