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The E&O Dangers of Selling Health Insurance

Health Insurance Agents: The Claims You Should Protect Against

Although the advent of the Affordable Care Act (ACA) gave millions more Americans access to health insurance, it resulted in dramatic shrinkage in the commissions insurance companies pay to agents. This has resulted in large numbers of agents fleeing the business to sell other forms of health insurance or allied products such as Medicare-related insurance or final expense. However, whether you have left the individual health insurance market or have re-focused your efforts on Medicare insurance or some other product, you still need to protect yourself against E&O lawsuits.

It’s no wonder the risk of selling health insurance is still high. According to various experts, the per-capita cost of providing healthcare to America’s citizens is roughly $10,000 per year. Consumers either pay for all of that if they’re uninsured or a portion of it if they’re insured. In either case, purchasing medical services is a common event for them. For those without insurance, it can also be a challenging, even frightening, event. For this reason, buying healthcare—and health insurance—is a high-involvement purchase. People care a lot about the care they receive and pay great attention to its results and costs. As you can imagine, when something goes wrong, either with their healthcare or their bill, they can get extremely upset. If they don’t receive a fair outcome, they may take legal action against their medical providers and their health insurance agents—against you!

For this reason, it makes sense for life and health insurance agents to carry comprehensive E&O insurance to pay for legal fees and for legal judgments or settlements in the event they get sued. What are the claims they should protect themselves against?

One of the most common E&O insurance claims is for misrepresentation. This might occur when you suggest a health insurance product has a feature it doesn’t actually have. You don’t have to do this with fraudulent intent. If you mislead a customer through ignorance, you are still on the hook for misrepresentation. Case in point: say you mistakenly tell a prospect that she is covered for a year’s worth of skilled nursing care via her Medigap insurance policy. The women ends up getting sick, hospitalized, and then needs six months (or 180 days) of skilled nursing. Unfortunately, 80 days of that care will go unreimbursed since Medigap policies limit coverage to only 100 days of skilled nursing. Given the daily cost of this care—about $250 a day for a private room—the client would need to come up with $20,000 out of pocket to cover her bill. Do you think she will be a satisfied customer or one itching to sue?

Another common cause of health insurance E&O claims is what’s known as “failure to explain.” Unlike misrepresentation, in which you either accidentally or deliberately misstate a policy’s provisions, failing to explain means you just overlook a policy detail or explain it poorly. In either event, your client will buy something he or she doesn’t understand. For example, most health insurance policies have complex interplays of premiums vs. cost sharing. Prospects can either elect to have the lowest initial premium (assuming they never get sick), but with high-cost sharing via deductibles, co-pays, and co-insurance. However, a policy with low premiums may actually generate substantial out-of-pocket costs for a consumer who does get sick. If you stress the attractiveness of the low premiums without discussing the risks of high out-of-pocket costs in case of illness, then you’re creating a potential E&O liability for failure to explain.

A third frequent cause of claims relates to inadequate fact-finding. If you don’t take the time to fully understand a prospect’s needs, the chances of recommending an inappropriate solution increases markedly. For example, imagine trying to help someone fill the gaps in traditional Medicare coverage. As you may know, Medicare does not cover services such as routine eye exams and glasses, dental care and dentures, outpatient prescription drugs, custodial care, and most chiropractic services, among other things. However, there are five potential insurance strategies to fill these gaps, each with underlying options. If you don’t fully understand the prospect’s situation, the odds of recommending the wrong Medicare option are high. Hello, lawsuit!

Finally, the fourth frequent cause of E&O claims are, well, claims. In fact, this is where the rubber meets the road. That’s because whenever a prospect develops a serious illness likely to generate hundreds of thousands of dollars in medical expenses or more, you are automatically looking at a potential E&O problem. Why? Because if the insurer mishandles the transaction (i.e., delays payment or pays the wrong amount) or denies the claim entirely, your customer may end up suing the insurance company and you for having sold the policy. Whether the insurance company was justified in denying the payment is a moot point. You will still need an attorney to get the case thrown out. Without E&O insurance, that expense will be on you.

In short, selling health insurance (especially Medicare products) can be emotionally and finally rewarding in the ACA era. But it can also be risky if you make a mistake or forget to do something important. If your error or omission results in a substantial financial loss to the client, watch out! You may be on the receiving end of a life and health insurance agent E&O lawsuit. But the good news is, having comprehensive E&O protection in place before you get sued will mitigate most or all of the lawsuit’s financial impact. Protecting yourself in this manner will not only provide you with peace of mind, it will also keep your assets out of the grasp of an angry client.

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Avoid Lawsuits with This Checklist

Would you prefer to spend time and money on growing your business or on protecting it? Yup, we thought so. And that’s because it’s human nature to focus on positive things and to avoid dealing with negative matters.

Yet preventing bad outcomes from harming your business can have as large a beneficial impact on your firm as launching a shiny new marketing program or buying new computer equipment or furniture.

In fact, spending money on E&O insurance may spell the difference between your company surviving a nasty client lawsuit or succumbing to it. But if you fail to buy E&O insurance and you get sued, you’ll have the aggravation of hiring and paying for your own attorney and then paying for any settlements or judgments out of pocket, with all of the opportunity costs that will entail.

So how to best avoid E&O lawsuits? By scrubbing your sales process of high-risk behaviors. This checklist shows you where to focus your mitigation efforts.

  • Only purchase sales leads from marketing firms that use compliant practices.
  • Properly identify yourself and your products in all pre-approach solicitations.
  • Conduct comprehensive fact-finding with all prospects.
  • Use a valid profiling instrument to understand your clients’ appetite for risk.
  • Only recommend suitable insurance and investment products to clients.
  • Never misrepresent the features, benefits, fees, or penalties of a recommended product.
  • Make sure clients understand what they’re buying, both at the time of sale and at policy delivery.
  • Review every client’s changing personal circumstances on an annual basis.
  • Execute all client service requests as quickly as possible.
  • Don’t disappear during times of market volatility; make yourself available to reassure nervous clients.
  • Establish reasonable expectations regarding the benefits of owning an insurance or investment product.
  • Document in writing when a client decides not to follow one of your recommendations.
  • Build a relationship with your clients’ children so they understand the nature of the work you do with their parents.
  • Memorialize in the client file all key plans and implementation steps.
  • Stay within your area of expertise; refer “outside” product sales to highly skilled third parties.
  • Do your own due diligence on product or insurance/investment firms before recommending them to clients.
  • Standardize your office policies and procedures, train your staff on them, and have printed copies on file.
  • Have a process for documenting and responding to client complaints.
  • Stay on top of regulatory and rule changes affecting your business.
  • Adopt a defense posture in every facet of your business; try to anticipate problems and eliminate risks whenever possible.
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When Regulatory Enforcement Is Down, Tout Your Ethics Advantage

Let’s connect the dots, shall we?

  • First, FINRA fines are on a downward slope in 2017.
  • Second, rogue brokers are taking refuge at a number of suspect broker-dealers, apparently immune from company discipline.
  • Third, state securities administrator enforcement actions have decreased in recent years.

What picture do these dots portray? Of a financial-services industry that continues to tolerate inappropriate conduct by too many agents, advisors, and brokers. Shocked? Of course, you aren’t. It’s been like this for years. But there is a silver lining: Ethical advisors have a huge opportunity to leverage their clean records to generate new business. But first they need to have an ethics code to guide their business practices, along with action steps for differentiating themselves on that basis.  But first let’s drill down on the data.

Regarding plummeting FINRA fines, it appears that the securities self-regulator levied $23.4 million in fines through June 2017. This compares with $79.4 million in 2016, according to a study from Eversheds Sutherland, a Washington, D.C. law firm. A case in point is what’s happened to variable annuity fines—a reduction from $30.3 million in 30 variable annuity cases in the first half of last year to $510,000 in six cases this year. Overall, Eversheds predicts FINRA will close out 2017 with $47 million in fines, a 73 percent reduction from 2016’s year-end total of $176 million.

The sheltering of rogue brokers has also been in the spotlight this year. According to an explosive study from Securities Litigation & Consulting Group (SLCG), “only 2.6 percent of brokers at firms with more than 200 brokers have customer complaints.” However, brokers with the worst complaint histories tend to congregate at 30 firms, the study revealed, based on SLCG’s slicing and dicing of FINRA BrokerCheck data from 2007-2016.

The study highlighted two brokerage firms with awful complaint histories compared to the 2.6 percent average. Aegis Capital Corporation had 24.49 percent of its brokers with complaints, while Newbridge Securities Corporation had 24.27 percent. SLCG says the problem with these (and other) firms in their study is that they “operate a high-risk (for investors) business model with a lax compliance and supervision environment.” They also “specialize in illiquid niche investments which pay high commissions,” SLCG found.

As for state-level investment advisor enforcement, the North American Securities Administrators Association (NASAA) 2017 Enforcement Report found that overall enforcement actions declined to 2,017 in 2017(!), from 2,060 in 2015; restitution decreased to $231 million from $536 million; and overall license sanctions fell to 3,510 from 4,265 in the prior year. NASAA did report increases in investigations opened, overall criminal relief (prison time/probation), and fines/penalties. Still, with the exception of fines and penalties levied, which posted the highest total in five years ($682 million), NASAA’s other performance metrics were either off the prior year’s pace or were lower than totals posted in recent years.

So how does one use the current regulatory environment as a marketing advantage? Answer: if you have a clean record, tout your commitment to ethics and compliance as a strong differentiator in the market and a huge plus for your clients. Start by developing an ethics code for your firm. Then apply that code to your business practices. Finally, communicate to your prospects and clients that you adhere to strong ethical values and practices in every aspect of your business.

To learn how to implement these steps, watch for Part 2 in this series.

For more information on ethical business practices, visit the Ethics Center at the National Ethics Association, sponsor of EOforLess. 

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Protect Yourself Like Your Clients | E&O Insurance

Independent Agency Owners Must Give Themselves High E&O Priority

As the owner of an independent insurance agency, you know how important it is to help your clients assess and mitigate their business risks. In fact, you’ve probably focused your entire career on meeting those dual challenges. But what about your own agency’s risks? Do you spend as much time on those as you do reducing client risks?

Granted, helping clients manage their risks is what you do for a living; it’s how you get paid, after all. But you should also find time in your schedule to reduce your own loss exposures. Not only is completing an E&O risk assessment crucial, so is the process of buying E&O insurance. Plus, once you have E&O insurance in force, it’s important to periodically re-assess your risks and to make sure your E&O insurance is still up to the task of keeping your agency safe.

In other words, what we’re suggesting here is that independent insurance agents should not succumb to what is popularly known as “shoemaker’s children syndrome”—the tendency of successful cobblers years ago to allow their children to go shoeless. If you recognize yourself here, don’t worry . . . you’re not alone. High-performing insurance agencies and their owners clearly must focus on the tasks that generate new and renewal revenue. And with only so many hours in each day, it’s understandable they allocate the lion’s share of their time to activities that grow their businesses. For example, the best general agents have a relentless focus on client-facing activities such as:

Assessing risks by engaging in careful risk audits
• Matching risks with appropriate types of property & casualty insurance
• Helping clients select sufficient coverage limits
• Identifying stable insurance markets that understand client needs
• Securing proposals from insurance carriers
• Helping clients evaluate competing insurers and products in order to make a wise purchase decision
• Helping clients understand what they bought and keep their coverage in force
• Periodically re-assessing client risk profiles
• Securing insurance coverage for new risks and updating coverage for existing risks

Successful independent agents will perform—and excel at—the vast majority of these tasks, if not all of them. If they don’t, their clients will find someone else with whom to do business. But do they excel at performing these activities for their own business? Perhaps not. And what about you? Do you postpone this task when client work beckons? Again, if you do, that’s fine. But recognize that the longer you put off addressing your own E&O exposures, the more likely you will suffer a crippling E&O loss. Is that what you want for your business?

What’s more, don’t think for a minute that getting sued only happens to other agency owners. According to Insurance Journal’s 2016 Agency E&O Survey, 22.3 percent of general agents had an E&O insurance claim in the past five years, 10.7 percent had one six to ten years ago, and 17.8 percent had a claim more than 10 years ago. In all, more than half of all general agents (50.8 percent) had suffered an E&O claim in the past.

Fortunately, the survey also found that 83.5 percent of agency owners purchase E&O insurance to protect their firm’s assets. However, many aren’t adequately evaluating their E&O exposures before the sale, matching those exposures to a suitable E&O policy with sufficient limits, and then reassessing everything periodically in the future.

How to Defeat Cobbler’s Syndrome

If your agency suffers from “cobbler’s syndrome,” what should you do about it? Here are some ideas to consider:

First, admit you have a problem. Facing up to the fact you’ve been neglecting your financial security will be your first step toward getting your risk exposures under control. Not admitting it means you will be trapped in self-defeating behavior that jeopardizes everything you’ve worked for.

Second, don’t beat yourself up over past omissions. What’s done is done. The important thing is to get your agency’s risk factors under control as quickly as possible.

Third, recognize that dealing with client needs will always trump addressing your own needs. That’s just the nature of the beast. The solution is to manage your time more efficiently so you can address not only your clients’ problems, but also your own.

Fourth, do an action plan for E&O risk mitigation. Break down the process into its component steps, and then get those steps on the calendar. As the old truism suggests, when it comes to achieving important goals, you need to plan the work and work the plan. Once you know what needs to get done, get those steps on the calendar and focus relentlessly on completing them.

Fifth, don’t rush the process of E&O risk analysis and insurance policy selection. Be really deliberate when it comes to these decisions because making a mistake could expose your agency to potentially fatal losses.

Sixth, do your due diligence on E&O insurance policies or group certificates from several providers. A key aspect of this process: the degree to which E&O marketing/admin firms and E&O underwriters specialize in agencies such as yours, as well as their ability to quickly investigate and pay E&O claims. Obviously, the insurer solvency ratings should be solid as well—at least a B+ from A.M. Best and ideally higher.

Finally, don’t underestimate the convenience of buying E&O insurance online from a firm such as EOforLess. With your time in short supply, why waste even a minute working through traditional brokers and underwriters with their complex paper forms, multiple carrier proposals, and long wait times from application to issue? You can reallocate the time you save here to the core tasks of keeping your clients—and your agency—well protected in a dangerous world.

In short, your agency might have been like a cobbler’s child . . . lacking not shoes, but adequate E&O insurance. But past is not necessarily prologue. It’s never too late to assess your firm’s E&O insurance needs and to buy effective, comprehensive, and affordable E&O insurance online from a firm such as EOforLess. Good luck!