What if your Insurance Company is mad at your broker?

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By Carl Santa Maria

If you are responsible for the risk management function in your company a major responsibility includes the development of insurance programs, managing your broker, deciding on what to buy, how much to pay, handling of claims, and satisfying insurance requirements of customers.

By definition a broker is different than and agent. While both can have contracts with insurance companies a broker represents the insured and an agent represents the insurance company.

A broker’s job is to help identify threats to client businesses, evaluate the risks and design programs to deal with these issues in the most effective and cost efficient ways. Often the best ideas don’t involve insurance but the elimination of coverages that may not be necessary and, instead, target on mitigating, reducing, or eliminating the threat entirely.

When insurance is needed, it is important to consider a number of variables. Do the terms of the policy adequately provide protection? Are the limits purchased appropriate? Is the cost of the insurance competitive? Is the insurance company of sufficient financial strength to deliver on its responsibilities? Does the insurance company have a reputation for handling claims fairly and efficiently? These are just a few.

The insurance company seeks to write policies for risks that are well managed, for companies that are well run, and which offer a reasonable opportunity to earn a profit. When there is a fair exchange of value that is a good thing. Evaluating this existence of this equilibrium is very difficult.

A top broker works to create a program model, vet it thoroughly with his client, and search for a product that most closely conforms to the model. This approach changes the paradigm of the process from supplier (insurance company) control to buyer (client control) and will produce better outcomes consistently over time. The client decides what he will pay and at what cost and the supplier will either agree or offer alternatives.

Disturbances in the market can occur. This is particularly true if the broker is not aggressively monitoring the marketplace or merely renewing programs automatically, often at the last minute. The market can change quickly.

Recently, a company which had been insured by the same broker and carrier for a number of years was concerned about unexpected premium increases. The business was aware that its competitors had far lower costs. After the renewal was issued (at the 11th hour), the company reached out to another advisor for a program review. Not surprisingly the program costs could be reduced significantly, without reduction in quality, by moving the program to another insurance company. The savings was significant even after incurring a cancellation penalty. The holding insurance company was very upset that it lost the business and felt that the new broker had treated it unfairly. So the insurance company was mad at the broker for responding to an unsolicited inquiry, developing a better option, and replacing a program that was uncompetitive. It seems that the responsibility resides with the former broker and to some extent, the underwriter who priced the renewal.

Similarly, an insurer was undecided about continuing to insure a segment of a company’s operation. The insurer alerted its intent to cancel the coverage mid-term.  The broker appealed and delivered risk improvement information. Never the less the carrier insisted that the broker try to find another market for the exposure. Another carrier was agreeable to picking up coverage on the condition that the entire account be moved to them. The new carrier provided a very competitive package, including the problematic exposure. At the last minute the holding carrier relented on the cancellation, but the difference in coverage and cost resulted in the replacement of the account with a new carrier. The new carrier was only brought in at the insistence of the holding insurance company. The insurance carrier was mad at the broker for the change.

The overriding principle is responsibility to the client. If the broker hadn’t acted in the best interest of his client he would have been derelict in his duty. If the carriers had not forced the issues they would not have lost the business.

Business is best conducted as if the process and result could be shown on the 6 o’clock news. Would the insurance company or broker be most uncomfortable with those optics?

Maybe it’s okay for your insurance company to be mad at your broker!

 

ERISA Bond vs. Fiduciary Liability: You Need to Know the Difference

By Craig Santa Maria

If you provide a health or retirement plan for your employees, they expect it to be there when they need it. And if the people managing the plan act outside of the law, resulting in plan losses, they can be held personally liable to the plan members. If you are a trustee of your company’s benefits plan, do you know if you and your company are adequately protected?

It’s the Lawnest egg

In 1974, Congress enacted the Employee Retirement Income Security Act (ERISA) to protect plan participants and beneficiaries from fraud, theft or mismanagement by plan managers, or fiduciaries. Basically, ERISA established rules governing how voluntarily-created, private-sector retirement and health plans must be managed and it requires those companies to provide protection to participants in the form of an ERISA Fidelity Bond equal to 10% of the plan value.

For additional information about ERISA Fidelity Bonds, visit the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) website.

Know the difference

ERISA bonds protect plan participants, but many business owners wrongly believe ERISA bonds also protect fiduciaries, those who handle plan assets, from liability against losses arising from breaches of fiduciary responsibilities. That is not true, and it can leave you and your company exposed to costly judgments.

For example:

  • A group of employees sued retirement plan trustees, claiming a new outside plan administrator improperly delayed transferring fund balances, resulting in lost investment income. They were awarded more than $1 million and defense costs totaled $250,000.
  • A manufacturer failed to submit the required forms for an employee’s life insurance policy, but continued to deduct the premium from the employee’s paycheck. When the employee died, the life insurer denied the claim. The employee’s heirs sued the plan fiduciary and recovered $250,000.

Fortunately, in both of these cases the companies had protected their plan trustees with fiduciary liability insurance, which provided legal defense and covered the legal settlements.

3 Critical Considerations

Every employer should carefully answer these three questions to be sure you have the proper protections in place for your employees, your plan fiduciaries, and your company:

  1. Do you need an ERISA Fidelity Bond? If you offer most types of employee benefit plans, you most likely are required to purchase an ERISA Fidelity Bond. There are some exemptions; check the EBSA website for detailed ERISA information.
  1. Is your ERISA Fidelity Bond sufficient? The law requires that the bond cover at least 10% of the plan value in the previous year for each fiduciary, so if your company has multiple people who have fiduciary responsibilities, each must be bonded for at least 10%. The bond must be at least $1,000, but no more than $500,000, for each bonded plan official. Each person is responsible for his own bonding, so if the bond amount is insufficient, that person can be fined by the EBSA.
  1. Do you also need fiduciary liability insurance? Remember that the ERISA Fidelity Bond does not protect the fiduciary from liability resulting from breaches of fiduciary responsibility. Claims against the fiduciary put his personal assets at stake. Even if you have a Directors and Officers (D&O) liability policy, most do not cover fiduciary liability.

If these questions raise any doubt about whether you or your company are adequately protected from claims related to ERISA, speak with a high-quality, experienced broker to ensure your business and personal assets are covered.

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Craig Santa Maria is President and COO of Santa Maria & Company (SMC), a risk management consultancy and commercial insurance brokerage in the San Francisco Bay area with deep expertise helping companies protect what is most important to them: their assets, their employees, and their futures. Contact SMC at 925-956-7600 or online at www.smcrisk.com.

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Experts in Risk Management and Providing Peace of Mind