November 1, 2016 by The CIP Society - Insurance Institute of Canada
The CIP Society Ethics Series
The members of a competitive sales team within a large insurance brokerage were briefly presented with a new overland flood product from an insurance company. With flooding in the news so much – and most home and business owners looking for protection – the team immediately started having the conversation about flood coverage with all of their clients at renewal.
Feeling this was an easy add-on, each member of the team started adding this coverage to almost every client’s policy, despite the fact that upon closer examination, not every client qualified for such coverage.
The team members believed that the addition would translate into greater sales revenue, and they wanted to be the top-producing team within the brokerage.
What are the ethical implications of not undertaking a proper risk assessment for each client, since not all clients living in flood areas are at risk and may neither need nor benefit from such a product?
And what about the clients who do live in areas that experience flooding, but will not be covered because the team does not understand the limits of a particular product and are selling the wrong policy for their needs? Who should bear the responsibility?
With new products available through multiple insurance companies – all with variations in wordings and exclusions – in what ways does the sales team need to understand how the available products best suit the needs of each specific client?
Thomas Newby, CIP, CRM, CAIB
Commercial Account Executive
Adding coverage to a client’s policy without his or her consent is always the wrong decision, regardless of how important or valuable it may seem.
Clients should always have the opportunity to review the information and decide for themselves if the coverage provides protection of a risk they want to be insured against.
Since companies offer a slightly different version of the coverage, brokers should provide quotes for all companies offering the coverage and highlight the differences. This will allow clients to make an informed decision about which product and coverage best suits their particular needs. These discussions should happen with all clients, not just clients in high-risk areas.
If the insurance company does not have a tool that confirms availability of flood coverage in a given territory or area, then the broker should confirm with both underwriting staff and the client to ensure coverage qualifications are met.
Adding the coverage to a policy without knowing whether or not the client’s property qualifies hurts both the client and the broker. The client could be left without coverage at the greatest time of need and the broker could face a potential errors and omissions claim from a client who believed he or she had coverage when he or she did not.
By presenting a client with the information and allowing that person to review the coverage differences, pricing options and qualification requirements, the broker has involved the client in the decision-making process that will help the client arrive at the best decision for the property in question. Sales goals should never interfere with the process of securing the client the best available coverage.
Senior Vice President & Regional Resource Leader
Risk Research & Solutions
Aon Reed Stenhouse Inc.
Insurance brokers are expected to understand their clients’ needs and to understand the scope of the insurance products they sell.
Unfortunately, brokers can sometimes fall short of this expectation when new products and coverage are introduced and/or changed. Over the years, there have been errors and omissions cases involving brokers miss-selling a product, and the list of cases is growing.
New coverage such as overland water needs to be understood and sold based on the needs of the client. Unfortunately, in too many cases, homeowners insurance is treated as a commodity and in order to increase margins on commodity business, the strategy is to sell value-added products. This is fine if the product truly is value-added.
There are subtle and not-so-subtle differences between policies for each insurer – it would be beneficial for brokers to prepare a fact sheet showing the pros and cons for each insurer so they can review these differences together and choose a product that the particular client is most comfortable with and covers his or her flooding needs.
Selling a product with careful attention to the client’s needs and the product’s inclusions/exclusions will benefit the relationship (the client will be satisfied with service and have peace of mind) and it will protect the broker from any potential errors and omissions cases that could harm his or her reputation.
Tracy McLean, CAIB
Executive Vice President
Marine and Surety
Moore McLean Insurance Group Ltd.
[RIBO Council and Executive Committee]
Senior Vice President & Chief Broking Officer
HUB International HKMB Limited
[RIBO Council and Executive Committee]
The ethical compass of a broker or agent should always be in “the best interest of the customer.”
While on the surface it may seem like the broker was acting in such faith, this style of selling should not be the practice. Doing so will put the client’s coverage in jeopardy, especially when the client will need it at his or her most vulnerable time – at the time of a loss.
There certainly would be a conflict between the insurer and the brokerage’s binding authority, leaving the client as the proverbial “monkey in the middle.”
Insurers have underwriting guidelines, and placing coverage with an insurer in breach of these guidelines, is not in the best interest of the client. A risk assessment should always be conducted and if the customer is ineligible for coverage from a particular insurer, the broker should seek coverage from alternative carriers that have different underwriting standards.
Full disclosure should always be undertaken with the customer and a recommendation made as to why a change of insurer may be necessary to ensure that the client is able to make an informed decision.
In the aforementioned scenario, it would appear this was a purposeful act designed to raise revenue for the brokerage. It should be questioned whether or not the brokerage had protection from its errors and omissions carrier – since this was neither an error nor an omission, this may leave the brokerage to pay for any losses clients sustain from their own funds or risk litigation.
There are a number of questions in this scenario that need to be raised, including the following: Is management at the brokerage turning a blind eye to this practice? Where is the supervision of the sales team?
The operating practices and procedures of the brokerage should be clearly defined and communicated within the firm. Management and sales teams should be reminded of their duties as brokers, which are separate and distinct from revenue targets of the brokerage.
THE LAST WORD
When it comes to meeting sales expectations, it may be easy to lose sight of one’s intended role. As a broker, that role is to provide clients with the best possible insurance coverage that will protect their assets based on a thorough risk assessment.
In the insurance industry, a product that appears to be an “easy add-on” can actually come with serious consequences if it, in fact, is the wrong product for the client’s needs.
This situation would suggest the broker should take a rules-based approach, with the intention of selling products that will protect the client’s assets. While sales goals are important for brokers, their main responsibility should remain protecting the client from risk.
To properly recommend coverage, the broker must take all the necessary steps within his or her means to fully understand the differences between policies.
This leads to the final recommendation, which is to take a situation-based approach and identify the necessary measures required to fully understand the differences between policies, and how these differences have subtle inclusions/exclusions that could be an advantage or disadvantage to the client.
The situation can be properly managed when clients are presented with insurance coverage options that best satisfy the price and coverage of their choice – thereby protecting both the client and the broker.
Following a situation-based or rules-based approach to this ethical dilemma will ensure that the broker does not lose sight of his or her number one priority, which is to be a trusted advisor to clients.
The CIP Society – Insurance Institute of Canada
The CIP Society represents more than 17,000 graduates of the Insurance Institute of Canada’s Fellow Chartered Insurance Professional (FCIP) and Chartered Insurance Professional (CIP) Programs. The CIP Society, through articles such as this, is working to bring ethical issues to the forefront and provide learning opportunities that enhance the professional ethics of all insurance professionals.