Payment of Referral Fees – Is It Legal?

The above question continues to come up every so often in the Free Legal Service program that I run for the members of the Independent Insurance Agents of Georgia. There is no definitive answer to the question in either the Insurance Code of Georgia or the regulations or other pronouncements issued by the Georgia Insurance Commissioner’s Office.  However,  I have advised my clients for a long time that a very strong argument can be made that the payment of referral fees is permissible, as long as their payment is not conditioned on the purchase of an insurance product by the person or business who is the subject of the referral.

The basis for my argument is that the law most often cited in support of the position that the payment of referral fees is illegal is the prohibition on the sharing of commissions by an insurance agent with a person or entity that is not licensed by the Insurance Commissioner’s Office.  I agree that this prohibition would most likely make illegal the payment of a referral fee only for referrals that resulted in the sale of an insurance policy or other product.  In that situation, it is easy to see how the agent or agency could be said to be sharing the commissions earned for such a sale with the referral source.

However, if the referral fee is paid regardless of whether the person or business who is referred buys an insurance policy or other product from the agent or agency, to say that such an arrangement would be the sharing of commissions with an unlicensed person would mean that an agency could not pay its employees who are not licensed by the Insurance Commissioner’s Office for the services rendered to the agency.  This because the source of the compensation paid to those employees was the commissions received by the agency for the insurance policies and other products it sold to its customers.

Obviously, such an interpretation of the law would make it cost prohibitive, if not impossible, for many agencies to conduct their business activities.  The passage of an amendment to the anti-rebate law by this year’s General Assembly lends further support to my argument.  In a change that took effect on July 1, 2016, that law was amended to allow an insurance company or producer to give a customer or potential customer certain kinds of gifts as part of an “advertising” or “promotional” program, as long as the giving of such gifts was not conditioned on the purchase or renewal of an insurance policy by the recipient of the gift. (Click here for more details on this new law).

If an agent and presumably an agency can give a customer or potential customer a gift as long as it is not conditioned on the purchase or renewal of an insurance policy, there is no difference in giving a fee or other gift to a third party for referring a potential customer regardless of whether that potential customer buys an insurance policy.




Can An Agency Create a Duty to Its Customers Based on Its Website?

The short answer to the above questions is Yes.  I have written a few blog posts in the past on how an agency or agent can unknowingly create a duty to their customers or potential customers that would not otherwise exist by what they say or do.  The same principles discussed in those blog posts also apply to the contents of an agency’s website or social media communications.  The dilemma faced by agencies and agents who are trying to do what the marketing consultants say (to attract customers you need to differentiate yourself from your competition) while limiting their exposure to E&O claims is perfectly illustrated by two articles in the most recent edition of IIAG’s Dec Page magazine.

As fate would have it, those two articles “Errors & Omissions:  Is Your Agency Making Empty Promises on Its Website?” and “Creating a Lead Friendly Website” appear back to back in that magazine.  The first article cautions agencies and agents against making statements on their website that indicate they will do things they are not prepared to do or can’t do, e.g., “our agents will help you choose the amount of coverage that best fits your needs”, “we work hard to ensure that you are fully covered for all those risks that apply to you”, “we are your business partner”, or “we will obtain coverage to fully protect the financial stability and assets of our customers.”  According to the article’s author, the last two statements were important reasons that Swiss Re Corporate Solutions, which handles the E&O insurance program that is available to IIAG members, decided to settle claims of inadequate or inappropriate coverage made by customers of the agencies on whose websites those statements appeared.

In the next article, IIAG’s communications coordinator advises agencies and agents to use their websites to give potential customers “a real reason to choose you as their insurance provider.”  This will not happen unless your website stands out the most from your competitors’ websites.  To do so, it needs to reflect the agent’s or agency’s personality and relate to the customers they are trying to attract.  This is done by offering to do what those customers need done.  Thus, the website should be ” a reflection of your area of expertise and should speak directly to the needs of your target customers.”

However, in doing so, the agent and agency need to be mindful of making statements that can then be used against them by a dissatisfied customer.  If a claim of expertise with respect to a certain type of risk is made, that may well create a duty to use that expertise in recommending insurance coverages and their amounts for such a risk.  Stating that an agency will satisfy the specific needs of its customers may well impose a duty to do so, which duty could be very difficult to fulfill.

In deciding what to say in social media posts and on a website, agencies and agents should only make statements about what they can or will do that they can live up to and recognize that once such a statement is made, they will be expected to live up to it with every customer.  It would be a good idea for every agency and agent to review what’s on their social media posts and websites to make sure that they can do for every customer what those posts and their websites say they will do.

Steve Anderson – Where Does He Find the Time?

Recently, it seems that every time I open my e-mail program there is something from Steve Anderson about things he is doing to make life easier for insurance agencies and agents.  I wrote some posts earlier this year about a social media marketing presentation that he made and a cyber security webinar that he conducted, which focused on the insurance industry.    He will be doing another free webinar on that subject on October 5, 2016 at 2:00 p.m. Eastern Time.  If you have not heard Mr. Anderson speak on this topic before, it will be well worth your time to attend this webinar (click here to register).

His latest ventures involve advice and training on how to choose the technology for use in an insurance agency that will give it the best return on the investment of time and money needed to adopt the technology, and he is working with the Agents Council for Technology’s newly created work group, Changing Nature of Risk, to give insurance agents basic information on the technological and other changes that are occurring in our society, how they impact the various segments of the insurance industry, and what agents need to do to keep up with these changes.  The first output of this work group is a series of advisories that focus on current technological and business changes that agents need to learn about and be aware of in conducting their business activities.  Each advisory contains an explanation of the technology or business process, why its important, its broad implications or uses, its economic impact, and how it affects the insurance industry. They end with suggested actions that agents should take and resources that an agent can use to learn more.  The subjects covered by these advisories include telematics, peer-to-peer insurance arrangements, drones, and the sharing economy (click here to read them).

Not content with helping to produce the above advisories, Mr. Anderson has created a series of three 25-30 minute videos devoted to explaining how insurance agencies and agents can decide which of the available technology products will help them the most in their business activities for the least amount of time and cost.  These videos are free.  In the first one, Mr Anderson explains how to use a matrix he has developed to determine what technology products will give a particular insurance agency the biggest bang for the buck, so to speak.  In the second one, Mr. Anderson discusses in detail what he considers to be the two most important metrics in his matrix, number of hours saved and number of new clients projected to be gained.  The third one is not yet available, but should be soon.

I don’t know where Mr. Anderson finds the time to be involved in all the above activities and still run his consulting practice.  But insurance agents should be glad he does, as those activities, all of which are provided without cost, can be very helpful to any one who takes advantage of them.

Payment of Producers Under New Overtime Rule

My last post concerned the exemptions from the overtime payment requirements of the Fair Labor Standards Act (“FLSA”) that will most likely apply to the employees of an insurance agency.  While the job duties of a customer service representative can probably be defined in such a way as to qualify him or her under the administrative exemption, because a producer’s primary job duty is the sale of insurance products that exemption would not be available for a producer.  The only exemption for which a producer who is not a door to door salesperson may qualify is the one for highly compensated employees, but as of December 1, 2016, that will require a producer to earn at least $134,004 a year, of which $47,476 was paid as a salary.

If a producer will not qualify for an exemption from the overtime payment requirements of the FLSA, an agency must decide whether to prohibit the producer from working more than 40 hours in any one work week, so no overtime pay will be required, or pay the producer one and a half times their calculated hourly compensation for each hour worked in excess of 40 in any one work week.  The latter option can get expensive in a hurry, so the question becomes is there a way a producer can be paid for working more than 40 hours in a week that is not as expensive as the traditional way.

The answer to that question is Yes by using what is known as the fluctuating workweek method of payment.  To be able to use that method of payment for any employee, the following requirements must be satisfied:

1. The employer and employee have an understanding that the employee will receive a fixed salary for the hours the employee works in a workweek, regardless of how few or many hours are worked, and payment of that salary is made.
2.  The hours the employee works fluctuate from week to week.
3.  The salary paid is such that in any given week, the employee never receives less than minimum wage pay when the salary is divided by the total hours they work during that week.
4.  The employee receives pay at a rate not less than half the regular pay rate for that week for any hours they work in excess of 40 hours in a workweek.

The financial benefit from using the fluctuating workweek method of payment is that the amount of overtime pay is calculated by dividing the total number of hours worked in any one week by the agreed on fixed salary and then using that hourly rate to calculate the amount of overtime pay due for any hours worked in excess of 40 during that week.  For example, if the fixed salary is $800 per week and an employee works 50 hours during that week, their hourly rate of pay is $16, not $20 which it would be if the employee were being paid a salary of $800 a week for an expected 40 hours of work  The overtime pay rate under the fluctuating workweek method would be $24 ($16 + $8), instead of $30 ($20 + $10), resulting in a savings of $60 ($30 – $24 x 10 hours).  This savings will increase with every extra hour worked because the hourly rate of pay on which the overtime pay rate is calculated will decrease.

The main problem with using the fluctuating workweek method of payment for producers is the requirement that a fixed salary must be agreed on, which will be paid no matter how many hours are worked in any given week, 50 or 30.  The fixed salary requirement will prevent a commission only compensation arrangement, but it could be used for new producers if the agency’s practice is to pay its new producers a guaranteed minimum amount and account for any commissions earned above that with a year-end bonus.  For veteran producers, an agency could agree to pay a fixed salary based on the commissions earned the prior year with a similar year-end bonus for any commissions earned above the salary amount.  In both situations, the salary should be adjusted to account for the expected number of overtime hours, so that the salary and overtime pay are equal to what the salary would have been without taking overtime pay into consideration.

Use of the fluctuating workweek method of payment will not work for all agencies or all producers, but it is an option that should be considered when an agency is determining how it will pay its producers and other employees to comply with the new overtime rule’s requirements.

New Overtime Rule – Who Is Exempt?

Judging by the reaction of the audience at a presentation on the new overtime rule I made a couple of weeks ago, that rule is going to create significant problems for independent insurance agencies.  I barely had time to introduce myself before the first question came and they just kept coming.  The focus of many of the questions was whether customer service representatives and producers could be exempt from the overtime pay requirements of the Fair Labor Standards Act (“FLSA”).

I addressed this issue in a post in early 2015.  At that time, the required minimum salary for an employee to be considered exempt was only $455 per week, or $23,660 per year.  I say only because as those of you who have followed my blog posts on the new overtime rule know, the required minimum salary will more than double to $913 a week, or $47,476 a year, on December 1, 2016.  That will significantly increase the financial cost of treating an employee as exempt, which cost should only be incurred if a particular employee can satisfy the duties tests for exempt employees.  If not, the employer is wasting their money and will need to look at other options.  (Click here for a more recent post on what those options are.)  

In my 2015 post, I discussed the most likely exemptions that could apply to customer service representatives and producers.  What was said in that post still applies, with one exception.  The commissioned sales person exemption will not apply to producers or any other employee of an independent insurance agency because that exemption only applies to employees of a “retail sales” business, and the U.S. Department of Labor (“USDOL”) has issued regulations that state businesses that sell insurance are not engaged in “retail sales” for purposes of that exemption.

As I told my audience, that leaves the administrative exemption as the most likely one for customer service representatives and the highly compensated employee exemption as the only one available for producers, unless they operate as door to door sales persons who have no office and meet with their customers only at the customers’ home or place of business. That is not how most producers perform their duties.  Producers will not qualify for the administrative exemption because the USDOL has ruled that an employee whose primary duty is the selling of a product or service cannot qualify for that exemption.  It will be very difficult to argue that a producer’s primary duty is not the sale of insurance products, especially if their main source of compensation is commissions from the sale of such products.  

Exceptions to the above general statements are possible because whether a particular employee is exempt from the overtime pay requirements of the FLSA is a case by case determination that is dependent on the duties actually performed by that employee. However, I told my audience that unless their producers were earning at least $134,004 a year, of which $47,476 was paid as a salary (highly compensated employee exemption), as of December 1, 2016, they would probably be required to pay their producers overtime for any hours worked in excess of 40 in any one work week.  That is true today for any producer who is not making the current threshold amount of $100,000 a year, of which at least $23,660 is paid as a salary.

As with any law, the fact I have never heard of a producer suing an agency for overtime pay does not mean that producers who don’t qualify for the highly compensated employee or outside sales exemptions cannot do so.  It just means no one has tried to do so for any number of reasons.  As explained in my 2015 post, the consequences of not paying required overtime to an employee can be severe and employees have an incentive to file such lawsuits.

For more detailed information on this subject, see the updated question and answer white paper prepared by IIABA and attend its seminar on this subject that is scheduled to begin at 2 p.m. on August 30, 2016.     

Office Printers – A Gateway for Hackers?

My last post dealt with gaps in coverages provided by cyber liability insurance policies.  I recently came across an article in Legaltech News that reminded me how many gaps there are in a business’ computer network that, if not properly protected, can be an entry point for the hacking of that network.  While the ability of modern printers to perform more than one function has eliminated the need for separate scanners and telefax and copy machines, that multi-function ability makes them vulnerable to hackers.

To perform its many functions, today’s printer must be connected to a business’ computer and telecommunications networks and it must have a hard drive on which information can be stored.  The printer’s ability to send and receive telefaxes and to send scanned documents to e-mail addresses makes it vulnerable to outside attack, and its connection with the business’ computer network gives a hacker potential access through it to other devices on that network, not to mention all the data stored on the printer’s hard drive.

To close the gap that a multi-function printer creates in a business’ computer network, it should be protected just like the desktop computers and any other devices that are connected to that network.  This means such a printer should be behind the network’s firewall, any security features it may have installed should be activated and continually updated, any default passwords for it should be replaced, and access to its features should be limited by passwords or other controls.  It is also a good idea to encrypt all data that is sent to or from the printer and at the least, to encrypt the data that is stored on its hard drive.  In addition, if possible, limitations should be placed on the destinations to which the printer can e-mail or telefax data or documents.

Finally, old printers, like lost laptops or smart phones, can lead to a data breach, if their hard drives are not wiped clean before they leave a business’ offices.

Cyber Security Coverage Gaps

My last post pointed out the need to carefully review a potential insured’s exposures to data breaches and then make sure that the policy chosen adequately covers those exposures.  The latter task is made more difficult by the lack of standardized cyber liability policies.  Each company has their own form for such policies and as the agent in the P.F. Chang case discussed in my last post found out, the wording of an exclusion clause can be critical.

Carefully reviewing the language of every company’s cyber insurance policies can be very time-consuming and sleep inducing.  Fortunately, someone has already done this.  Betterley Risk Consultants has recently published a reportthat explores in detail the  coverages available for 10 different types of exposures associated with data breaches.  Who provides coverage for regulatory and statutory claims, remediation costs, security assessment requirements, theft, third party liability, terrorism, and even bodily injury and property damage, along with other types of exposures, is discussed.  The executive summary for the report is available online.  If you are interested in getting detailed information about coverages, that can be obtained for a reasonable price from the International Risk Management Institute’s website.

One important trap for the unwary that was not discussed in my last post, but should be mentioned, is the exclusion found in many policies for the failure to maintain security standards.  As the Betterley report points out, this exclusion is very harsh on an insured who may be doing their best to meet the standards established when the policy was written, but for whatever reason are unable to do so.  Such a failure, event though having met the standards would not have prevented the data breach in question, can result in the denial of any coverage.  Policies with this exclusion should be avoided, if possible.

Another coverage trap for the unwary involves what has come to be known as “whaling”, or social engineering (the Betterley Report prefers to call this type of illegal activity deceptive funds transfer, which is not as colorful but more descriptive of what happens).  It involves the use of e-mails that appear to be from officers or employees of a company, but are really from hackers.  The hackers use the names and e-mail addresses of these officers or employees to request the transfer of funds by the company to an account set up by the hackers.  Millions of dollars have been lost by companies who have been the subject of these attacks.  Many of those companies have discovered to their dismay that they have no insurance coverage for such fraudulently induced transfers because the standard theft coverage in their insurance policies does not cover funds that are voluntarily transferred by the company, as opposed to being taken from the company by third parties.

In keeping with my theme of cyber liability being a two-edged sword for insurance agencies and agents, they and other small businesses should not assume that “whaling” only occurs at big companies and for large amounts of money.  As noted by Steve Anderson in post he did on this subject, “whaling” has happened to insurance agencies for relatively small amounts of money.  Mr. Anderson’s post also has some advice on what agencies can do to protect themselves from this type of attack.

Cyber Security Insurance – Traps for the Unwary

It has been awhile since I last posted anything about cyber security, but it continues to be a very hot topic in the various insurance related newsletters that I receive.  As I noted in my first two posts of this year, cyber security is a two-edged sword for insurance agencies.  While they need to protect themselves from data breaches and their consequences, that same need of other businesses presents a selling opportunity for agencies.  With that selling opportunity come risks that are not present in more established lines of business due to the lack of standardized language for cyber security insurance policies.

A recent federal court case in Arizona involving the restaurant chain P.F. Chang is a good example of those risks.  P.F. Chang suffered a data breach involving its customers’ credit card information.  Like most businesses, P.F. Chang used a third-party payment service to process its credit card transactions.  Its agreement with that service required it to indemnify the service for any claims that may be made against it by the issuers of the credit cards for which payment services were provided.  Those issuers did make claims against the payment service as a result of P.F. Chang’s data breach in the amount of $1.9 million and when the payment service looked to P.F. Chang to pay those claims, P.F. Chang found out it did not have insurance coverage for them under its cyber insurance policy with Federated Insurance.

Even though Federated had marketed its cyber insurance policy as “a flexible insurance solution designed by cyber risk experts to address the full breadth of risks associated with doing business in today’s technology-dependent world” that “[c]overs direct loss, legal liability, and consequential loss resulting from cyber security breaches”, its coverage only applied to claims made by persons whose information had been taken and it excluded liability for any claims made as a result of P.F. Chang’s contractual assumption of liability. It did not include payment card industry coverage, which would have protected P.F. Chang in this situation.  It’s not hard to imagine the conversation that took place between P.F. Chang and its insurance agent when P.F. Chang lost its court case against Federated. Hopefully, that agent properly documented his or her discussions with P.F. Chang about the types of cyber coverage it wanted.  Even so, that agent will likely never sell another insurance policy to P.F. Chang.

To avoid being put in the situation of P.F. Chang’s insurance agent, it is essential that an agent find out all the possible exposures of their customers to a data breach.  A recent post on Property Casualty 360 discusses the five essential coverages that every cyber insurance policy should have.  Depending on the size and business activities of a particular customer, coverage for public relations expenses may not be necessary in every case, but the other four coverages should be a part of every cyber insurance policy sold.  Forensics and legal expenses are necessary to determine the scope of any breach and what legal responsibilities are created by it.  Those responsibilities will typically include notification of the affected customers and possibly, the provision of credit monitoring services.  Business interruption coverage will help the customer overcome the inevitable loss of income that will occur as the customer focuses on dealing with the consequences of the data breach and with the rise of ransom ware attacks this year, every business should have protection against having to pay a hacker to unlock their data that has been encrypted by malware.

Of course, every business that accepts credit cards as payment for their goods or services will need the payment card industry coverage that P.F. Chang lacked.  That includes insurance agencies, all of whom should be checking their cyber insurance policies to be sure they have such protection.

One More New Law of Interest to Insurance Agents

My last post concerned new laws affecting insurance agencies and agents that became effective as of July 1, 2016.  This post concerns a law that became effective on June 3, 2016.  That law effectively rewrote the procedures for the filing of garnishments to collect judgments that have been entered against a person.  Some changes were made to those procedures for garnishments served on employers of which all Georgia employers should be aware.

Before discussing the changes made to those procedures, I want to point out three things that were not changed.  First, it is still illegal to fire an employee because their wages were garnished for “any one obligation.”  It appears that it remains legal to fire an employee who has his or her wages garnished for more than one obligation.  Second, it remains legal for an “authorized officer or employee” of a legal entity to sign and file an answer to a summons of garnishment and to pay any money shown on the answer into the court’s registry.  However, if a traverse, or objection, is filed to the answer by the plaintiff or the employee, the legal entity must hire an attorney to represent it from that point forward.  Finally, if an answer to a summons of garnishment is not filed by the statutory deadline or within 15 days thereafter, a default judgment for the full amount of the debt owed by the employee can still be entered against the employer.

What has changed involves how an employer must answer a summons of garnishment and what the employer must give the employee at that time.  As of June 3, 2016, an employer’s answer to a summons of garnishment must state when the employee’s wages were earned, whether they were earned on a daily, weekly, or monthly basis, the employee’s rate of pay and hours worked, and  “the basis for computation of earnings.”  If the employer has been served with a summons of garnishment for more than one debt of the employee, in its answers to all such summons, the employer must state to which court any money owed will be paid and the case numbers of all the cases in which a summons of garnishment has been served on it.

In addition to serving a copy of its answer to a summons of garnishment on the plaintiff or its attorney, an employer is now required to serve a copy of its answer on the employee or his or her attorney by personal delivery or mail and to include with that document two new documents, Notice to Defendant of Right Against Garnishment of Money, Including Wages, and Other Property and Defendant’s Claim Form.  Copies of these documents are to be provided to the employer by the plaintiff, along with the summons of garnishment.   Their purpose is to inform the employee of his or her right to claim that some or all the property shown on the employer’s answer is exempt from garnishment and to provide a form for the employee’s use in making an exemption claim.

The Georgia Attorney General is required to maintain a list of all the exemptions from garnishment and it can be found here.  There are a surprising number of exemptions, but very few, if any, will apply to the money or other property ordinarily owed employees by employers.

New Laws of Interest to Insurance Agents

July 1 is the date on which any law passed by the General Assembly earlier that year will take effect unless a different effective date is specified in the law itself.  This year, July 1 will bring two changes in Georgia’s insurance laws that should be of particular interest to insurance agents and agencies.

The first such change was the subject of an earlier post.  It concerns what are known as Stated Value, or Valued, Policies.  They are policies that provide coverage for certain residential buildings in a specified amount, which amount will be paid upon the complete destruction of the building without any proof by the insured that the building was actually worth the policy amount.  As noted in my earlier post, before July 1, 2016, such policies could only be issued to “a natural person or persons.”  Beginning on that date, such policies can be issued to ”any legal entity wholly owned by a natural person or persons.” Buildings or other structures that are residences for one or two families and that are owned by a legal entity that is in turn wholly owned by one or more individuals can be covered by a Stated Value policy.  Please see my earlier post for some potential traps for the unwary agent that such a policy presents.

The other, probably more significant, change that will occur on July 1 is a change in the anti-rebate law.  Up to now, it has been unclear whether an agent or agency could make gifts having a monetary value to their customers or potential customers as a way of thanking a customer for their business or encouraging a potential customer to get a quote or other information from the agent or agency.  Beginning on July 1, the making of such gifts “not exceeding $100.00 in value per customer in the aggregate in any one calendar year” will be permitted, as long as a customer or potential customer does not have to buy or renew an insurance policy to get the gift.  The type of gifts that can be made are limited to “prizes, goods, wares, store gift cards, gift certificates, sporting event tickets, or merchandise.”

Store gift cards and gift certificates are subject to the requirements of Georgia’s Fair Business Practices Act of 1975.  That Act requires that a gift certificate or store gift card be limited to use at a single merchant or group of merchants that share the same “name, mark, or logo” and that it be issued in a specified amount that cannot be increased, in the case of a gift certificate, but may be increased, in the case of a store gift card.

The change made to the anti-rebate law, O.C.G.A. Section 33-6-4, was also made to the law governing the rates that can be charged by insurance companies, O.C.G.A. Section 33-9-36, because that change also allows insurance companies to make the permitted gifts to their customers or potential customers.   It is my understanding that a large insurance company with a captive agency force was involved in the effort to get this change made.  That likely means agents and agencies who are competitors with such companies better be ready to take advantage of this change in the law, because those companies will be doing so.

For those who are interested in the other changes made to Georgia’s insurance laws by this year’s General Assembly, click here for the IIAG’s Capital Report, which summarizes all the changes made.