“I am looking for assistance in drafting a letter to our clients indicating we will no longer contact them regarding late/past-due payments for their direct-billed insurance policies. I want to be sure that we are correct in the content of the letter so we are not creating a potential E&O situation. Are you able to help with this? I was not successful in finding any content regarding this are on the site.”
From an E&O standpoint, following up with late-paying or past-due customers is not advised, as they can be a prime source of E&O claims when, sooner or later, someone forgets to contact them and they have an uncovered loss due to cancellation or nonrenewal. While I haven’t seen any hard data, these types of insureds are widely believe to present a morale hazard.
At one time, the E&O Happens website had a sample letter available for such notification. Luckily, one of our faculty members still had a copy of it in paper form in his instructor’s manual:
Dear Client:
In the past, we may have contacted you when a payment on your insurance policy, billed to you by the insurance company, was overdue. We are changing our agency practice of notifying clients of non-payment on direct bill accounts. Effective immediately, we will no longer do so, and it is your responsibility to make premium payments on or before their due dates in order to avoid cancellation of your insurance policy. Prompt payment of premiums due will ensure that you receive the protection you need in the event of a loss.
We hope you understand that our agency cannot accept any responsibility for late payments to the insurance carrier. Thank you for being a continued valued customer and if we can be of service to you, please don’t hesitate to contact our office.
Our E&O carrier recommends these letters be sent via certified mail, return receipt requested. Yes, expensive, but it protects you from a client who says “I never got the letter.” By the way, every agency we’ve heard from that has discontinued the notification practice has been glad they did. In addition to creating an E&O exposure, it is a costly and time-consuming activity.
In addition, another VU faculty member commented:
I got tired of the process and time wasting activity 25 years ago. Another agency asked how I stopped and this is what I did:
1. Sent a separate one page notice by bulk mail to all customers that we were stopping notifying that day.
a. Didn’t want to miss anyone.
b. Wanted the definitive line drawn in the sand.Wanted the definitive line drawn in the sand.
c. Didn’t want to continue the notices 1 more day.
d. Could control the expense to 2 mailings and no more employee time wasted on agency notices each day/week/month.
2. Printed a list of current names and addresses it went to with a count.
3. Scanned all actual letters with names and addresses for future reference in a bulk file.
4. The post office then gives a receipt of how many pieces were mailed to match our count.
5. 30 days later do it one more time.
6. Thinking back I would have liked an envelope that stated something like “open immediately, important changes inside.”
7. I wanted to handle separately from mailing policies, endorsements or other items, so that it didn’t get muddied with other things.
8. I already had a bulk mail permit for other mailings like newsletters, calendars and the like.
Good luck!
Finally, below is an article written recently by David Thompson of our Florida association.
Last Updated: February 26, 2016
Late Paying Clients: To Call or Not To Call
Not much gets a “fight” going quicker in an E&O class than addressing the question of, “If a direct billed customer is late in making their premium payment, should the agency contact them?” Almost every answer and suggested solution offered has its own pitfalls. It’s almost the proverbial, “You are damned if you do, and damned if you don’t.”
An agent recently sent me a question directly on-point. Her customer had actually sent this to her in an email:
“As you are aware, I have experienced several instances of late payments, missed payments, and insurance expirations during the years your office has been servicing several of our policies. “If we have one more instance of a policy expiration because you failed to send us (or my clients or relatives) a courtesy reminder, I see no choice but to take my business elsewhere. I trust you understand my position.”
My gut reaction was, “Huh?” I’d translate what the customer said as, “I am not responsible enough to pay my bills on this, and that is your problem.” I replied to the agent, in part, saying, “I use Quicken on my home computer to track my finances. When I pay bills I record them in Quicken. I have reminders set up for recurring bills. For example, about three days before my utility bill usually arrives to me via email I get a ‘pop up’ reminder when I log into Quicken. It stays there until I either pay the bill or delete the reminder. I’m an adult, not a 12-year-old child any more, and if I fail to pay a bill, it’s my fault; why blame someone else for it?”
I ran this issue by SwissRe/Westport (FAIA’s lead E&O carrier) for their thoughts. Two vice presidents and senior underwriters (one is an attorney) stated that their official position is agencies should not send “courtesy reminders” or make “courtesy reminder calls.” One underwriter said this, “Our official policy is always don't do it when it comes to giving billing notices, but I know some agencies will ignore that advice in the real world. If they do go the other route as some will, even though we don't recommend it, then I think it is important that they are consistent in applying the procedure that they do establish across the board to everyone equally.”
That underwriter’s response is the proverbial “invariable practice” concept. That means that all customers are pretty much treated the same way. In other words, if the agency elects to contact customers who are late paying, then every customer should be contacted. If the agency position is that no customers are contacted, then as I joke, “If your momma is late you better not call her!”
For example, in one actual claim, the agency had a procedure whereby commercial customers were contacted, but personal lines customers were not. One commercial customer was late on a regular basis. As it turned out, they were located in the same building as the agency. So, agency staff would walk upstairs and hand deliver the late notice with a reminder to pay. The agency also wrote the personal lines account of the business owner, including an auto policy for his daughter. The daughter had an accident and there was no coverage because the personal lines auto policy had lapsed for non-payment a few weeks earlier; the personal lines department did not contact customers who were late, and the customer pursued the agency claiming, “You treated my daughter differently than you treated me.”
I’ve run across several agencies that are split between various departments such as large commercial, small commercial, high-net-worth personal lines, and “main street” personal lines. One agency told me (during an E&O class!), “We contact our high-net-worth personal lines customer, but not main street personal lines customers.” I wonder how that would play out in a deposition when the agency was asked why they did not remind Mr. Smith who had a $200,000 house that his premium was late? Would the answer be, “Oh, he’s not high-net-worth?” I doubt that would play out very well.
Agencies should recognize that if they voluntarily elect to remind customers of a late payment, they have likely raised the duty of care owed to that customer. If the agency fails to send the reminder notice or make the reminder call, the customer could easily look to the agency and say, “You didn’t call me.” In fact, this exact situation came up during an agency visit I made after Hurricane Charlie. A customer came into the office to report a loss a few days after Charlie hit in August. The CSR advised the customer, “Your policy lapsed in May for non-payment.” The customer asked for the owner, and told him, “If my house has big damage and I have no coverage I am coming after you; your staff always called me before if I was late and no one ever called in May.” Luckily, the damage to the house was below the hurricane deductible. The agency owner told me face-to-face, “We got darn lucky here.”
What, then, is the best procedure if the agency decides not to contact customers who are late paying? What if the policy cancels; then what? Should a “final close-out letter” be sent? If so, and if that were done several times and that letter wasn’t sent, would that also create an E&O exposure? SwissRe’s comments were:
“Your ‘damned if you do, damned if you don't’ analysis is spot on. For direct bill policies, our recommendation is that the agency should never contact the customer regarding payment of any kind PRIOR to lapse/cancellation. However, immediately after the policy lapses, they can and possibly should contact the customer and ask if they want to remarket or try to rewrite the account. I don't believe that by contacting them after the fact of the cancellation/lapse, regardless of how many times they do/don't do it, they would be held responsible. Of course, a court may prove me wrong, but we'll see when that happens as I'm not aware of any such situation.”
If an agency currently contacts customers who are in a late pay status but wishes to stop the process, proper notification is the key. All customers (even those who are never late) should be advised that the agency will no longer contact them in late pay situations. As always, documentation of this notice is key. SwissRe even stated the following: “I've always recommended that the agency send out letters certified mail return receipt requested to properly document that they 1. sent the notice, and 2. that the customer received it. I virtually always get pushback about the cost but I tell them that the minimal cost for those receipts they spend is less than their deductible for a claim if they have one customer claiming they didn’t get the letter.” That is, perhaps, a lofty goal. It does, however, come straight from the professionals who make their living defending agencies in E&O claims.
The ultimate decision on whether to contact customers in a late pay status lies with the agency. Invariable practice and proper documentation are key in making the decision.
Copyright FAIA, 1/11/16
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