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.

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?

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.

 

Recording Customer Telephone Calls – A Good Idea But Is It Legal?

In a recent post on his blog, Steve Anderson recommended that insurance agents take advantage of the new telecommunications technology that makes it relatively easy to record all incoming and outgoing telephone calls.   He suggested that making such recordings could become the primary means by which an agency documents its contact with its customers and potentially, its insurance companies.  This would save time by eliminating the need to type information about such calls into the agency management system.  There are software products that will integrate recorded telephone calls with those systems and associate the recordings with the appropriate customer and policy.  If you still want to have the security of an electronic “paper trail”, there are many transcription services available that can create such a trail much faster than your office staff.

Please see his blog post for Mr. Anderson’s thoughts about other advantages to the recording by an agency of its telephone calls with its customers and the steps an agency should take before implementing such a procedure.  However, one very  important aspect of telephone call recording was initially overlooked by Mr. Anderson; its legality.  Under federal law, it is illegal to make such recordings without the consent of at least one party to the conversation.  But each state is free to impose greater consent requirements, and it is the requirements of the state in which each party to the call is located that will govern the legality of its recording with respect to that party.  In checking the laws of Georgia and the states that surround it, I found that all but one of them require the consent of only one party to the recording of a telephone call.  Florida was the only state that imposed a greater consent requirement.  Under its law, all the parties to a telephone call must consent to its recording.

If all your agency’s customers are located in Georgia, Alabama, Tennessee, South Carolina, or North Carolina, there is no need to obtain the consent of those customers to the recording of their telephone calls.   However, if the agency decides to record all such calls, to avoid any potential issues with its customers or other parties over the recording of their telephone conversations without their knowledge, it would be a good idea to include an announcement before any incoming call that it will be recorded. Such an announcement can be programmed into many of the new telephone systems to play when the call is first answered and before any of the agency staff actually speak to the caller. It should protect the agency from violating the law of Florida and any other states that require the consent of all parties to the recording of telephone calls by allowing the agency to argue that the caller’s proceeding with the telephone call after hearing the announcement amounted to its consent to the recording of the call. That is apparently the conclusion drawn by many large companies, as such an announcement is routinely played when calls are made to their customer service centers.

If you want to be able to safely record outgoing calls, the agency staff will need to be trained to begin each such call with an announcement that it will be recorded and ask the other party if that is acceptable.  Such a procedure is advisable as the violation of the law on the recording of telephone calls is a crime, and in Georgia and most of the surrounding states, it is a felony.  Some of those states also give the other parties to such calls a right to sue for damages, if the law is violated.

What Rights Do Customers Have to Information in Agency Files?

The above question was recently asked of me by a caller to the Free Legal Service program that I run for the members of the Independent Insurance Agents of Georgia.  In particular, the caller wanted to know if they could refuse to provide loss runs to a former customer whose policy had been cancelled for non-payment of premium.  This customer owed the agency money, and the caller wanted to condition delivery of the loss runs on payment of the money owed.

The short answer to the question depends on two things.  First, whether the information sought by the customer is related to a commercial or personal lines policy and second, if related to a personal lines policy, what type of information is being sought.  As you might suspect from the short answer, there is no law or regulation applicable to Georgia agents or agencies that requires them to provide a commercial lines customer with information or documents maintained by them about that customer or the policies issued to that customer.  Such information and documents belong to the agent or agency, and they can control the circumstances under which their commercial lines customers can have access to their files.  Of course, such a customer can always go to the insurance company that issued the policy in question and ask for information about it from the company.

If the customer is asking to have access to information and documents related to a personal lines policy, under Georgia law, they have a right to be given access to certain kinds of information about them that is kept in an agent or agency’s files.  This right is found in the same law that governs the giving of notices to customers about the information gathering and privacy policies of agents and agencies (click here for a post about that law).  Under it, a personal lines customer has the right to request access to “recorded personal information” about the customer in an agent or agency’s files.

The request must be made in writing and “reasonably describe” the information the customer wants to review.  If that information is “reasonably locatable and retrievable”, the agent or agency must do several things within 30 days after receiving the customer’s request.  One of those things is permit the customer to “see and copy, in person” the information requested or have a copy of that information mailed to the customer, whichever the customer wants.

The information that a personal lines customer has the right to “see and copy, in person” or obtain by mail is “any individually identifiable information gathered in connection with an insurance transaction from which judgments can be made about an individual’s character, habits, avocations, finances, occupation, general reputation, credit, health, or any other personal characteristics.”  This right even extends to persons who only submitted an application for insurance and never obtained a policy from the agent or agency.  There is an exception for “privileged information”, which is any information the relates to a claim for insurance benefits or a civil or criminal proceeding involving the customer that was “collected in connection with or in reasonable anticipation” of such a claim or proceeding.

If the caller to the Free Legal Service Program had been asking about the claims history of a personal lines customer, the answer to the above question would have been completely different from the one I gave that caller.