About Mark Burnette

I have over 30 years experience as an attorney. For the past 15 years, I have specialized in small business law with a particular focus on the insurance agency industry. During that time, I have represented the Independent Insurance Agents of Georgia and have presented programs on many occasions to its members and at the Georgia Insurance Expo in Athens, Georgia. I have also written numerous articles on various legal topics for the IIAG's newsletter and quarterly magazine, the Dec Page. Click here to see a sample of those articles. In additon, I operate the Free Legal Service Program under which members of the IIAG are entitled to 30 minutes of legal consultation per calendar quarter on a variety of business related topics. Click here for more information on this program. I spent the first part of my legal career as a trial attorney, beginning in the State Attorney’s Office for Duval County, Florida, and then moving on to a small law firm in Winter Park, Colorado, before coming to the Atlanta, Georgia area in 1986. In the Atlanta area, I was an associate at two law firms, Branch, Pike & Ganz (now part of Holland & Knight) and Weekes & Candler, before forming Joyner & Burnette, P.C. in September 1992. Since then, I have focused my practice on the representation of family owned and other privately held businesses and providing estate planning services to the owners of such businesses and other individuals. I graduated with a Bachelor of Arts degree, summa cum laude, from Hampden-Sydney College in 1976. While there, I was inducted into the Phi Beta Kappa society. I then went on to attend Duke University School of Law, from which I graduated with distinction in 1979 with a Juris Doctor degree. I was admitted to practice law in the State of Florida later that same year, and was subsequently admitted to practice law in the State of Colorado in 1983 and then in the State of Georgia in 1986.

Brokerage Fees – Revisited

A recent Bulletin from the Insurance Commissioner’s Office has caused me to reconsider a blog post from almost five years ago.  In the Bulletin, the Insurance Commissioner reminded brokers who handle excess and surplus lines policies that they cannot collect sums for those policies in excess of the “premiums and charges for insurance specified by the insurer in the insurance policy.”  This prohibition is found in the Unfair Trade Practices section of the Georgia Insurance Code.  That section contains a specific reference to excess and surplus lines policies and states “the premiums and charges for insurance. . . shall not be in excess of or less than those specified in the policy.”

In my previous blog post, I concluded that a broker who had no contact with the insured and was acting purely as an intermediary between the insurance company and another insurance agency or agent could charge whatever they wanted for their services.  That conclusion is now open to question if such a broker’s services are considered to be part of the process of obtaining insurance coverage, and thus, covered by the phrase “premiums and charges for insurance” found in the above code section.

That clearly appears to be the Insurance Commissioner’s conclusion with respect to the services performed by excess and surplus lines brokers.   According to the above Bulletin, they can only receive whatever compensation is included within the “premium” or other “charge” specified in a surplus lines insurance policy.  In another section of Georgia’s Insurance Code, “premium” is defined broadly to include “any assessment or any membership, policy, survey, inspection, service, or similar fee or charge in consideration for an insurance contract.”  Such fees or charges for the broker’s services are routinely included in the amount charged by the insurer for a surplus lines policy.

However, in other types of policies such additional fees are not usually included as part of the “premium” that is to be paid for them.  If the Insurance Commissioner believes that the services provided by a broker who has no contact with the insured are part of the process of obtaining any type of insurance coverage, not just excess and surplus lines coverage, then such a broker cannot charge a fee for their services, except to the extent such a charge is included in the “premium” specified for the insurance coverage in question.  In the absence of anything about such a charge in the stated “premium”, the broker would be limited to sharing in the commissions payable for such coverage as compensation for their services.

Until there is clarification on this point from the Insurance Commissioner’s Office, to be safe, a person acting as a broker for any insurance coverage should not charge a separate fee for their services, unless provided for in the stated “premium” for the policy in question.  They should just receive a share of the commission paid for that policy.

Insurance Certificates and Opinion Letters

My last post about insurance certificates was almost two years ago.  At that time, the consensus seemed to be that issues regarding them were declining as all the interested parties became more familiar with Georgia’s law and regulations.  However, I learned from a recent participant in the Free Legal Service program that I run for members of the Independent Insurance Agents of Georgia that six years after they were enacted some people have still not gotten the message.

The agent contacted me about requests that he received “all the time” to provide a letter stating that his agency’s customer “has or can provide the required types and amounts of insurance coverage” specified in a contract to which the customer either was already or would become a party.  The agent was concerned that providing such a letter called for an opinion outside of the scope of his knowledge or duties and thus, could create a potential E&O exposure.  He was correct to be concerned about the potential liability exposure he would create by providing such a letter.  It could be the basis for a claim by the entity to which it was sent if what was said in the letter was not completely accurate.

Avoiding such a potential liability exposure is one reason not to send such a letter, but an even better reason is that it would be illegal to do so and could subject the agent to disciplinary action by the Insurance Commissioner’s Office.   O.C.G.A. Section 34-24-19.1, specifically prohibits anyone from preparing, issuing, or requesting “either in addition to or in lieu of a certificate of insurance, an opinion letter or other document or correspondence that is inconsistent with this Code section.” That law goes on to state that “No certificate of insurance shall contain references to contracts, including construction or service contracts, other than the referenced contract of insurance.”

This prohibition was clarified in the regulations subsequently issued by the Insurance Commissioner’s Office.  Those regulations prohibit the reference in an insurance certificate “to any language or contents in the construction or service contracts.” The only thing that can be referred to in the insurance certificate is “a reference or contract number from the construction or service contract for identification purposes only.” The regulations also flatly state that “Neither an insurer nor a producer shall be required to issue an opinion letter or other document in addition to or in lieu of a certificate of insurance.” Instead, “Insurers and producers may provide the certificate holder with the certificate and an actual copy of the policy, insurance binder or relevant policy provision to demonstrate contractual compliance.”

If an agent can’t refer to contracts other than contracts of insurance in an insurance certificate, then as the regulations make clear, an agent can’t refer to other contracts in an opinion letter or other document that is requested by the certificate holder or anyone else.  If the person requesting such a letter insists on it being provided, the agent should point out to that person that the above law prohibits requesting such a letter or other document, as well as providing it, and that a fine of up to $5,000 can be imposed for its violation.

Severe Weather Issues for Insurance Agencies

Given the likelihood that Hurricane Irma will have a significant impact on the Georgia coast and potentially other areas of the state, I thought it would be a good idea to remind agency owners of the rules regarding payment of their employees if their offices are closed.  My blog post in January of this year explains those rules in some detail.

Another issue concerns the steps that should be taken to protect an agency’s data and technology.  The best advice I have seen on that subject was from a company that offers consulting services on the operation of law firms, but it applies equally to insurance agencies.  It is as follows:

1. Contact your IT team today to verify what is being backed up and that your backup is functioning properly. Ask them to run a test backup and restore to confirm proper operation.
2. Verify where your backups are being kept (local, online) and how you can access backed up data.
3. Verify who to contact after the storm to restore data if necessary.
4. Set up a call list with your attorneys and staff to ensure everyone is safe. Include cell and landline numbers on the list.
5. Pick up computers and all electronic or electric equipment from the floor and consider moving them to interior offices. Unplug anything that does not need to be plugged-in to protect from power surges often associated with storms.
6. Remove all loose papers off your desks and floor so they don’t end up on the street if windows break.
7. Bring all insurance paperwork with you when you leave the office.
8. Make working copies of essential data and documents needed to meet upcoming deadlines in the event you lose access to your server or online storage. Either print what you need or copy files to an encrypted USB drive.
9. Note the exact versions of all of your critical software. You will need this information if you need to reinstall software or restore from backup. You can do this two ways.
o In each program, go to Help, About. Take a screen shot of the entire window and print it or save it to a secure location.
o Download, install, and run Belarc Advisor. Belarc will run a report in your web browser with all of your hardware and software details. Print it or save it to a secure location.

Finally, although it may be a little late, this blog post from three years ago deals with the preparation of disaster recovery plans and the resources available to assist agency owners in creating one.  If nothing else, those resources explain ways to stay in touch with an agency’s employees and customers during and after a severe weather event or other disaster that can be implemented now.

Best of luck to those of you in the path of Hurricane Irma.  It’s never too late to take action to protect your homes, families, and businesses.  Hopefully, this post will give you some direction on what to do.

 

Is An Agency Required To Obtain A License When Its Agent Must Obtain a Non-Resident License?

My last blog post dealt with the question of when an insurance agent must obtain a non-resident license if they are placing insurance coverage for a risk located in another state.  This post will explore the related question of whether the agent’s insurance agency must also obtain a license from the insurance department of the other state.  As with the first post, it will be limited to the laws of the states adjacent to Georgia.  It will also discuss when an agency must obtain a certificate of authority from the business entity regulator of those states.

With one exception, all the states adjacent to Georgia require a business entity that sells, solicits, or negotiates insurance within their state to obtain a license.  The exception is Tennessee, whose law only states that such an entity may obtain a license as an insurance producer.  Unfortunately, unlike individual insurance producers, the law of all these states does not contain any reference to licenses for non-resident business entities.  That can lead to two possible approaches by the insurance departments in those states.  First, the literal interpretation would be that any business entity no matter where its principal offices are located must obtain a license if it sells insurance coverage for a risk located in that state.  On the other hand, the lack of any reference to licenses for non-resident business entities could be interpreted to mean those entities do not have to obtain a license, since the law does not mention them as it does with individual agents.

If you don’t want to expend the time and effort to contact the insurance department in each state to find out how they interpret their state’s law on this question, the safest course of action would be to obtain an agency license in any state where one or more of the agency’s producers have had to obtain a non-resident agent’s license.  If an agent doesn’t have to obtain such a license, it would make no sense for his or her agency to have to obtain one.  But a good argument can be made that if an agent has to obtain a non-resident license, then his or her agency should obtain one, as well, since the agent is a representative of their agency.

A separate, but related question, is whether an agency must obtain a certificate of authority to transact business in a state if it sells an insurance coverage for a risk located in that state.  Such certificates are obtained from the government agency that regulates all business entities in a state, not the state’s insurance department.  This is a very gray area and each state will have it own interpretation of when such a certificate must be obtained.  However, with one exception, all the states adjacent to Georgia have statutes that specifically exempt from the certificate requirement a business entity that sells its products or services in the state through independent contractors or that solicits or obtains orders for goods or services in the state if those orders must be accepted by an entity located outside the state before they become a binding contract.  The exception here is Alabama, which requires any legal entity that would have to obtain a certificate from its Secretary of State if it were created in Alabama to obtain such a certificate.

A good argument can be made that an insurance policy or bond fits within the exemption for orders solicited or obtained that require acceptance outside the state to become binding contracts.  An insurance application must be accepted by the insurance company before a policy or bond will be issued.  As long as the person making the decision to accept the application is not located in the state where the risk to be covered is found, there is no need to obtain a certificate of authority from that state’s business entity regulatory agency.

When Are You Required to Obtain a Non-Resident License?

Unlike most summers, this one has been very busy for my law practice.  I have been involved in the sale of three of my insurance agency clients in the past couple of months, which is one reason I haven’t been as diligent as I should have in making blog posts.  This post concerns an issue that has arisen in each of those sale transactions and about which I sometimes get a question in the Free Legal Service Program I operate for the Independent Insurance Agents of Georgia.  When are you required, as a Georgia resident insurance agent, to get a non-resident agent’s license?  I will address  the related question, are you also required to obtain a license and/or certificate of authority for your agency at the same time in my next post.

Both the above questions are important issues in the context of the sale of an insurance agency, because the buyer will routinely want the selling agency to represent and warrant that it has obtained all the licenses and other governmental approvals required to conduct its business activities.  If those activities involve the issuance of insurance policies covering risks located in other states, which is often the case, the question arises do you, as the agent, need to obtain a non-resident license from the other state’s insurance department, and if you do, what about your agency.  The failure to obtain such a license or licenses when required will not only have a negative impact on the sale of an insurance agency. It can create significant problems for the individual agent and agency with the insurance departments in both their home state and the other state involved.

In late October 2000, the National Association of Insurance Commissioners proposed a model act for the licensing of insurance agents.  This act has largely been adopted by Georgia and the states surrounding it, with one exception noted below.  Under it, the solicitation, sale, or negotiation of insurance coverage by a person in a state is illegal unless that person has the appropriate license for the type of coverage in question, which license has been issued by the insurance department of that state.  The model act contains several exceptions to this requirement.  Unfortunately, only one of them is relevant for the purpose of this post.  It exempts from the license requirement a non-resident insurance agent who sells a commercial lines policy that covers risks located in the state and in other states, as long as the agent is properly licensed by the state in which the insured’s principal place of business is located and the policy covers risks located in that state.

The above exemption is a relatively narrow one, and it is not recognized by Florida.  In Florida, the sale of insurance coverage for any risk located there requires a license that has been issued by its insurance department.  The law of the other surrounding states, Alabama, Tennessee, North Carolina, and South Carolina, will not permit the sale of an insurance policy that covers a Georgia insured’s out of state vacation home or any other personal lines risk located out of state without a license issued by their state’s insurance department.  The same thing is true for any commercial lines risks of a Georgia insured that do not fit within the above exemption.

Fortunately, it is not difficult to obtain a non-resident agent’s license in the states that surround Georgia.  All those states permit the issuance of a non-resident license for any type of insurance for which the non-resident is properly licensed in their home state upon the submission of the required paperwork and license fee, as long as the agent’s home state grants the same privilege to agents who are licensed in the other state, which Georgia does.  When the National Association of Registered Agents and Brokers Reform Act is fully implemented this process will be even easier.  That Act was passed in early 2015 and set a two year time frame for full implementation.  Unfortunately, it seems to have gotten lost in the shuffle of the current political activity in Washington, so its anyone’s guess when it will be fully implemented.

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.