Uninsured Motorist Coverage – Traps for the Unwary

In May of this year, the Georgia Court of Appeals issued two decisions involving uninsured motorist coverage that all agents should be aware of, as both of them create potential E&O exposure.  In the first case, the Court of Appeals held that the insureds had uninsured motorist coverage in the amount of their liability coverage, not the statutory minimum of $25,000, even though the declarations page for their policy stated that was the amount of uninsured motorist coverage.  Under a law that took effect in 2002, an insured who did not affirmatively reject uninsured motorist coverage had such coverage for the same amount as their liability coverage, unless the insured affirmatively elected a lesser amount of coverage.

In this case, the insureds had previously rejected uninsured motorist coverage for a policy that had been continuously renewed since 1986.  However, in 2003, the insureds changed their minds and requested that uninsured motorist coverage be added to their policy.  Unfortunately, for the insurance company, it was not able to produce any documentation of that request, as it had been made over the telephone or possibly, the internet.  Since the law required the insurance company to prove that the insureds had affirmatively elected an amount of uninsured motorist coverage less than their liability limit, the absence of any such documentation proved to be fatal to its case.  The fact that the declarations page for the policy had continuously shown a limit of $25,000 for such coverage from the time it was requested in 2003 until the loss event nine years later was not sufficient proof of an affirmative election by the insureds in the opinion of the court.

A similar lack of documentation also proved to be fatal to the insurance company in the second opinion issued by the Court of Appeals.  In that case, the Court held that the uninsured motorist coverage under the insureds’ umbrella insurance policy had not been properly cancelled.  The major issued decided by the Court was that the cancellation and non-renewal requirements imposed by O.C.G.A. Section 33-24-45 on personal lines motor vehicle insurance policies also applied to umbrella policies that include such coverage.  Thus, those portions of umbrella policies can only be cancelled or non-renewed for the reasons and in the manner specified by that statute.

O.C.G.A. Section 33-24-45 requires that a notice of cancellation or non-renewal be delivered to the insured either in person or by first class mail that is evidenced by a receipt provided by the U.S. Postal Service or such other proof of mailing as would be accepted by the Postal Service.  In this case, the insurance company claimed it had sent the insureds a notice of cancellation of the uninsured motorist provision of their umbrella policy two years before the loss event.  As in the previous case, the declarations pages for the policy issued during that two year period showed their was no uninsured motorist coverage under it.  And like the previous case, the Court held that was not sufficient to overcome the insureds’ denial that they had received any notice of cancellation from the insurance company.  Since the company could not produce a receipt issued by or acceptable to the U.S. Postal Service for the mailing of that notice, the uninsured motorist coverage was still in effect at the time of the loss event.

The lesson of the above two cases for insurance agents is clear.  It is essential in dealing with uninsured motorist coverages that the letter of the applicable law be followed, as the courts will not make exceptions based on the duty of an insured to read their policies.  An agent who does not properly document everything that is done with respect to such coverages is leaving himself or herself open for an E&O claim.

 

IIAG Annual Convention – What You Missed Too

My last post described what Harrison Brooks of Reagan Consulting had to say to those who attended IIAG’s annual convention earlier this month about major trends affecting the insurance industry.  He also had some advice on how an agency can determine if it is doing what needs to be done to be successful in the long term.  That advice focused on three measurements that will allow an agency to compare itself to the most successful agencies.  These three measurements involved sales, hiring of new producers, and their validation.

Organic growth is the key to the long term success of any agency.  Such growth is the result of increases in the commissions and fees received from an agency’s existing customers due to the sale of additional products and services to them and from new customers.  The best way to measure this growth is comparing the amount of net new business revenue in a year to the prior year’s total net revenue.  That fraction tells an agency its sales velocity.  If the sales velocity is 15% or more, your agency is doing what the most successful agencies are doing.  For an even more secure future, at least 7.5% of the sales velocity should be coming from producers who are under 45 years of age. (For a more information on the concept of sales velocity, click here to register for a free webinar on that subject on June 28, 2017.)

In order to sustain organic growth, it is necessary to hire new producers.  Mr. Brooks showed an amusing video of man on the street type reactions of millennials to the question of what they thought about working in the insurance industry.  The comments made revealed a profound lack of knowledge of what is involved in that industry.  Mr. Brooks’ recommendations for how to interest millennials in becoming a producer was to emphasize four things: (1) it provides an opportunity to build relationships with customers, (2) it involves consulting with customers about solving their problems, (3) it provides the opportunity to build a book of business, and (4) it involves providing quality products they can believe in.  It is not about hard selling people to buy things they don’t need or want.

The way to determine whether an agency is hiring enough producers each year is to compare the number of new producers hired to the number of producers working for the agency during the prior year.  That fraction tells the agency its hiring velocity.  Anything 20% or above is an indicator of a healthy agency.

Once hired, a new producer has to quickly be able to pay for themselves.  Mr. Brooks recommended giving a new producer only six months to show they had the ability to do that.  If they did not show such ability, he advised firing them and hiring someone else. A successful new producer hire will fully validate themselves in three to five years.  Mr. Brooks standard for full validation was bringing in $40,000 to $60,000 a year in new business and building a book of business that at the end of the above time period would be worth (at 1.5 times commissions) what it cost the agency to train and pay them during that time period.

Mr. Brooks advised not to let the failure of a producer to validate himself or herself in three to five years discourage new hires.  The most successful agencies only have new producers meet that standard a little over 50% of the time.  So a roughly 50% failure rate is to be expected.  To give new producers the best chance to validate themselves, Mr. Brooks recommended having a well thought out plan for training and mentoring them and sticking with that plan.

 

IIAG Annual Convention – What You Missed

The 120th annual meeting of the Independent Insurance Agents of Georgia was held earlier this month.  It began earlier than usual with a two hour legislative panel on Thursday afternoon followed by morning meetings on Friday and Saturday, which ended an hour earlier than usual.  However, the information and networking opportunities provided were as valuable as always.

The legislative panel acknowledged that the 2017 session of the General Assembly was not as productive as it could have been, mainly due to political reasons.  2018 is an election year and several members of the House and Senate were positioning themselves for runs for higher office, in particular the governor’s office. This led to the failure to pass some laws what were considered to be non-partisan and broadly supported, including a bill to reform Georgia’s adoption code and to permit the Insurance Commissioner’s Office to enforce the payment to agents by health insurance companies of the commission rates that are specified in their filings with that Office.    Unfortunately, it does not look like things will get any better in 2018.

On Friday morning, Harrison Brooks of Reagan Consulting spoke about trends affecting the insurance industry.  Mergers and other acquisition transactions hit an all time high in 2016, and 2017 is off to an even better start.  This activity is primarily due to the record amount of money being spent by private equity firms to buy insurance agencies.  Such firms purchased over half of all agencies sold in 2016.  The prices being paid for best practices agencies averaged eight times earnings before interest, taxes, depreciation, and amortization (EBITDA), with the potential to earn three times more over an earn out period after the sale closes.  However, almost as many new agencies have been formed in the past five years as have been purchased, so the industry remains in balance.

For those agencies looking to grow by acquisition, Mr. Brooks recommended looking locally, within a 30 minute radius of your current location.  He advised looking for other agencies that have good leadership, younger producers and/or other staff, serve a different geographic area, and have developed a specialization that gives them a competitive advantage.  If can’t afford to buy another agency, Mr. Brooks suggested looking for good producers at other agencies, the younger the better.

Another big trend affecting the insurance industry is the rise of what is referred to as “InsureTech.”  In recent years, over $6 billion has been invested in technology companies like Lemonade that purport to offer a new or more efficient way to buy insurance.  This investment has been made in four main areas:  health insurance, auto insurance (pay by the mile), on demand insurance (individual items insured for specified periods of time), and peer to peer insurance (Lemonade).

In Mr. Brooks’ opinion, InsureTech was the greatest threat to independent insurance agencies that rely heavily on personal lines business, but small commercial lines competition would soon be coming.  His advice for agencies was to upgrade their ability to conduct business electronically, especially on mobile devices.  There are many resources available for agencies who want to do so; IIABA’s Agents Council For Technology, Insurance Digital Revolution, and CB Insights being some.

Mr. Brooks also had some things to say about how independent insurance agencies can determine if they are on the right track in terms of growth and the hiring of new producers.  His comments on those topics will be the subject of my next post.

What You Don’t Know About a New Employee Can Hurt You

As employers, agency owners need to be aware of the ways they can get in trouble due to the actions of their employees.  Many owners are probably aware that they can be held liable for acts of their agency’s employees committed while performing their duties on behalf of the agency.  This legal concept is known as vicarious liability, or respondeat superior.  It is the reason why all employers should adopt policies regarding the use of cell phones by their employees while driving a motor vehicle on agency business. (click here to find out what happened to a Georgia employer whose employee was looking for their cell phone when they ran into the back of another motor vehicle)

However, vicarious liability is not the only way that an agency can be held liable for the acts of its employees.  Such liability is possible even when the acts constitute a crime, as Avis Rent a Car recently found out.  In early May, a judge in Gwinnett County found that Avis was liable for $38.5 million of a total of $54 million in damages awarded by two juries to two persons who were injured when an Avis employee stole a rental car and then ran into them.  Even though the employee was engaged in criminal conduct when the accident occurred, Avis was held liable for the consequences of that conduct because it failed to properly check the background of the employee before he was hired.

If Avis had done so, it would have found the employee had been convicted of stealing cars and eluding the police.  As the employee himself told one jury, “Just like you won’t have a sex offender watch kids”, you don’t hire a person who has been convicted of stealing cars to take care of cars.  The legal concept underlying Avis’ liability is known as negligent hiring, and an employer can also be held liable for negligent supervision or retention of an employee.

If you ask a potential new employee for references, all the references provided should be checked.  A criminal background check should be run, if the employee will have access to agency or customer funds or other property.   Appropriate corrective action should be taken, if the employee does something or fails to do something that could have resulted in injury to a customer or other third party or their property.  If it happens again, it may be time to consider ending the employment relationship.

The law in this area focuses on what a reasonable person in the position of the employer would have done under the same circumstances.  That should be the guiding principle for agency owners in hiring and supervising their employees when injury to customers or other third parties is possible due to an employee’s act or failure to act.

 

 

Summer Interns – It’s That Time of Year Again

With Memorial Day weekend, the unofficial start of summer, fast approaching, it’s a good time to go over the rules regarding the use of interns.  Nothing of significance has changed since my post on this subject last year, but it never hurts to refresh one’s memory, as a business that violates these rules can find itself in trouble with the U.S. Department of Labor (the “USDOL”) and potentially, the IRS.

The issue that poses the biggest risk of trouble for an agency is whether an intern will be compensated and if so, how much compensation they will be paid.

If an agency does not want to pay an intern for their services, the burden is on the agency to prove that the intern is a “trainee”, who does not have to be paid anything for their services, and not an “employee”, who must be paid at least the minimum wage for their services.  The same burden must be met if the agency wants to pay an intern less than the minimum wage for the hours worked by the intern.  That burden is higher for an agency or other profit-making business because the USDOL, which is responsible for enforcing the minimum wage law, will presume that such an intern is an “employee”.   The USDOL has issued a Fact Sheet in which it establishes six criteria that must be met to prove an intern is a “trainee.” (Click here for an article I have written that discusses those criteria.)  The bottom line is that if the agency derives any significant benefit from the services of an intern, that intern will most likely be considered an “employee” by the USDOL for purposes of the minimum wage law.

It does not matter that the intern willingly agreed to perform the services in question without pay or for less than the minimum hourly wage, as the United States Supreme Court has held that an individual can not waive their rights under the minimum wage law. Thus, an intern could decide, up to three years later, that maybe they should have been paid the full minimum wage for all the services they performed for the agency.  A successful claim could result in the intern receiving up to twice the amount of compensation they should have been paid and will result in the agency paying the intern’s attorney fees and other expenses of litigation.

For an agency that is considering hiring someone who is under 18 years of age, both the federal and state governments impose restrictions on the types of activities in which such a person can engage and for how long each day, regardless of whether they are a “trainee” or an “employee.”  The main difference between the two sets of restrictions is that Georgia law requires a person under 18 to get an employment certificate, or work permit, from the school they last attended or the local county school superintendent.  (Click here for a fact sheet from the USDOL on this subject and here for a summary of the restrictions imposed by federal and state law from the Georgia Department of Labor.)  For agency owners who want to give their children a taste of what it’s like to work in the agency, only the restrictions on prohibited occupations will apply.

A summer internship can be beneficial for both the intern and the agency, but to avoid trouble, the agency needs to know and follow the above rules.

BEST WISHES FOR A SAFE AND ENJOYABLE MEMORIAL DAY WEEKEND.

Employment Termination Notice Periods – Are They Enforceable? (Part 2)

My last post addressed the enforceability of employment termination notice periods from the perspective of the employer.  Unfortunately for the employer, when an employee quits without providing the required notice, there is not much the employer can do beyond prohibiting the employee from acting contrary to the interests of the employer during the required notice period.  Is an employee who is fired without being given the required prior notice in a similar position?

The answer depends on what effect a termination of the employee’s employment has on their right to receive post-employment compensation.  The Georgia appellate courts have held that the failure of an employer to give the required notice of termination to an employee entitles the employee to sue the employer for breach of contract.  But the employee’s only remedy is payment of the compensation and other benefits that would have been paid or provided to them during the required notice period.  The employee cannot get their job back.  However, such a breach of contract by the employer will void any provision in the employment agreement that restricts the right of the employee to receive compensation they have already earned after their employment terminates.

In one case, the Georgia Court of Appeals refused to enforce a provision in an employment agreement that limited the improperly terminated employee’s right to receive commissions for sales made to those that were received by the employer within 10 days after the termination of the employee’s employment.  In another case, the Court of Appeals refused to enforce a provision that reduced the amount of commissions the improperly terminated employee was entitled to receive after their employment was terminated.  Any attempt to avoid the payment of a bonus or other compensation that involves the improper termination of an employee will also fail.

Since an employer will have to pay an employee the compensation and provide the benefits the employee would have been entitled to receive during any required termination notice period, there is no reason not to take advantage of such a period to do what can be done to make the employee’s departure as painless as possible.  Where there are contractual provisions that restrict an employee’s right to receive compensation they have already earned after their employment terminates, it is imperative that any required notice of termination be properly given.  If it is not, those provisions will not be enforceable against the employee.

 

Employment Termination Notice Periods – Are They Enforceable?

There was an article a few months ago on HR Daily Advisor about what to do if an employee quits their job without giving any prior notice.  In the absence of a written agreement to the contrary, there is no requirement that either an employer or employee give prior notice of their intention to terminate the employment relationship.  That is the basic meaning of “at will” employment.  Either side can terminate the relationship at any time for any or no reason (as long as the reason is not one prohibited by law).

As the article points out, when an employee quits without notice, it can cause many problems for the employer, some of which may result in extra expense.  When I prepare employment agreements for my clients, I always ask if they want to require the employee to provide prior notice before they can terminate their employment.  Having such notice can allow for a smoother transition by giving the employer time to find a replacement, or reallocate duties among the remaining employees if no replacement will be made, before the employee leaves.  For those employees who are in sales and have significant customer contact, it can give the employer time to contact the customers who will be effected and introduce them to another contact person at the employer.  This will give the employer a better chance of maintaining the customer relationship after the employee leaves.

So what are an employer’s options if an employee quits working without providing the contractually required prior notice?  While that would be a breach of contract by the employee, the employer’s options are limited.  The 13th Amendment to the U.S. Constitution and Georgia law prohibits forcing the employee to continue working during the required notice period.  However, the employer would have a cause of action against the employee for any expenses it incurred as a direct result of not being given the required prior notice and may be able to use the employee’s breach of contract to avoid paying any compensation that would otherwise be due the employee after the termination of their employment (e.g., bonus or severance pay).  This does not extend to withholding payment of compensation for work that has already been done.  The proverbial “last paycheck” should not, as a general rule, be withheld from the employee, as the employer would risk violating the Fair Labor Standards Act and related Georgia laws.

An employee who fails to give the required notice can still be considered an employee of the employer during the required notice period.  As such, they will have a duty not to do anything that would be harmful to the interests of the employer.  This duty can be used by the employer as a basis to prevent sales employees or others who have significant customer contact from contacting its customers during the notice period or to sue such employees who do act contrary to the employer’s interests during that period.  It is generally easier to prove a violation of this duty than of a non-solicitation or non-disclosure covenant.  However, to make use of this duty, the employer must be willing to pay the employee their normal compensation for the notice period.

While an employer’s options for dealing with an employee who does not give the required prior notice of termination are limited, the existence of such a requirement can be helpful to the employer in the vast majority of cases where employees abide by the requirement.

Gamification – What Is It and How Can It Help Agencies?

My last post concerned the use of raffles by insurance agencies and agents to promote the making of referrals.  I thought it was an innovative idea, and one that makes use of the insights into human behavior that are the basis for what is known as gamification.  Gamification is the application of the principles and techniques used by game makers to develop popular games to encourage desired behavior in non-game activities.  Research has shown that creating a competition among a group of people for a reward for desired behavior increases the engagement of those people in the desired behavior beyond just offering the reward.  This is due to our natural desire to compete and the joy that comes with winning a competition.

Staging sales contests among salespersons with the winner receiving a reward of some type (e.g., bonus, trip) is a long standing practice among sales oriented businesses.  However, there is nothing to prevent the application of such a strategy to an agency’s other employees or its customers or potential customers to encourage them to engage in a desired behavior.  Holding a raffle is a very simple application of gamification research, which has confirmed that most people would prefer to gamble on getting a bigger prize than take a sure thing if the prize is something they value.

In the case of the raffle described in my last post, the agency could have opted to give a gift card or other reward with a relatively small value for every referral made, but the research indicates more people would participate (i.e., make a referral) if the potential reward for doing so was desirable enough.  In this case, that reward had a value of several hundred dollars.  The nature of the reward can also be used to encourage the members of a specific target market to participate.  In the agency raffle I wrote about, the prize was a much sought after tech gadget.

Even attorneys are not immune from gamification principles.  Just last week, I signed up to make a blood donation to the Red Cross in response to an offer to be entered into a drawing for a $1,000 shopping spree.  I normally make a blood donation every three or four months, but decided to break that pattern and give sooner due to this offer.  These type of promotions have become commonplace in today’s world for the simple reason that they work to engage more people in whatever behavior is desired than other types of promotions.

Earlier this year, American Modern Insurance Group applied gamification principles to a program designed to educate its agents about its specialty residential insurance products.  Instead of holding seminars or webinars, the company created weekly contests that required its agents to answer questions about how its products would apply to unusual situations.  The agents were awarded points for correct answers and the speed with which those answers were given.  Those agents with the most points at the end of the contest period will be entered into a drawing to be named the “Most Confident Agent in the World”, and each successfully completed weekly contest earns an agent an entry into a drawing for a cash prize. (Click here for an article on this program.)

The possibilities for applying gamification principals and techniques to the promotion of an agency, the education and training of its employees, and the improvement of its business processes are limited only by one’s imagination.  If you are interested in learning more about how those principles and techniques can be used for those purposes, click here for a whitepaper that addresses just that topic.

 

Raffles – Can They Be Used to Encourage Referrals? (Updated)

A recent caller to the Free Legal Service program that I run for the members of the Independent Insurance Agents of Georgia asked the above question.  His agency was thinking about running a promotion that gave a raffle ticket for each referral made to the agency during a specified period of time.  The winner would receive a prize having a value of well over $100.00.  With my previous posts on this subject, I thought I had thoroughly covered all aspects of it.  However, I failed to take into consideration the creative ability of independent insurance agents when it comes to thinking of ways to generate more business for their agencies.

The short answer to the above question is YES, if certain requirements are followed.  Those requirements are found in the Georgia Insurance Code and the Georgia Criminal Code.  First, as my regular readers are no doubt well aware, the Georgia Insurance Code prohibits the sharing of commissions with any person or entity that is not properly licensed by the Georgia Insurance Commissioner’s Office.  This means that any fee or other consideration given in exchange for a referral cannot be conditioned on the referral resulting in the sale of an insurance policy or related product.  Under a change to the Insurance Code that took effect on July 1, 2016, agents and agencies are also prohibited from giving “prizes, goods, wares, store gift cards, gift certificates, sporting event tickets, or merchandise” having a value of more than $100 to any customer or potential customer in any one calendar year.

Thus, under the Insurance Code, a raffle can be used to encourage people to make referrals to an insurance agency, as long as the referral does not have to result in the sale of an insurance policy or related product and if the raffle is limited to customers or potential customers of the agency, the value of the prize cannot exceed $100.00.

What does the Georgia Criminal Code have to do with the above question?  Under that Code, a raffle is considered to be a form of gambling, like the Georgia Lottery, and is prohibited with certain exceptions.  The one exception that is relevant to the type of raffle proposed by the caller to the Free Legal Service Program requires that the raffle be conducted as an “advertising and promotional undertaking in good faith solely for the purpose of advertising the goods, ware, and merchandise” of the business in question.  In addition, the raffle cannot require its participants (i) to “pay any tangible consideration” to enter it, (ii) to purchase “anything of value” from the business, or (iii) to “be present or be asked to participate in” any type of sales or other presentation, and (iv) the prize awarded must be something other than cash and cannot be awarded based on the playing of a game on a computer or mechanical or electronic device at a place of business in Georgia (this last requirement was omitted from the original post).

The type of raffle proposed by the caller to the Free Legal Service Program satisfies the requirements of the Georgia Criminal Code because the only thing a person had to do to be eligible to participate in the raffle was supply the name and contact information of a potential customer for the agency’s products and services, which were made known to the participant, and the prize was not cash.  Since there was no requirement that the referral made result in a sale by the agency and it was not limited to customers or potential customers of the agency, the requirements of the Georgia Insurance Code were also met.