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Costly Coverage Mistakes

Simple Mistakes Can Be Costly to Your Clients and Your Agency

Everyone occasionally makes mistakes, and many missteps arise from insureds tempted by the notion that cheaper and faster insurance quotes and coverage is better for them.

With social and economic inflation at the forefront of today's insurance claims costs, Swiss Re, our errors & omissions (E&O) insurer, calls this “The Year of the Customer." Post COVID restrictions, Swiss Re risk management experts recommend reconnecting with insureds you may not have communicated with in some time to reeducate clients about their coverage options.

Here are some of the top tips you can use to coach your clients and help you avoid an errors and omissions claim.

Making and Accepting Late or Direct Bill Payments

Remind your insureds that there may not be a grace period for a late payment, and never come between your clients and their direct bill payments to the carriers. According to consultant Cheryl Koch, “It's called direct bill for a reason." If you insert yourself in the payment process, and the insurer cancels that policy for a late payment, you expose yourself to liability, according to Koch.

Recommend your clients sign up for electronic fund transfer (EFT). Even your clients who shun technology should take this opportunity, because they have many added benefits to an online account such as some risk management tools many carriers offer.

Remind your clients that if they pay late more than a time or two, they may lose any premium reduction for timely payments, or if they've had a loss or two, the carrier may not accept the payment or may nonrenew.

Additionally, in rural and low-income areas, many clients still pay cash. Often, those payments are late, according to Koch. Who gets the blame? Your agency will since the payment is in your office.

Many agencies today refuse to take client payments. Before taking this position, there is another side to consider.

According to Virginia Bates, a licensed insurance adviser in her home state of Massachusetts, "In the collection of premium, the agent (or even broker) is legally the carrier, in that the agency or broker is at that time representing the carrier (the insured is not "paying the agency"; they are paying their carrier in good faith into the hands of the agent/broker). The agency, therefore, cannot legally refuse a payment if it is on time, just as the carrier could not legally reject an on-time payment. If the agent (or broker) refuses the payment and there is a loss, the carrier would recognize the policy as cancelled (since they never got or heard about getting, the payment and would deny coverage. The insured would say, 'I tried to pay and they refused to take it' and could then most likely sue the agency - and win."

It is her opinion that agents and brokers must accept on-time payments on behalf of the carrier and then, of course, notify the carrier immediately and get the money to the carrier asap. If you do accept a timely payment from a customer, inform the carrier immediately and ensure you send the money to the carrier immediately, as well.

Also remind your clients of the dangers of a policy lapse for non-payment. These include the following.

The insurer may charge to reinstate the policy due to the coverage lapse.
The reinstaement may include surcharges for accidents or violations unknown at the policy's inception.
The insurer may re-underwrite or review the account, and reject the reinstatement, leaving the insured searching for new coverage.
Any lapse in coverage means your insured may face an uncovered loss. Especially in states where weather plays a role in insurance premiums, no one wants to face a coming storm or flood without the appropriate coverage.

Making automated payments through EFT is a solid solution for all your clients. Also, warn your clients that you do not contact them if they receive late payment or lapse notices, not even if they're related to you. This will go over like a lead balloon with your cousin or sister, but if you call to prompt one client, you must contact them all. Since carriers do not always notify agencies about upcoming cancellations, reminding your clients of cancellation can be a dangerous precedent.

Decreasing Coverage Limits or Coverage Options to Reduce Premiums

The “cheaper/faster is better" that proliferates insurance advertising today can create challenges for today's independent agents. If your insureds obtain quotes from direct writers, for example, do they offer you a chance to compare that quote and its coverage with their current coverage? While your client may save money in the short term, once a loss occurs, they may find they're badly underinsured.

Additionally, each year, homeowners may add features such as charging stations for electric vehicles, expensive jewelry or art, or other items like a trampoline or even a protection dog. These items not only create additional liability, but these changes may also increase the home's value well beyond their current insurance limits.

Approach this “faster is better/cheaper" approach with reminders to your clients that insurance is not a commodity governed by price. Social media posts, emails, newsletter articles – all these methods should remind your insureds of the value-added services you and your agency provide. Make this your agency's “year of the client" with frequent updates and recommendations.

Changes in Occupancy

Has your client had a change in occupancy? Events can occur that change the occupancy of one or more buildings or residences. For example, your insured may have rented out that summer home, or turned it into a short-term rental. Perhaps a relative died and your insured is handling the estate creating a vacant premises. A commercial building's tenants may have vacated, creating occupancy issues under the commercial property policy.

Remind your insureds that any change in occupancy can reduce or eliminate coverage.

Are Your Client's Liability Limits Adequate?

In today's world, it's very easy to blow through limits of $100,000 or $300,000 if someone is seriously injured on your client's property or your insured is in an at-fault auto accident.

According to the Insurance Information Institute, the average cost to settle a dog bite claim in 2023 was $64,555, a jump of 31.7% from 2021. Additionally, some insurers exclude certain dog breeds, or place sublimits on canine-related incidents. Your clients with dogs may consider a standalone canine coverage if they face breed restrictions, or just want additional peace of mind for their pugnacious pooch.

Remind your insureds (and document those reminders) of how quickly a claim can devastate their liability limits, and how affordable umbrella coverage remains, both for personal umbrellas and commercial umbrellas. Where else can they buy peace of mind for a few dollars a month?

Do Your Clients Need to Reconsider Flood Insurance?

“Congress mandates that federally regulated or insured lenders require flood insurance for all buildings located in a Special Flood Hazard Area (SFHA) with a federally backed loan," according to the Federal Emergency Management Agency (FEMA) website. Unless your clients live in an SFHA, their lenders won't normally require flood insurance. However, FEMA classifies only 8.7 million properties with “substantial risk," or located within SFHAs.

First Street Foundation finds nearly 70% more properties (14.6 million) with the same level of flood risk. Their complimentary, online tool offers your clients the opportunity to calculate their flood risk. At their Risk Factor site, your clients enter their address to calculate their estimated flood risk. As a bonus, it also calculates their wildfire, wind and extreme heat risk.

Repairing flood damage is expensive. Another complimentary tool you can offer your clients is FEMA's Cost of Flooding calculator. With only two inches of water, the calculator estimates the damage to your client's home at $26,892. Can your client afford that cost alone?

Warn your clients of the waiting period for most flood insurance policies, so they shouldn't wait until the approach of a major storm before investigating coverage.

Remind Your Clients to Call You Before They Change

According to Statistica, 54% of consumers aged 18-to-29 years bought insurance online in 2023. For those aged 30-to-49 years, the percentage was 52%.

Frequent reminders on your blog posts and social media outreach recommending people avoid the temptation of buying insurance online can help keep your clients loyal and well informed. It can also bring in new clients who may want to talk to an agent before they buy.

Because you don't want all your communications to seem like a sales push, add some other interesting facts in your communications, as well. The more you communicate with your clients about coverage gaps, limitations and limits, mixing in a little fun like a meme or recipe, the greater your chance you'll avoid an E&O claim, and keep customers on your client list.

Last Updated: January 31, 2024

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