How To Correctly Design Insurance Coverage AND Make More Sales
Years ago, Chris Boggs authored a phenomenal white paper titled “How to Read an Insurance Policy.” Everyone selling insurance, adjusting claims, and underwriting should read it, especially people new to the industry. It is a must read.
I share this recommendation because what follows is meant to complement his paper. Once you know how to read a policy, you need to know how to apply that knowledge. Begin with this thought process: Your job is to design the coverage your client needs rather than just sell them a policy you have on hand. Instead of quoting three companies’ BOPs and offering the price differences with a summary of the major coverage differences, or in other words selling the policies you have in your system, design the coverages your client needs. Designing coverage is far more valuable to a client and more rewarding for those agents who want to make the world a little better by protecting their clients.
When designing coverage, begin with the most essential point. Who has an insurable interest? In other words, if property is stolen or burned, who has an insurable interest in that property? With only a few exceptions (see cyber), insurance cannot be issued to cover property when the insured lacks an insurable interest in that property.
For example, a person buys an engagement ring. Does that person have an insurable interest in the ring? Yes. It is their loss if the ring is lost. However, assuming the ring is fully paid for, do they still have an insurable interest after they give the ring to their fiancee? No. They do not incur a loss if the ring is lost or stolen because they no longer have any ownership interest in the ring. The financial loss related to losing the ring is the fiancee’s because the betrothed-to-be was the owner of the ring at the time of loss. (If the ring-giver still owes money to a finance company, then the issue is completely different, including whether they can legally transfer ownership of the ring if it is collateral to a loan).
That being said, what happens when a marriage contract is signed? Does the insurable interest in the ring change to joint ownership? That would depend upon the terms of the marriage contract and prenuptial agreement.
As a sidenote, claims related to the loss of engagement and wedding rings are some of the most interesting claims I have ever seen. It is amazing how many times people feel the need to leave rings in vehicles before entering bars or leave their rings in bathrooms when re-entering bars, and somehow cannot find their ring upon returning.
The key point is if a person does not own something, they cannot insure it unless they otherwise have an insurable interest. A bank has an insurable interest in a home that is collateral for a mortgage. Rather than paying for their own insurance policy, the bank insists on being listed as an additional insured on the homeowner’s property and casualty policy. If the homeowner does not carry insurance, the bank will likely place “forced place” insurance upon the homeowner and add it to the mortgage.
Identify Parties with Insurable Interest
When designing an insurance policy, begin by identifying all of the parties who have an insurable interest in the property. In a family, how are the vehicles actually titled? If a 25-year-old son owns the title to a car, can his mother insure his vehicle? No, because she has no insurable interest.
Lots and lots of agents screw these situations all to heck and some agents are known to mispresent this point so they can continue to earn commissions even though the policy they have sold provides no known coverage.
What happens when a buddy has four rental properties and each has a different LLC as the owner? Each LLC has its own insurable interest. With some carriers it is possible to write these four rentals on one policy but it takes care and knowledge to do it correctly. Otherwise, four different policies are required. Over and over I have seen agents botch these situations up all while having no clue they did anything to harm their client’s coverage.
How about a business that has five separate companies that are at least partially vertically integrated? How about a situation where three shareholders own each of the businesses, but the percentage of ownership varies in each business? Or, when you have a situation where most of the shareholders are the same in each entity, but here and there an additional shareholder exists?
Lots and lots of amateur agents who only care about the sale are selling policies off the shelf, and do not take the time to design the correct insurance coverage for their clients.
A professional will focus first on the alignment of the insurable interests and who should be considered as an insured. I know agents who have made a good living focusing on their competitors’ mistakes on this point alone. They identify the mismatch and then advise, “You know, you don’t likely have coverage on these policies because the named insured is wrong. What would you like to do?”
Design Specifics
Writing coverage correctly, i.e., protecting your clients well, means an agent must always design coverage specific to the insured and their needs. This means asking questions and having conversations with your clients.
For those agents who might say that their clients will not give them the time to have these conversations, do you have the right insureds? Think about it. This means the insured does not have adequate coverage. When they have a loss, where is your documentation that they would not give you the time to discuss adequate coverage? I usually find that most agents who say they have such clients do not really have such clients. The situation is that they are too intimidated to request their clients’ time.
Homeowners insurance is one of the simpler, though not entirely simple, types of insurance. Failure to design correct coverage is a key reason it is estimated that at least 65% of insureds are materially under-insured. A basic example of the failure to design and failure to understand coverages involves Ordinance coverage. When building codes change, the increase in rebuilding costs can easily exceed the 10% throw-in coverage. Virtually no one takes the time to explain to insureds how much Ordinance coverage they need. In some areas of the country, 50% or more is required.
Designing coverages customer by customer will simultaneously teach an agent how to write coverage well. Taking orders from insureds regarding which coverages the insureds think they need is akin to a patient telling a doctor how to perform a surgery. Most insureds do not know what they need. I recently saw a claim where the insured was extremely well educated with decades of business experience. She told her new agent to match her existing coverage because she had “good insurance.” Based on my review it was clear she did not have good insurance coverage. She was severely lacking in key coverages but also lacked the insurance knowledge required to know what truly “good” coverage is.
Insurance is complex. What is being sold is a legal contract sold by someone who has probably never taken a law class. Your clients are usually not attorneys, so they do not understand the policy language, and many of your clients are not architects, engineers, or contractors so they don’t know the cost to rebuild. No reasonable expectation should exist on your part that they know which insurance coverages they need. It is a professional’s job to educate clients and design coverage specific to each client, and then convince them to purchase the coverages you believe they truly need. You want to design comprehensive coverage to show you are not like all the other agents. This extra effort is your competitive advantage.
Insurance is fun when a person can employ their creativity, too. Most young people look at insurance as the epitome of boring. It is if agents are selling straight off the shelf without any consideration of an individual’s needs. Designing insurance to suit individual clients allows for great and rewarding creativity, and by doing so, it is a win-win-win for all parties.