RISK MANAGEMENT—PRODUCERS AS CONSULTANTS

By Donald S. Malecki, CPCU

Despite the wishes of some people, the hard market is likely to be around through 2003. Given that prediction, there's no better time than the present for producers to begin (or rekindle) the consulting process. It doesn't have to be a sophisticated process. Start off by looking at the various activities undertaken by a business and determining whether the basic insurance program is in order.

When meeting with clients to try to get a better fix on the exposures confronting them, producers don't have to play the role of lawyers and read contracts, barring only the insurance requirements. It makes good risk management sense to do so. Contracts, instead, are best left with lawyers or more experienced consultants who often work in concert with lawyers.

A visit with a client's chief financial officer and other department heads also pays dividends. The visit doesn't have to be long. In fact, a visit shouldn't be longer than 15 - 20 minutes. It's surprising how much one can learn about a company by talking to department heads. One reason is that department heads seldom communicate with one another about insurance-related exposures. But they have a lot of information to offer when probing questions are raised.

In one recent case, it was not until a producer visited one of his retailer clients and asked some of those probing questions that he discovered that the client was also in the trucking business as a common carrier. The producer was able to prevent a situation where the client might have had an accident and found itself without any coverage.

When visiting a client to discuss the upcoming renewal, one producer struck up a conversation about the client's new activities via the Internet. Specifically, the client was explaining how much success he was having generating sales by use of a Web site. The client said he could get hundreds of hits a day and at considerably less cost than if he were to do a direct mail campaign with high postage costs.

The producer, however, recalled an article he'd read on the pitfalls of using facsimiles. He informed his client that some businesses that engaged in this marketing practice were targets of a class action suit resulting in large verdicts against them. These actions were based on a statute enacted by Congress in 1991, which set $500 as the damages for each violation/illegal fax or telephone call, and triple damages if the violation is committed willfully and knowingly.

The producer's comments generated the question regarding whether there was any insurance coverage for this kind of suit. The producer had heard that personal and advertising injury liability (Coverage B) of a commercial general liability policy might cover this kind of an offense. However, once these class actions grow, he said, there is no telling when insurers would add another exclusion to the policy.

In this case, the producer, in probing the client's business affairs, offered some timely advice that could go a long way if the client were to be caught up in a class action. The client, of course, was not happy that his producer was the bearer of bad news, but he did respect the producer and sought additional advice from him.

Risk management process

The risk management process, as far as a producer's involvement is concerned, does not have to be complex. It may be as straightforward as the producer and client reviewing a checklist to go over what exposures exist and whether there is adequate coverage. It is surprising how many producers have found clients purchasing duplicative coverage or high limits on coverage that is virtually useless.

One example of duplicative coverage is a client who had purchased a fiduciary liability policy that included employee benefits liability coverage, and a separate employee benefits liability policy. Upon examining the client's coverage, the new producer discovered that for a number of years preceding service from the current producer, the client was paying for both policies when only one was necessary.

Which one should be canceled? The answer was easy because the fiduciary policy in question could not be written alone; it had to be combined with employee benefit liability coverage. The downside to this solution was that the client's umbrella policy would not apply excess over the fiduciary liability policy, but it would apply over employee benefit liability coverage. Another disadvantage was that the fiduciary liability policy, in combination with the employee benefits liability coverage, could be written for only one policy limit.

In the final analysis, the client must decide which coverages to select. While we don't know what the client decided, we do know that the producer in this case offered the service of pointing out not only the existence of duplicative coverage, but also the advantages and disadvantages of both types of policies.

The point is that producers can't be of assistance to their clients until they better understand the exposures, and that, without question, will require producers interacting with their clients on a higher level than simply serving as order-takers.

But if a producer chooses, there's nothing wrong with being an order-taker. In fact, it's a way of possibly playing it safe with respect to errors and omissions accusations. [See, for example, the October 1999 issue of this column titled "Addressing the 'Order-Taker'/'Consultant' Conundrum." The article can be accessed at the Rough Notes Web site: www.roughnotes.com/rnmagazine/1999/october99/10p132.htm.] But if producers want to solidify their accounts and do something extra, now is the time to begin wearing the consulting hat. *

The author
Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is an active member of the CPCU Society, serves on the Examination Committee of the American Institute for CPCU, and is an active member of the Society of Risk Management Consultants.

RISK MANAGEMENT—ADDRESSING THE "ORDER-TAKER"/"CONSULTANT" CONUNDRUM

There are pitfalls associated with taking on the role of a consultant who, by tradition, delves into risk analysis, evaluates the risks identified and recommends ways to deal with the risks, with and without insurance.

By Donald S. Malecki, CPCU

Risk management is a term that is used in a number of different disciplines. With respect to the discipline of insurance, this term is used in general to encompass the non-insurance techniques available to deal with the risk of financial loss such as contractual risk transfer and retention.

Since this column was introduced in 1987, it has been titled "Risk Management." Our aim has been to assist producers in sharpening their product knowledge and to help them to recognize potentially troublesome areas that could lead to allegations of errors or omissions, or foster allegations of accountability beyond the producer's traditional role of an "order taker."

Some producers want to be more than order takers in fulfilling the needs expressed by their clients. They also want to be consultants. In fact, the occasion may arise where the producer needs to wear two hats. However, producers need to understand that there are pitfalls associated with taking on the role of a consultant who, by tradition, delves into risk analysis, evaluates the risks identified and recommends ways to deal with the risks, with and without insurance.

It is no secret that some insurers in the market for agents and brokers errors and omissions insurance will not write the coverage for consultants and even will go so far as to advise producers against exceeding their roles as order takers. The problem is that it is not always easy to determine whether or not what a producer is doing on behalf of his/her client could be perceived as consulting and therefore subject to a higher standard of care.

Yet, there are some producers who, for competitive reasons, will go so far as to advertise that they serve as consultants. It needs to be made perfectly clear, however, that simply advertising that kind of service does not mean (and should not mean) that the producer can be automatically considered a consultant in every instance. Whether that allegation can stand must hinge on the facts.

For example, a large broker, that advertised its services as including insurance consulting, was sued by its insured for failing to obtain the coverage requested. Briefly, the insured, a large manufacturer with a risk management department, asked the broker to replace its expiring policy with the same or broader provisions. The broker obliged. When claims started rolling in, the insurer balked at providing coverage. It was at this point that the insured realized that the policy provisions were not as clear as they were thought to be.

The insured therefore sued its broker alleging that the broker was an expert and subject to a higher standard of conduct than simply an order taker. However, the broker, undoubtedly capable of providing consulting services, did nothing more in this particular case than find another insurer to replace the expiring policy. (The replacement policy was, in fact, broader in some areas.) The broker never made a risk analysis or recommended any form of coverage and, therefore, based on the facts of this case, was not held to the standard of conduct being alleged.

Nonetheless, the producer who wants to limit his/her services to filling coverage orders of clients rather than performing services that could be perceived as rising to the level of one who performs consulting still has to exercise care in getting to know his/her client, and the insurance product.

Getting to know the client

Sometimes producers really go out on a limb in getting to know their client by compiling their own questionnaire, rather than relying on an insurer's application. These producers reason that it is better to give underwriters one set of specifications for coverage (based on the questionnaire) rather than complete applications for each insurer.

This is precisely what one producer did in a recent case. He decided what client information was necessary to obtain certain forms of property and casualty coverage. With that information obtained by querying the client, he proceeded to submit it to various insurers for the purpose of receiving coverage offers.

What the producer did not realize was that he was creating future problems with each underwriter who was willing to accept the producer's specifications as an alternative to requiring a completed application.

It is difficult to understand why an underwriter would forgo the requirement of a completed application and accept the specifications of a producer. After all, the producer does not know what an acceptable risk may be and what underwriting standards may apply.

On the other hand, in these situations where underwriters rely on what producers furnish instead of seeking the information about a prospect themselves, underwriters have the ideal defense when there is a problem over a coverage issue. By saying that they were not told about a given exposure, they leave the producer to face the consequences all alone.

This is what happened in the above case. The producer's good-deed gesture of supplying information about a client rather than completing the carrier's application gave the underwriter the opportunity to sidestep accountability. The underwriter maintained that he was not informed about a particular risk, based on the specifications that the producer submitted to the insurer.

Adding insult to injury, the insurer went so far as to actually place the entire blame on the producer. Had the producer completed the insurer's application, the underwriter might not have had that defense.

Sometimes producers have to ask questions beyond what an underwriter may require. This does not mean that the producer in every instance is acting as a consultant. But producers need to be careful that what they do is not being perceived as consulting, particularly if they have no intention of offering that broader service. *

The author
Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is a committee member of the International Insurance Section of the Society of CPCU, on the Examination Committee of the American Institute for CPCU, and an active member of the Society of Risk Management Consultants.