The Competitive Advantage: Insurance is Losing the Battle of Public Relations

Flooding in southern Louisiana in the late summer of 2016 revealed 86 percent of flooded homes had no flood insurance. No flood insurance next door to one of our nation’s — and that state’s — largest catastrophe, which involved a huge flood.

The average elevation of the flooded area is only 30 feet to 50 feet and is surrounded by rivers. How can this happen? Heck, even the federal government runs advertisements all over the country advising of the need to buy flood insurance, and somehow, some way, agents fail to sell it. I don’t see how those agents deserve either the title “insurance agent,” “salesman,” or “saleswoman.” I can think of many other titles, but none possess positive connotations. To be fair, I know many do offer flood, but offering and selling are not the same. I know many clients decline to purchase, but 86 percent?

Closer to my personal home in Colorado, four or so years ago, approximately 700 homes burned to the ground in two separate fires. I never learned how many were materially underinsured and/or did not have the right coverages. I’ve heard stories though that an extremely large percentage, probably close to the 86 percent cited above, were not arguably insured properly. The result was not a huge deluge of errors and omissions claims from what I know anecdotally (maybe because most of the homes, as is common, were insured by captives or I’m not part of that grapevine), but worse.

A California nonprofit partially funded by the plaintiff’s bar saw the opportunity this presented. They helped homeowners fight for more claims dollars. They then worked to change the laws in Colorado to make agents more responsible for getting ITV’s (insurance-to-value) correct. The standard of care for agents here, specific to homeowners at least, is likely now higher than any other state.

A few months ago, a small fire burned eight homes near me. Homeowners on the news were thanking this same nonprofit for helping them get more claims dollars, within 72 hours of the fire if I remember correctly. If it was not for that nonprofit, in their opinion, they’d be shafted by the insurance company. In only 72 hours, such a factual conclusion isn’t realistic, but emotionally the conclusion is final.

The nonprofit is now the hero. Where is the agent? Where is the agent when the agent sells insureds the right coverages and the homeowner does not have to fight the mean, bad insurance company? If that story is not communicated, quality agents lose. Period.

Moreover, to go after the insurance companies may not always be fair based on my anecdotal but very experienced knowledge of the coverage inadequacies. The problem is not always the company (although it may be more likely with certain direct/captive situations because the distinction between the agency and the company is either lacking or blurred).

The problem is not necessarily or even primarily that the insurance company is shorting the insured. If the insured does not have the right coverage because he or she bought insurance from an agent that failed to explain, advise, and promote the right coverages, then the fault is at least partially the agent’s depending on the applicable standard of care. We can distinguish between amateur agents for which the homeowner really is a caveat emptor situation (Leonard v. Nationwide U.S. District Court S.D. Mississippi, Southern Division) and those situations involving professional agents. But in either case, none of the articles or television reports I’ve seen even mention how the disgruntled policyholders are upset with their agents. I have heard even less about them suing their agents.

This is a blessing for the incompetent agents writing homeowners insurance. Heaven knows plenty of incompetent agents write homeowners insurance. It makes me sick every time I learn of how some agent has convinced a homeowner they only need 80 percent of their ITV. I’m seeing a number of potential E&O claims already being filed relative to recent catastrophes. My data is clearly partial and imperfect, but based on what I see, many claims are due to pure, sometimes gross, agent incompetence. It is embarrassing.

A key question then exists if all the incompetent agents are captives/direct or independent agents. If the company is the agency, maybe the consumer attacking the company makes sense. It’s half a dozen of one and six of another.

For independent agents, the agent should be sued for incompetence if it is a coverage issue for a common coverage that should have been offered assuming the agent is acting as a professional. That is not the company’s problem. I am not writing of hard to find coverages or obscure endorsements. I am not concerned with situations where the insured fails to disclose or even misrepresents. I am writing of 100 percent ITV’s to the best of a reasonable person’s ability (allowing for the huge degree of honest variance when completing ITV’s), updated regularly (the inflation factors only apply if the homeowner makes no material changes to their home and people regularly make such improvements). I am writing of offering the replacement cost endorsements, extra O&L, extra additional expenses, additional care for outbuildings, and schedules.

Flood is a great idea, too, as is earthquake in many areas. Umbrellas should almost always be offered. Just because you, the producer or the CSR, have become Karnak and can predict that no point exists in offering coverages “you know” the client will not purchase, does not mean you should not at least document their rejection. Karnak type knowledge does not hold up in court.

My experience in conducting E&O audits and due diligence for 25 years is that the problem is not usually the insured. The proximate cause of loss is the fact that agents do not offer the applicable coverages. I state this as a fact because 90-plus percent of the agents I’ve audited or met do not use coverage checklists with any consistency if they use them at all. If a coverage is not offered, a client cannot buy it.

The opportunity for professional independent agents, truly professional independent insurance agents, is great. The silence of professional independent agents is thunderous and damaging. Silent professional agents pay the price for the incompetent agents because in a barrel of bad apples, the few good ones are going to get thrown out with all the others. The standard of care gets reduced and the lower the standard of care, the less important it is to be professional. The less important it is to be professional, the more commoditized insurance will become.

E&O suits against incompetent agents, rather than railing against unfair insurance companies, serves a valuable purpose for the professionals in this industry. It distinguishes between the amateurs, snake oil salesmen, confident men and women versus professionals. Truly professional agents will benefit if courts and regulators, and especially companies, recognize the difference between these two classes. The time is great to stand proud and take a stand against incompetence.