Why Independent Agents Should Take Advantage of a Higher Standard of Care

I’ve had many independent agents (IAs) vent, fume, exclaim, yell, scream, curse and express total exasperation at losing an account because a captive or direct writer undercut the price while promising speculative coverage, insuring property at 80 percent (or less), or telling insureds they can save money if they do not purchase such and such coverage because they really do not need the coverage (although they do). The IAs often ask me, “How can they get away with that?”

They can get away with it in many situations because their standard of care is often less than that of an IA. Their standard of care is less because of their own contracts with their carriers or because they work directly for the carrier versus an IA contract. Their contracts generally stipulate they work for the insurance company, not the client. They do not, to oversimplify, owe as much to clients then as an IA does. Depending on the exact situation, they may not owe anything to the client other than to not steal their premium dollars.

The best case I know exemplifying their low standard of care is Paul and Julie Leonard v. Nationwide Mutual Insurance Co. This was a federal case from the Southern District of Mississippi. Per the case description, Findings of Fact, the Leonard’s home was approximately 500 feet from the water at an elevation of 12 feet. It was flooded when Hurricane Katrina hit and they did not have flood insurance. The property did qualify for flood and it was clearly in a flood zone. Mr. Leonard asked his Nationwide agent in 1999 whether he needed flood insurance and the agent advised Mr. Leonard he did not need the coverage.

This was not a one-off piece of advice. Per the case description, “[The agent] sometimes discouraged his clients from purchasing flood insurance policies.”

“There was no testimony from which I [the judge] can discern the reason [the agent] discouraged some of his clients from purchasing flood insurance policies …” However, the court found the agent had not violated his standard of care because he was simply offering an opinion, albeit without any reason for his opinion being offered. So he did not misrepresent anything and did not offer a reason for his opinion, and therefore did not breach any standard of care.

Factors to Consider?

I am not an attorney so I do not pretend to know every applicable case or statutory law. My experience has been that every situation is case specific. Easy answers do not always exist, so please keep this in mind if you are involved in an errors and omissions (E&O) claim. Some of the factors are based on a combination of:

• The state in which the insured is located,
• Type of agency, or
• Direct/captive.

Brokers– Their duty depends on the situation, their carrier contract, their advertising, and the state relative to whether brokers are even permitted. If a broker is a true broker with a true broker-carrier contract (many agencies have such contracts that benefit carriers without necessarily knowing it), their duty to the insured may be higher than the duty an IA owes because their duty to the carrier is usually less than that imposed contractually upon an IA.

Independent agents– IAs are special because they have a duty to the carrier and a duty to the insured. This is the legal theory of duality whereby someone has duties to two opposing parties but they never have those conflicting duties simultaneously.

Therefore, they have a duty to one party one moment and a duty to the second party the next moment, but never does the agent have duties to both parties at the same moment. In and of itself, this scenario seems to make the duties an IA owes more complex than with other distributors of insurance.

At this point in most E&O articles and seminars, the writer/instructor will advise how to minimize your E&O exposure by not doing this or that. In other words, because the IAs standard of care is high, do not raise the bar on your standard of care. Such advice is good except those “dos and don’ts” do not generate sales.

For example, “do not advertise you are an expert.” That is great advice for not increasing your standard of care, but if you are not an expert than why buy insurance from you? The job of selling insurance as a non-expert has already been taken by computers and direct writers.

Keep in mind this entire issue is not just one of comparing IAs to direct writers, and other similar providers. The difference going forward is your own carriers may directly sell the same brand and the same forms but with a lower standard of care. So if someone else is selling the same product with a lower standard of care and you do not advertise you are an expert or something similar such as a claims advocate, or a risk manager, or some level of expertise, a need does not exist for you.

Another example is the standard of care is elevated not just by advertising claims, though those claims are extremely important, but also fees. If an agency charges fees, a good case can often be made the agency owes the insured much more. Of course, entering into a special relationship is another great example.

Surpassing Frustration

Consider the frustration of other distributors having a lower standard of care and getting away with offering poor advice or the wrong coverages. Remember the old Chinese saying that when you point your finger, notice where the other three fingers are pointing? Part of the frustration is really knowing that agents have to improve their game. They know that the work involved in improving their game, the challenges involved, and the emotional and intellectual energy required can seem overwhelming.

Subconsciously, this is the genesis of the frustration. Independent agents know why other distributors can get away with more, and they know that to compete, they have to greatly increase their skills and abilities. That is always easier said than done.

The opportunity awaiting those who surpass their frustration is beyond imagination. I look at the situation like this – if an IA has a greater standard of care, then make the most of it. You can’t change this so advertise it.

Advertise the difference. Advertise that you are paid to give the right advice versus the internet provider or the type of agent paid to just make a sale. Advertise that you are the expert. The standard largely already exists so accountability already exists, so why not make the most of it?

Of course, this strategy goes against the advice of E&O attorneys who advise that you should keep your head down and not advertise anything but a phone number and a name, which likely does decrease your chances of being sued for two reasons.

First, you’ve reduced expectations to the lowest possible denominator and second, by reducing expectations, you’ll have less sales. And with fewer clients your chances of being sued are less.

Take advantage of those agents that take these experts’ advice. If they are not experts then tell the world you are. More important, fulfill that promise.

Some independent agents will hide from all factors possible that create a higher standard of care. Some agents will advertise or have a business model suggesting they have a higher standard of care but they will not fulfill them. Only a few independent agents will have the guts to advertise true expertise and actually fulfill those promises. For those few, the future is unimaginably great.

This is how an independent agent can turn a lemon, a higher standard of care, into lemonade, sell it for a much higher price and have much more fun doing so.