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 plans 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 claim 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 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 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 dynamics 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.Whenever a client 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 give you  peace of mind, it will also protect your assets against litigious clients. Make sense?

By EOforLess

People either love or hate U.S. Senator Elizabeth Warren. Both sentiments became even more fervent in late April 2015 when she announced her investigation into the non-cash compensation practices of annuity insurers. Many annuity agents and companies decried her efforts to shed light on the “vast range of perks (paid) to entice sales.” But critics of the industry’s incentive system applauded her for sparking debate on the need to eliminate conflicts of interest that weaken people’s ability to save for retirement.

At the National Ethics Association, we believe reality falls somewhere between the two camps. Still, her investigation, along with several other regulatory initiatives over the last several years, represents a sea change in how regulators and the public view conflicts of interest. Financial advisors must adapt to what is rapidly becoming a conflict-phobic marketplace or suffer negative consequences. Are you open to reconsidering your long-held beliefs about sales incentives and other sources of conflict that erode trust between advisors and their clients? If so, keep reading this article!

The first step is to understand where Senator Warren is coming from. She views cruises, trips to glamorous foreign cities, and diamond-encrusted Super Bowl-style rings as obvious conflicts that could tempt you to sell unsuitable annuities to consumers nearing retirement. She looks at FINRA (then NASD) banning non-cash compensation back in 2003 and wonders why that hasn’t occurred in insurance. And she sees companies giving motorcycles and exotic cars to their top producers and wonders if such rewards might be better spent adding to an annuity’s consumer rate of return.

In short, Warren believes that “annuity agents that (sic) are more interested in earning perks than in acting in their clients’ best interest can place Americans’ savings and retirement security at risk.” Before you dismiss this as just more posturing from a liberal politician, consider this: Warren is extremely popular in certain quarters and has the ear of the media, so what she says resounds loudly. When the Senator charges the industry with being corrupt, many people will listen . . . and believe.

And Warren isn’t alone in criticizing the industry. Stan Haithcock, dba “The Annuity Man” in Ponte Vedra Beach, Florida, is also uncomfortable with annuity sales perks. “The annuity industry hasn’t gotten the memo yet,” he says. “Agent recommendations are too often motivated by the trip (agents) will go on or the gift they will earn if they sell enough of a particular annuity.

“ . . . There are a ton of annuity salespeople that (sic) pride themselves on doing the right thing and always working on behalf of the client’s best interest. However, when a trip to France is on the line with an annuity sale, my fear is that some agents (will) lose their client focus and fiduciary responsibility (will) take a back seat.”

Joining Haithcock in opposition to non-cash perks is Scott Dauenhauer, a fee only financial planner in Murrieta, California, who specializes in the 403(b) marketplace. “There is no law against offering special perks, and insurance companies are within their right to offer agents big incentives to sell their products,” he says. “However, it’s my opinion that this is a major conflict of interest that should be disclosed and potentially even banned. Fully paid for vacations to exotic locales could certainly persuade an agent to sell one annuity product or another or to sell an annuity when another financial product would be more appropriate.”

From where we sit, accepting perks for annuity sales represents a significant ethical risk. Here’s what worries us. They may . . .

  • Distort your professional judgment so that you recommend an unsuitable product because it generates significant production credits, not because it’s the best solution for the client.
  • Tempt you to “gang production” with one carrier or FMO in order to meet qualification thresholds, when another carrier or FMO might have more suitable offerings for your clients or be in a stronger financial position.
  • Hook you and your spouse on taking nice trips and receiving prizes you’d otherwise not be able to afford. You begin to ask yourself, “What’s more important . . . keeping the wife or husband happy or doing what’s right for the client? And once you qualify for a number of years running, it becomes even harder to tell a spouse you didn’t qualify this year.
  • Color your judgment on the quality and support your FMO provides or tempt you to overlook their flawed recommendations.
  • Put you at a marketing disadvantage with fiduciary advisors who don’t accept perks.
  • Place you in the awkward position of explaining to clients how their purchase funded your London or Paris trip or helped to pay for your sparkly diamond ring.

Now, we’d be foolish to suggest that annuity perks serve no legitimate purpose. They generate sales and profits for insurers, which fund product development and technology enhancements that benefit clients. They fund the efforts of FMOs who help advisors learn about products, generate leads, close sales, and stay in compliance. They motivate agents and advisors to talk to prospects about their retirement-income needs and to motivate them to take action now to fund those needs. And in the case of conventions and trips, they provide onsite education, networking, and inspiration that helps advisors become more capable, focused, and excited about helping their customers achieve their financial goals.

Now that you’ve heard from both camps, where do you stand? Do you think the current environment merits taking another look at the perks you accept? Does it make sense to position yourself as an advisor who stands above the conflicted herd? Might you consider swearing off pure cash or merchandise rewards that do nothing for the client, while agreeing to go on trips that have significant educational elements that make you a better advisor? And should you begin disclosing your non-cash sales incentives even though you may not be legally required to do so?

Only you can answer these questions, but with everything happening on the regulatory front these days, we encourage you to answer them soon. Because ultimately, you need to decide why you’re in this business. Do you want to provide objective advice and to serve the best interests of the client? Or do you want to leverage the incentive system for maximum financial gain? Is there a middle ground, and will it be defensible in the fiduciary marketplace of the future? Perhaps Senator Warren can let us know!

For more information on affordable errors-and-omissions insurance for low-risk financial advisors, visit E&OforLess.com. For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center

In ancient Greece, the famed philosopher Diogenes walked the daylight streets with a lantern in search of an honest man. In your work as a financial professional, do you ever feel the same way . . . that way too many of your customers have lost touch with the truth? If so, you’re not alone.

In the sales process, prospects often tell “white lies” to deflect you. They say they can’t meet with you because of their doctor’s appointments (no such thing), their existing products or services (no such things), or their relationship with another provider (no such brother-in-law). If you do get to meet with them, they may tell more serious lies, such as hiding material information or masking their true motivations for buying insurance or investments.

Now, don’t get us wrong. The vast majority of customers are truthful. But the lying happens often enough to get under your skin. In fact, as one businessperson commented, “You don’t know whether to laugh or to get mad at clients for thinking you are stupid.”

What’s more, deceitful customers pose a risk to your business. If they’re willing to lie to you, what does that say about their character? Would they also be willing to fabricate an errors-and-omissions claim for personal profit?

So what do you do when a prospect or customer lies to you? The answer depends on your assessment of the magnitude—and context— of the lie. For example, if a prospect gives you a phony excuse for breaking an appointment, do you simply banish them from your prospect list? Probably not, since if you did this with every fibbing prospect, you wouldn’t do much business. Rather, try to view such “white lies” as buying objections. As such, you want to meet them head on, respond to the underlying concern, then attempt to close the sale again.

If a lie is serious—for example, generating false information that hinders the appropriate sale of your product or service—then watch out. People who tell such lies are trouble magnets. You ultimately need to consider whether they’re worth dealing with and whether you want to jeopardize your errors-and-omissions record on their behalf.

So the next time a prospect or client lies to you, take a deep breath, then . . .

  • Give the person the benefit of the doubt. Don’t automatically assume someone is lying. Probe to see if there’s a misunderstanding.
  • Call the lie out. When you hear a lie, don’t just let it pass. Let the client know that it’s in both of your best interests to be completely forthright. Then ask for a clarification.
  • Encourage the individual to come clean. When the person admits to lying, give them another chance. If the lying persists, reconsider whether you want him or her as a customer.

Finally, don’t be afraid to keep your truth lantern lit during the day. Like Diogenes, you want the world to know how much you value the truth—and welcome those who speak it.

For more information on reducing your errors-and-omissions insurance liabilities, please visit our E&O Headquarters at EOforLess.com.

The Incident

An agent writes a $1 million life insurance policy on his then 36-year-old male client. The client requests a premium waiver in case he ever gets disabled. The agent assures the client the policy will be issued with the rider. However, the policy is issued without one. The client receives the policy, never looks at it, and places it in a drawer for safekeeping.

Years go by and the client pays his premium faithfully. One day, on his way home from work, he loses control of his car on the highway due to an oil tanker spill. He’s seriously injured. Ultimately, he loses use of an arm and goes on long-term disability.

Months pass and the client still can’t work. Since he can no longer afford to pay for his life insurance, he tells the company he wants his premiums waived. The company responds that the policy has no such rider. The policy lapses due to non-payment of premium.

Eventually, the client dies from his injuries. The client’s beneficiaries file a death claim with the insurer, which is denied because the policy is no longer in force.

The Claim

The client’s beneficiaries sue the agent and the carrier for negligence, breach of contract, bad faith, misrepresentation, and violation of consumer protection laws.

The Outcome

The agent insists the client never requested a premium waiver. But he has no proof of this.

The client’s beneficiaries claim their loved one asked for the rider in the initial sales interview and that he always believed he had one.

Because the claim is a he-said/she-said scenario, backed by conduct consistent with the client’s believing he had the rider, the insurance company is unable to defend the agent. It settles the claim out of court.

The Takeaway

Agents can avoid such E&O claims by:

• Documenting all client requests in writing.

• Filling out the application line by line during the sales interview.

• At the end of the meeting, confirming what the client bought.

• At policy delivery, reviewing the policy benefits one more time.

• Always encouraging clients to ask questions about their coverage.