June 30, 2015 by Alan Prochoroff
Gather ‘round, kiddies, and we’ll tell you how we used to pad agency fees back in the day. In fact, some lowtech methods still work…um, until you get caught.
A Superior Court judge in Massachusetts has determined that the Kilgore Insurance Agency in Peabody, along with one of its former agents, has to repay more than $3.5 million—$2.2 million in restitution for nearly 100 clients, plus $1.3 million in pre-judgment interest of 12 percent per year from when the attorney general’s office filed the lawsuit in December 2009.
The judgment came out of a 22-day trial that took place in 2012 and 2013. Most of the victims were small businesses in Massachusetts whose insurance was placed through surplus lines brokers and included premium financing agreements.
“These defendants purposely and secretly increased the cost of their clients’ insurance by tacking on undisclosed and excessive agency fees,” said attorney general Maura Healey.
The defendants would tell customers that the agency had shopped the market on the customer’s behalf and that the insurance policy (and the premium) was the cheapest or only insurance policy available. They left out the part that the premium being quoted included a large, sometimes enormous, fee that would go right in the defendants’ pockets.
That was simple enough to do because the Kilgore Agency rarely provided an itemized accounting to its customers. As Jeffrey Kilgore admitted, “…Unless asked otherwise, when we communicate the cost of insurance to our customers, we do not break down items of fees, premium, surplus taxes, inspections costs, etc…. We simply provide a bottom line cost we are willing to accept to place and service the business….”
Writing their policies on the unregulated surplus lines markets made things easier, too. Most surplus lines brokers carriers never deal directly with the end client, relying on retail brokers like Kilgore to do that. As a result, retail brokers like Kilgore handle all of the paperwork— applications, invoices and the actual policies— for placing the insurance.
That also puts the retail agency in a prime position to limit the distribution of the paperwork, seeking quotes from a select group of surplus lines brokers and carriers, even while it was telling the client it was shopping the policy to many insurers. Those quotes would typically include a 10-percent commission for Kilgore.
Former agent Andrew Crowther Jr. and agency owners Cyrus and Jeffrey Kilgore would then allegedly add their agency fee mark-up to whatever price had been quoted. To hide their fees, they turned to Liquid Paper to whiteout the actual premiums on the insurance policies; then it was simple enough to re-type the figure showing their inflated premium, with the undisclosed agency fee rolled in.
Crowther and the Kilgores kept the standard 10 percent commission paid by the insurer then double-dipped by charging the customer an additional agency fee that averaged 47 percent of the total, but often was in the range of double or triple the cost of the actual premiums.
Crowther and the Kilgores were also charged with forging customers’ signatures on documents that revealed an insurance policy’s true premium, including surplus lines affidavits, and then filing those documents with the Massachusetts Insurance Division.
This story was originally published by Canadian Insurance Top Broker.