Does Your Agency Have a Perpetuation Plan?

For many agencies the answer to the above question is no and that can lead to a lot of problems when it comes time for one or more of the principal owners to retire, which according to research done by Reagan Consulting will be sooner rather than later for the majority of agencies.  In a presentation that was given to one of my clients recently they reported that the average age of agency owners was 54 and that this average age had increased by three years over the period from 2008 to 2014.  Their Private Ownership Study, completed in 2010, was the basis for the presentation made to my client on the elements of a successful perpetuation plan.

In the past few months, the IA newsletter has contained a couple of articles on different aspects of perpetuation plans.  One of them discussed the three major types of plans, sale to family members, sale to other owners or employees, and sale to an outside third-party (which is more of an exit strategy than a perpetuation plan).  Each of them has their advantages and disadvantages.  The first two ensure continuity of operation of the agency, but can falter if no family member is ready to take over and successfully run the agency or there are disputes among family members.  Similar lack of readiness or disputes can also derail the sale to other owners or employees, and in both instances there may not be enough cash flow to support a buyout of the retiring principal owner for a valuation that is acceptable to that owner.  The sale to an outside third-party would most likely result in the highest amount paid to the retiring owner, but there would be no guarantee that the agency would continue to be operated as before or that the jobs of employees who may have worked for the agency for many years would be preserved.

The other IA newsletter article discussed the timing involved in implementing perpetuation plans, which timing would also apply to a sale to an outside third-party.  The consensus of the persons interviewed for that article was that implementing a successful perpetuation plan takes a minimum of five years.  The first and perhaps most important thing that must occur is for the retiring principal owner to decide what they want to see happen when they leave, which requires them to decide what they want to do with the rest of their life.  Do they want to stay involved with the agency in some way or would they prefer to devote themselves to some other interest or tour the world?  Such lifestyle decisions will be an important factor in how much money the retiring principal owner needs to get for their ownership interest in the agency.

Once the initial decision is made about what the retiring principal owner wants to see happen, they need to determine if their preferred outcome is possible and then develop a plan to reach their goal.  This is where the Private Ownership Study can be a valuable resource. It concludes that there are four things that must be in place for any perpetuation plan to be successful.  They are a healthy agency operation, a reasonable seller, able buyers, and an effective ownership transfer mechanism.   The Study explains what goes into each of these “Four Pillars of Perpetuation” and its Appendix C has a handy checklist that can be used to see where an agency may be lacking in the foundation for a successful perpetuation plan.  What should give hope to any agency principal owner who would prefer to transfer their ownership to family members, other owners, or employees is that doing what it takes to make such an internal perpetuation possible will also maximize the value of the agency for an outside third-party purchase in the event the internal perpetuation plan does not work out.

Be Careful What You Do For Your Customers

In last week’s post, I talked about how an insurance agent can create a duty to their customer that they would not otherwise have by what they say to the customer.   The August 7 edition of the IIABA newsletter contained two articles on how an agent can create E&O liability exposure by what they do or don’t do for their customers.  The first article discussed the problems that could arise when an agent assists a customer with a claim.

When a claim is denied, it is important for an agent to avoid crossing over the line between advocating for the customer with the insurance company and taking the blame for the denial.  The article advised being very careful about putting anything in writing about the claim denial, especially interpretations of the relevant policy provisions, as what an agent says about the circumstances of the claim and its validity can be used by the customer against the agent, if it turns out the agent’s interpretation or statements made about the circumstances prove to be incorrect.

The article also advises notifying the agent’s E&O carrier before providing documents, giving recorded statements, or participating in settlement discussions with the insurance company and customer, as doing so without the knowledge and consent of the E&O carrier could give the carrier a basis to deny coverage of any claim that may be made by the customer.   The article referred to a webinar held earlier this year which explored in detail the do’s and don’ts for agents in this situation.  The webinar was recorded and the presentation slides used in the webinar are available for review and download.  The slides contain specific guidelines on when and how to advocate for a client and when to call your attorney.

The other article addressed the E&O exposure created by allowing an insured’s policy to automatically renew without determining if any changes had occurred that may affect the coverage needed or at least obtaining something in writing from the insured that authorizes the renewal with no changes.  This may seem like a no-brainer, but in the rush of trying to produce new business and dealing with claims and other administrative problems on other policies, it is easy to overlook those policies that are on automatic pilot, so to speak.  In this instance, it is more a what you don’t do for the customer that can get an agent in trouble.

It would be preferable for reasons unrelated to E&O exposure for an agent or CSR to conduct a review of the insured’s situation before the renewal of their policy.  Such a review provides a reason for contacting the insured to remind them of your existence and to determine if changes in their circumstances require additional coverages, as well as changes to their existing coverage.  If an agent does not have the time to conduct a review of the insured’s situation, they should at least get a written statement from the insured that they do not want any changes made to their existing coverage before its renewal date.  Such a statement would be a good defense to any claim by the insured if in fact changes needed to be made, as long as the agent had said nothing to the insured that reasonably lead the insured to believe the agent would be responsible for determining if any changes were needed.  The article also contains a cautionary case study about what can happen when an insured informs the agent that their address has changed and that information is not reviewed in light of all the insurance coverages provided to the insured by the agent.

Be Careful What You Say to Your Customers

A couple of years ago, I wrote a blog post on the duties owed by an insurance agent to his or her customer.  In that post, I pointed out that, although as a general rule an insurance agent had no duty to their customer, the words and conduct of an agent could create a duty, for the breach of which an agent could be sued.  A recent decision of the Georgia Court of Appeals revealed just how easy it is to create such a duty regarding the obtaining of adequate insurance coverage.

The case before the Court of Appeals involved a small trucking company that had been sued by its customer for damage to some goods it was hired to carry.  The insurance agency had obtained a cargo insurance policy from the Underwriters at Lloyds (“Lloyds”) for its customer.  While that policy did provide coverage for the damage to the goods, it did not require that Lloyds assume the defense of the claim made by their customer’s customer.  It only gave Lloyds the option to do so.

The refusal of Lloyds to provide a defense lead to the filing of a declaratory judgment action by Lloyds in federal district court, in which action it prevailed.  As you might suspect, this lead the insurance agency’s customer to sue the agency for negligence and breach of contract for failing to obtain an insurance policy that required the carrier to defend any claims made under it.  The agency moved for summary judgment on the basis that it did not owe a duty to its customer to obtain such an insurance policy and even if it did owe such a duty, if the insured had read the policy obtained it would have known that the carrier had no duty to defend any such claims, only the option to do so.

The appellate court ruled against the insurance agency on both counts.  It found that the agency’s customer had put forth sufficient evidence to require a jury to decide whether the agency had held itself out as an expert and the customer had reasonably relied on the agency’s expertise to identify and obtain the correct amount or type of insurance.  That evidence consisted of statements by the customer’s owners that they told the agency they “wanted a policy which covers everything, the trucks, the cars, the cargo… physical damage, liability, general liability, everything.”  The owners did not request any particular coverage.  Instead, when they spoke to a representative of the agency, they were asked what type of business they did and then were told by that representative what type of insurance coverage they needed and perhaps, most importantly, that once they obtained the coverage recommended “you are covered, don’t worry.”  Sound familiar.

The insurance agency was not saved by the exception to the rule of expertise, which will let an agency or agent escape liability even if they do owe a duty to the insured to obtain a particular type of coverage if an examination of the policy would have made it “readily apparent” that the coverage requested was not issued.   In this case, the relevant language was buried in a paragraph of the policy that did not appear from its heading to have anything to do with the carrier’s duty to defend and the important language did not clearly state the carrier had no duty to defend.  I am sure it will come as no surprise that the customer’s owner testified that “she did not understand” the meaning of that language.

If you don’t want to end up like the insurance agency in the above case, be careful what you say to your customers about the coverage obtained for them and above all else don’t tell them that “you are covered, don’t worry.”