I’m not sure if you noticed, but prices went up in 2022. After decades of low inflation, the dams burst last year—and the United States experienced the highest inflation since the Carter Administration. In order to combat this historic inflation, the U.S. Federal Reserve increased interest rates from near zero in early 2022 to over 4% by year end.
The combination of inflation and increasing interest rates have caused a shift in the insurance marketplace. The soft market that had existed for a decade appears to be over—at least temporarily. In its place are the telltale signs of a hard market: reduction in capacity and increasing premiums.
Get ahead of client questions
With insurance premiums on the rise, policyholders may question why they are paying more in premium for the same coverage. It’s a natural reaction: Just like I don’t like paying $5 for a dozen eggs when I used to pay $2. Policyholders don’t like to pay more for the same. When faced with premium increases, it is likely that policyholder behavior will change.
Policyholders may look to lower the cost of their insurance through reducing or removing coverage altogether. This isn’t just hypothetical. PIA has received numerous questions over the past year from PIA members on the best practices for handling client requests to reduce or remove coverages.
Anytime a policyholder decides to reduce or drop coverage, agents should be nervous for what will happen if, and when, a loss occurs. Reducing coverage to save money may seem like a sound idea to the policyholders at the time they are paying the premium, but they will be sure to regret the decision when a loss occurs. If there is a shortfall in the insurance payout, policyholders may explore other avenues for additional funds—including looking for coverage from their agent’s errors-and-omissions policy.
So, what should an agent do in these situations? If there is one universal piece of guidance that I could give to you, it would be to make sure you have the capabilities and procedures in place to document interactions accurately and effectively with clients and potential clients.
Documentation, while boring, is the first and best line of defense for agents against E&O claims. I would suggest at least two pieces of documentation when a client decides to reduce or remove coverage.
One, there should be some record of the conversation between the agent and the client concerning the change in coverage. A frequent question PIA receives is how thorough the documentation should be, and when should information be recorded. The answer to this question involves a balancing act between timeliness and completeness. In a perfect world, agents would record their conversations with clients verbatim and in real time. Of course, that is not realistic. Most agencies don’t record conversations and storing that amount of data could be costly, not to mention time consuming to sort through. When balancing between timeliness and completeness, I veer toward timeliness. [EDITOR’S NOTE: This does not apply to article due dates.]
The biggest mistake an agent can make is to fail to document a client interaction properly and then have an issue arise. Once a potential E&O claim is on the horizon, it’s too late to start the documentation process. That is why timeliness is so important. The further you get from a client conversation, the fuzzier your memory is, and the less likely it is that the conversation gets documented. Jotting down a quick note in your agency management system or in a client file as to the who, what, where, when and why of the conversation is preferable to pages of detailed notes, days later. Here is an example:
John Doe called to discuss reducing his auto limits due to the premium increase. I advised that reducing coverage is not advisable, as it would leave John and his family underinsured in the case of a claim and with a gap in coverage between the auto policy and the umbrella policy. John said he understood and asked for quotes with reduced coverage.
Date and time stamp that note, and you have yourself some good documentation. Hopefully, the client takes the agent’s advice and does not reduce coverage.
Two, should the client reduce or remove coverage, make sure you obtain a signed statement from the client acknowledging that he or she is purchasing a policy with less coverage than in the prior policy period and that the client has been advised of the risks of doing so.
Related to this, whenever a client decides to reduce coverage, agents are advised to check to see if there is an umbrella policy in place. If so, make sure the policyholder is advised of the impact a reduction or removal of coverage will have on the umbrella coverage. It is almost certain that a reduction in coverage will create a gap in coverage between the base liability policy and the umbrella policy.
When there is an umbrella policy in place, the signed statement should include language indicating that the policyholder has been advised of the impact that reducing coverage will have on the umbrella policy. Have the policyholder sign and date the statement and keep it in the client’s file. In many cases the conversation about reducing coverage and the decision to do so will happen within minutes of each other. Even in those situations, it still is advisable to record a note about the conversation and have the signed statement.
As I write this article, inflation and the price of eggs are decreasing. Yet, with interest rates still climbing, it looks like agents should be getting used to the hard market and increasing premiums. This will undoubtable lead to difficult conversations with clients and even more difficult decisions. Just make sure these conversations are documented.
This article originally appeared in the March 2023 issue of PIA Magazine.
PIA members can access Top five coverages that inflation can affect in the PIA QuickSource library.
Bradford J. Lachut, Esq.
Bradford J. Lachut, Esq., joined PIA as government affairs counsel for the Government & Industry Affairs Department in 2012 and then, after a four-month leave, he returned to the association in 2018 as director of government & industry affairs responsible for all legal, government relations and insurance industry liaison programs for the five state associations. Prior to PIA, Brad worked as an attorney for Steven J. Baum PC, in Amherst, and as an associate attorney for the law office of James Morris in Buffalo. He also spent time serving as senior manager of government affairs as the Buffalo Niagara Partnership, a chamber of commerce serving the Buffalo, N.Y., region, his hometown. He received his juris doctorate from Buffalo Law School and his Bachelor of Science degree in Government and Politics from Utica College, Utica, N.Y. Brad is an active Mason and Shriner.