Insurance Miscellaneous

Your Agent Is a VIP (Vital Insurance Partner)

My friend Howard Candage taught me that the most important part of the insurance transaction is the relationship an insurance buyer has with his or her insurance agent. Having the right agent is critical to a successful insurance program. There has to be trust and respect between the two parties.

Your relationship with your agent has to be as trusting as the relationship you have with your lawyer or accountant.

Insurance agents can be either employees of the insurance company for whom they sell (called direct writers) or independent business people who work for themselves. Independent agents usually represent more than one insurance company. While each will tell you that his or her approach is best, I find that both independent agents and direct writers have a place in the market.

Most community banks do business with independent agents. Often it’s an agent from the community. No two agencies have the same abilities or resources. No two agents have the same level of knowledge and expertise.

When the chips are down, your agent can make all the difference in a claim or coverage dispute. Make sure that your agent can meet your needs. Here are some questions as you review an agent’s services:

– Who will manage your account on a daily basis?

– How long have the producer and service people been in the insurance business?

– Will the agent provide advice on all aspects of bank insurance?

– Does the agency have special expertise in banks and financial institutions?

– How are claims handled? Does the agency have a claims department?

– Will one person in the agency oversee claim incident reports?

– Who will provide help preventing losses — the agent, the insurer, or both?

It is common for banks to buy insurance from an agent who is a customer of the bank. Many banks use several agents to “spread the wealth.” I’ve worked with banks where one agent handles the property insurance, another handles auto insurance, and still another handles directors’ and officers’ insurance. Consider this strategy carefully. You may be opening yourself up to misunderstandings in terms of exposure and coverage. In such a setup, one agent may not know what coverage the other agents are providing. If you are going to work with multiple agents, consider building a list of coverages showing all policies. Share the list with all your agents so each knows what the others are doing.

My recommendation is usually that a business should have one insurance agent handle all the property and casualty insurance needs.

Insurance is Not Gambling

Countless people over the years have told me that buying insurance is nothing more than gambling. Not true. Gambling creates risk, while insurance addresses and protects you from existing risk. When you gamble, you can finish in one of three places: as a winner, as a loser, or as someone who has broken even. You can also choose not to play.

Insurance addresses the risks you already face. You own a building. You must be sure it’s still there tomorrow. The next day, the building either is there or is not. Insurance, unlike gambling, does not create risk.

Insurance passes the risk of loss from you to the insurance company. That’s why “self-insurance” is a misnomer. You either buy insurance or you don’t. If you don’t buy insurance, you are funding the risk yourself, which is also known as “retention;” you retain the risk.

Be an Exceptional Risk

Obtaining favorable insurance rates depends in part on you. Maintain your buildings. Insist on safe work habits. Train your employees to manage emergencies.

Put your best foot forward with your insurance company (current or potential) when inspectors show up. Housekeeping is important when insurers are evaluating your operation. Go on a pre-inspection walk-through, looking at your operations, branches, and locations as an insurance company would. Make sure fire extinguishers are up-to-date and properly located. Electric panels and appliances should be installed correctly. Extension cords should be removed or replaced by hardwired outlets. Pick up trash and clean up storage rooms.

Show insurers that you’re a quality risk by having policies and procedures in place to control losses and manage claims.


Good Maintenance = Premium Credits

One bank client learned the hard way that housekeeping is important.

Three months prior to the bank’s insurance renewal, the insurer inspected the branch offices. I told the CFO that the bank’s maintenance team should do a thorough, pre-inspection walk-through to prevent any surprises. I gave him a rundown of the things the inspector would be looking for, including fire extinguishers, use of extension cords, fire safety issues, general housekeeping, electrical code violations, and a review of any cooking exposures or potential for loss in employee break areas.

Several weeks later, I received a call from the bank’s agent. He told me that the underwriter had removed most of the premium credits for the upcoming package policy renewal. Apparently, the inspection had not gone well.

I urged the agent to get a copy of the deficiencies and ask the underwriter for an agreement that if all deficiencies were remedied within three weeks, the credits would be returned to the policy. The resulting premium credit to the policy was a savings of 15% to the bank.

Loss Prevention Is Always Your Best Tactic

What can you do to prevent accidents and losses? How can you make your operation safer?

It is always less expensive to prevent a loss than to have one. Inspect your properties regularly and look for problems. How would an insurance company inspector view your offices? What can be done to make the property safer and less prone to an accident or loss?

Consider ways to control the losses that do occur. Sprinkler systems minimize the damage caused by a fire. Expand your video surveillance system to show your parking lots. Having a clean desk policy in your administration center can limit the losses if the sprinkler or plumbing system fails. Exceptional data backup procedures limit downtime.

Look for practical ways to limit and prevent losses.

Consider Your Renewal Dates Carefully

The most popular renewal date for business insurance programs is January 1st. July 1st is also common. The “quarter changes” of April and October are busy times for insurance companies, too.

Don’t renew your insurance anywhere near these dates. Underwriters and agents are scurrying around trying to handle three or four times their normal workload. Unless you are spending one million dollars a year on your insurance, you won’t get the attention you deserve. If you currently have one of the above policy dates, consider changing it to a date like February 17th or June 12th.

One exception: Rarely do I recommend changing policy dates on workers’ compensation policies. The experience modification calculation does not respond well to changing policy periods. See the section of this report on workers’ compensation for more information.

Renewals – Use Competition in an Intelligent Way

Competition with renewal is not one agent quoting your policies with three insurers. Competition puts your agent and insurers in jeopardy of losing your business if they don’t sharpen their pencils. It is only natural that an agent will work harder when there is the threat of losing you as a client.

Be cautious, however. Most insurers only provide quotes to one agent in a bid. It’s called market blocking — insurers accept the first application submitted. No other agents can quote that insurer.

Having two agents attempting to access the same insurer creates conflict and infighting between the agents, which will hamper your bid efforts. Be sure the competing agents bring insurers into the bid process that your current agent can’t access. Consider national specialty programs to compete with your local agent. This adds a different flavor to the bid process. Direct writers such as Liberty Mutual can help, too.

An integral part of the bid process is your control over which agent uses which insurance company.

A Downside to Bidding

Above I’ve outlined the conflict that can occur when two agents access the same insurer. Assigning insurers to specific agents can also lead to imperfect combinations of coverage.

The best insurance program does not always come from one insurance company. Perhaps Company A has the best auto program, while Company B has the best package policy. If you assign Company A to Agent A and Company B to Agent B, you will not be able to use one agent for the all-around best insurance program. You could cherry-pick. However, using two agents comes with its own set of troubles.

Consider Competition Without Bidding

The best approach to getting the best insurance program may not be the traditional bid process. A broker selection process allowing presentations from several agents can work well. Each broker outlines his or her approach and services. Sometimes the best approach is a conceptual proposal that includes a broker’s suggestions on coverage and service improvements.

Build a list of agents that you think can provide the service and expertise you require. Get names from colleagues and other bankers. Prepare a summary of your current insurance, including insurers and premiums, along with a detailed description of your business. Prepare a questionnaire that agents can complete. Ask about services provided, résumés of the people who will handle the account, and insurers who will work with you.

See appendix two for forms to help with the broker selection process.

What if You Can’t Change Agents?

About 60% of the community banks I work with cannot — or will not — change insurance agents. Perhaps your agent is a stockholder. Maybe you own your insurance agency. I have several clients who have strong marketing agreements with their agent. Sometimes the agent is the best friend (or brother-in-law) of either the owner of the bank or the CEO.

Get outside help. I realize this may sound self-serving, as I do make my living providing these consulting services. However, without another competing agent or consultant reviewing the work of your agent, you will have no idea if you have the right insurance or not.

Another option is my bank insurance toolbox (, which provides pages and pages of questions you can ask your agent to start a conversation about insurance coverage.

Review Coverage for Value

Review all your insurance coverage to determine the true value in light of current premium levels. Many banks have added earthquake, flood, and machinery breakdown coverage in years past. Is the coverage worth the current premium? Are your premium dollars better spent in other areas? Is the cost of the coverage worth the value of the protection? Consider catastrophic losses as you review your insurance for value.

All decisions are value decisions. Unfortunately, sometimes insurance coverage is considered a basket where you only add items — never reducing what you buy. Sometimes it makes sense to pare back.

Reducing Insurance Coverage

Insurance agents hate to reduce coverage, and it isn’t just the idea of losing commissions that is abhorrent to them. Almost every trade magazine your insurance agent reads has horror stories about insurance agents getting sued for claim problems. Insurance agents get it drummed into their heads that their clients are out to sue them. Most agents attend educational events where the speakers talk about “E&O Nightmares.” (Errors and omissions, the professional liability insurance that agents buy.)

Listen to the recording your agent has on his or her voicemail. Read the disclaimer your agent puts at the end of his or her emails. Most agents are absolutely paranoid about this stuff.

Go ahead and consider reducing your insurance. Nothing sacred here! Just because you have a twelve million dollar umbrella policy this year does not mean you have to buy that same limit next year. Having the peril of earthquake on your policy now might make sense. Next year, the premium for quake may be too high. My advice might be to remove the coverage. Your agent will probably make you sign a letter and swear a blood oath to reduce any part of your coverage.

If it makes economic sense, buy more coverage. If not, buy less.

Start the Policy Renewal Process Early

You’ll need at least one hundred twenty days to “work” the renewal of your insurance program. If you’re getting quotes from other agents, it will take time to develop bid specs and gather the information and data that the underwriters will need.

Even if you’re not bidding, talk with your insurance agent early in the process. He or she should know what your current insurer is planning. Ask about premiums and coverage. Many carriers add exclusions and restrictions to renewal policies. Get at least a ballpark renewal quote as early as possible. Push your agent and insurer. You’re the customer!

If you are not bidding your insurance, insist on getting renewal indications at least ninety days before your insurance expires.

See Chapter Twenty-Two for more info on the renewal process.

Review Your Insurer’s Financial Ratings

Every year, insurance companies go out of business. In the past twenty years, more than six hundred insurers became insolvent, severely impacting their clients. Claims went unpaid. Policies had to be replaced quickly, resulting in lower coverage and higher premiums — not a fun time.

Several organizations analyze the soundness of insurance companies. The best known is the AM Best Company ( Standard & Poor’s also rates insurers. I rely on Weiss Ratings ( as a tough, unbiased source of information. They never accept fees from insurers. They utilize industry and regulator filings in their analyses. They’re tough graders, too; a B- is still considered good in their system.

A recent review of AM Best Ratings revealed that almost 90 percent of insurance companies receive a rating of “Very Good” or better. Only 29%  of insurers received a Weiss Rating of “Good” or better. I believe that Weiss has a higher standard. When working with my clients’ money, I want objective, tough, and accurate ratings.


An insolvent insurer means your coverage is compromised. Use rating organizations such as AM Best and Weiss Ratings to help you make informed decisions.

Remember the Pollution Exclusion

Over the past twenty years, the insurance industry has been hammered by the courts on pollution claims. Now, most standard insurance policies have pollution exclusions so broad that the industry calls them “absolute pollution exclusions.”

Liability arising out of pollution is excluded by most general liability insurance policies. If the oil tank for your heating system leaks and pollutes your neighbor’s well, there is no coverage.

Directors’ and officers’ policies also have pollution exclusions.

Your property insurance is also likely to have an exclusion for damage to your property caused by pollution — either your pollution or pollution caused by others.

The only exception to the above is for the cleanup of pollution on your premises caused by a peril included in your property insurance. Coverage is usually limited to $25K.


Pollution Cleanup Expense Example

In most insurance policies, the only pollution coverage is for the cleanup of a spill caused by an insured event at your premises.

Example event: Ice from your roof falls and severs the fuel line of an outside oil tank that runs to your heating system. One hundred and fifty gallons of heating oil spill onto the ground.

In every state, the Environmental Protection Agency requires that the contaminated soil is removed and trucked to a special landfill. Monitoring is mandated, and the hole must be left open for three months to assure complete removal of contaminants. The total cost is usually around $20K.

Learn to Read Your Insurance Policies

The mere thought of reading an insurance policy can make your head hurt. Here are some hints to make it less painful.

Understand the Purpose of the Policy – An auto policy is designed to cover vehicular accidents. General liability insurance is purchased to protect the insured from liability arising out of bodily injury, property damage, personal injury, and advertising injury. Directors’ and officers’ insurance indemnifies the key people for errors in judgment and bad decisions. Reading a policy with the intent of coverage in mind goes a long way to helping you understand the contract.

Read the Declarations Page – The declarations page is usually the first few pages of the policy. It will contain information specific to the policy being reviewed, such as policy effective and cancellation dates, names of insured, the subject of the insurance policy (list of vehicles, buildings, description of property, etc.), premiums charged, policy form numbers, and form edition dates.

Review the Definitions – In most insurance policies, words that are defined by the policy are in bold type or quotation marks. Find the definition section of the policy and browse the terms. Mark the section of the policy with a paper clip. You’ll be going back to it time and time again. Read the endorsements. They can change the definitions.

Read the Insuring Agreement – The insuring agreement is usually the first part of the actual policy wording. It will tell you what is covered by the policy. For property insurance, learn what causes of loss (perils) are insured. For a directors’ and officers’ insurance policy, look at the definition of “wrongful act.”

Review the Exclusions – The exclusions tell you what is not covered by the policy. Most policies start with broad insuring agreements and then whittle away at the coverage with the use of exclusions. Broad exclusions are not necessarily bad. For example, a general liability policy will exclude auto accidents. No problem. That’s why you buy an auto insurance policy. Look for exceptions to the exclusion, with wording like, “This exclusion does not apply to. …” For example, the general liability policy excludes watercraft. There is an exception to the exclusion in most policies for watercraft that you do not own and that are less than twenty-six feet in length. (The exception to the exclusion provides non-owned watercraft coverage if the boat is less than twenty-six feet long.)

Review the Endorsements – The endorsements are usually found at the end of the policy. They amend the standard policy language. It is not unusual to have more than ten endorsements to a policy. The title of the endorsement usually gives you a good idea of what is trying to be accomplished with the form. If an endorsement deletes a section of the policy, mark that section in the policy document for future reference.

Review Policy Conditions – The policy conditions will show you the general “rules of the road” for the contract. Issues like cancellation, arbitration, and claims reporting are usually covered in this section.

Read Your Policies With a Pencil – I read insurance policies with a pencil in hand. I mark sections and summarize the contents of a particular clause in two or three words. It helps me find sections later and ensures that I am not wasting time looking at a section that is amended by an exclusion.