Author: Bill Wilson
An agent discovers that his insured, a childcare center, has been underpaying her premium for at least five years due to a clerical coding error. He knows for a fact that she cannot pay any past-due premium. His choices are remaining silent or telling the carrier about the mistake and risk subjecting his client, a surefire renewal without competition for the next 10 years, to an unexpected financial burden. What would YOU do?
Here is a question posed by a VU faculty member:
"A young agent is contacted by a for-profit childcare center in a small town about their insurance. He makes his visit and collects the information he needs to write their WC, GL, etc. He can take the workers comp with the letter of record and keep it with the state fund (who must take all comers).
"Upon reviewing the current policy he suspects the payroll has been grossly misallocated between a low rated clerical code and the governing class code. A quick check of the math indicates the account has been underpaying thousands of dollars a year, for at least 5 years.
"The only reason the carrier hasn't caught the misallocation is the account is written in a special program for small businesses (less that $5,000 premium), and they use voluntary audits for efficiency. The agent is thoroughly convinced there is no deception by the insured. The owner isn't particularly business minded, and seems sincere and ethical (as you'd hope with someone caring for small children).
"He believes strongly that, should the correct premium be charged, it could jeopardize the survival of the business in the future. He fears the carrier would also attempt to collect on corrected audits of prior years, which could cripple or bankrupt the operation as well.
"His choices: tell the carrier and the customer and live with the fallout to the customer, don't tell the carrier and carry on a deception, suggest the insured consider non-subscription (a dangerous option in Texas), or walk away from a sure thing that you could renew for the next 10 years without competition.
"What should he do?"
For me, this is a really easy one...while I'm sitting here leaning back in my chair at the PC. If I'm the agent, it's a tough call. However, from a purely legal/contractual standpoint (forgetting the ethics issue at the moment), I think the agent has to point out the error to his carrier. Under the law of agency, and probably within the spirit of the agency/company agreement, the agent most likely has a contractual obligation to tell the carrier everything he knows about the account.
I'd sit down with the underwriter and explain the situation. If the account has been profitable, perhaps the company would be willing to make an agency accommodation for past premiums, but adjust the current premium to reflect the actual risk. If so, I'd then point out to the insured that the company is legally entitled to the premium, but is waiving that right on previously expired policies.
(I'm aware of at least one court case where the court ruled the insurer was stuck with past clerical errors, though policies often give the insurer 2-3 years after expiration for audits. In my state, we have a law that prohibits insurers from changing class codes after a policy expires, though it's somewhat gray regarding reassigning premiums among existing class codes. So, under these circumstances, the carrier might not be able to collect past premiums due.)
If the company isn't willing to do this and insists upon being paid as far back as the contract or statutes permit, then the agent could be faced with losing the account. That might be better than the company finding out later and the agent losing a market. Of course, that doesn't help the poor insured who's relied on past premium payments and quotes. If s/he could have gotten coverage at a lower cost elsewhere, there could be the possibility of an E&O claim.
Needless to say, by remaining silent, the agent most likely avoids all of this...until or unless the carrier discovers the underpayments. Personally, I think the agent is better off fixing the problem right now rather than living a lie. If he has a conscience, it's going to have to be correctly rated at some point, then the questions will start coming.
If you have an opinion, email it to Bill.Wilson@iiaba.net and we'll post it here. Include your name, agency name, city, and state, or we'll assume you prefer to contribute your opinion anonymously.
Without a doubt honest disclosure is everything. Upon advising the company of the error and possibly working out a deal, he would ultimately have to inform his client of the situation. The truth is what prevails. If the customer had been overcharged would not a refund be appropriate? In this case, the company as well as the customer would have to respect the agent's integrity, which should be built on more than just one account.
Roosevelt Haywood III, President/CEO
Haywood and Fleming Associates
Gary, Indiana
I totally agree with you that the agent should correct the situation on the upcoming policy. I have had a few instances in the past forty years similar to this and felt it is always best to confront it head on. In this case I would call the underwriter and explain the situation, but not reveal the insured name. That way I would try to get an agreement from the underwriter that he would not go after the past five years premium and that I will correct the upcoming policy. That way we have a compromise. If this does not work with the underwriter, walk away.
Alan Kunkel
Kunkel Insurance Agency, Inc.
Jasper, IN