Agent is an Expert Consultant...Except When They're Not

By: Robert Burns

As agent’s E&O underwriters we look at a lot of agency web sites.  Some just have some contact information and some many contain sweeping portraits of agency expertise as risk managers.

Reviewing agency websites and reading brochures it is common to see the ability to offer expert advice as one to the most important values being offered in the agency/client relationship.  Producers spend time and effort earning CIC or CPCU designations. 

Sometimes an agency principal will become upset over our claims department characterization of the agent as an “order-taker” in a transaction.  No one would reasonably want to denigrate the professional standing of the agent.  Yet in that case the characterization was the best defense for the agent.  It all boils down to the client’s expectation and need.

It is common for accountants to complete a specific agreement of expectation for every service transaction.  This is because the possible scope of accounting services is so broad that it is important to nail down the exact nature of the services expected each time.  Is the accountant acting as a management consultant or a bookkeeper?

This can  be true with insurance agents and brokers.  We find many claims stem from a simple misunderstanding of the relative roles being played.  For example, the CFO of a mid-sized construction firm is meeting with a producer and offers a list of values that he confirms represents the cost of the company’s buildings.  The producer enters the numbers on the statement of values included with the application.

After the loss, the carrier invokes the co-insurance clause.  At that point the CFO recalls that he submitted the list to the producer for his approval and agreement.  The producer recalls that the CFO was emphatic that the values provided were sufficient and all that he was willing to insure. 

In this interaction the producer assumed the role of order-taker while the CFO saw him in the role of consultant (after the fact of course).  Either or both could be correct; it would be helpful if the roles had been agreed to before hand.

Producers will often begin the relationship by emphasizing their expertise and ability to advice.  As the association develops the agency client asserts more control over their program and the producer accedes to their opinions.  Perhaps the client shows some irritation at the “constant costly coverage suggestions.”  The producer backs off on some offerings in response.  At some point the roles change without express discussion.  A loss at this point could well result in a claim against the agency.  Both parties would have some substance to their defense.

Clients may see constant recommendations for more coverage as price gouging on the part of the agency.  The producer responds by withholding advice in deference to the client’s program decisions.  This is particularly true for clients large enough to employ an accounting professional in the position of controller but not so large to employ a risk management staff.

In cases where a risk manager is employed the roles are clearer.  The agency is given a request for proposal (RFP) and obtains insurance proposals that meet the specifications with an addendum that details variances or alternate recommendations.  Here the role of the order-taker is appropriate.

A way to deal with this situation may be to have a discussion with the client and establish a clear understanding of what service are being offered.

An example of points that could be useful to establish go as follows:

• The producer will review client’s evaluation of their property and casualty risk exposures and offer suggestions.
• The client will provide financial, staff and physical plant data necessary to a survey of risk.
• The producer will develop an array of insurance options to be considered by the client.
• The client will develop an assessment of their appetite for risk acceptance which outlines the maximum non-insured amounts acceptable as well as stability expectations.
• The producer will make recommendations based on client’s guidance regarding risk appetite.
• The client will complete and sign all requested applications with the assistance of the producer
• The client will read and understand the policy options offered.
• The client will choose the option best suited to their needs according to the terms offered.
• The producer will obtain the coverage selected and confirm when it is in bound.
• The producer will thoroughly check the coverage provided by the carrier.

Or under other circumstances:

• Client will provide a list of coverages required with values and limits.
• Producer will produce applications to be signed by client.
• Producer will acquire proposals of coverage from appropriate insurance carriers.
• Client will read and understand the insurance programs recommended prior to making selection.
• The producer will thoroughly check the coverage provided by the carrier.

The point of these agreements is multi-fold:

• First it establishes the roles each party is undertaking.  A new agreement can be made for each renewal or continued until changed. 
• Second, it reminds the client that they have the responsibility to read the policies provided.
• Third, it establishes the ‘right’ of the producer to put forward suggestions for coverage.  Or it clarifies that the agent is restricting their activity to following the client’s instructions.
• Fourth, by varying the agreement to be used it can empower the client while protecting the producer from a ‘twenty/twenty hindsight perspective.’

Our claims staff is very careful to note that any ‘evaluation’ of risk is inherently dangerous.  It is essential that the ultimate responsibility for decisions of how to manage risk clearly reside with the agency client.  Whenever an agreement is to be reduced to writing it always recommended that they are reviewed by counsel.  

In any event it is vital that the producer maintain a very clear understanding of their role in the insurance transaction and ensure that the perspective is shared by client.  You can also use this initial discussion to remind the client that it is your job to suggest coverages.    In the long run premiums paid are much cheaper than uncovered losses.