Author: VU Faculty

After years of preaching to agencies that they should not call customers whose direct bill policies are in a “pending cancellation” state due to non-payment of premium, at least one insurer is suggesting that agents make a “courtesy call” on most clients whose direct bill policies are unpaid past their due dates. Could this present an E&O exposure for the agency?

"After years of preaching to agencies that they should not call customers whose direct bill policies are in a 'pending cancellation' state due to nonpayment of premium, one of them has let me know that one of their carriers has a practice that I find potentially problematic.

"The company has told them that they should make a 'courtesy call' on any client whose direct bill policy is unpaid past its due date unless the premium is less than $750. They feel this improves their retention (which I’m sure it does) and they can’t understand how this could possibly be an E&O situation (which I assume it isn’t TO THEM, since the standard of care would not apply to them.) They claim that since they own the account receivable, they can do anything they want to see that the premium is paid.

"I think this can be very confusing to the policyholders, who apparently think this is the agency calling, after the agency has notified them that they don’t make these calls and that premiums need to reach the carrier by the due date. Although it may be far-fetched, I can see this potentially undoing the steps the agency has taken to unwind its E&O obligation.

"I wondered if any of the other VU faculty had heard about this or had some thoughts."

Many, if not most, E&O instructors have been saying what you're saying. Cancellation is a process governed by the insurance contract. The contract is between the insured and insurer so, generally, it is advisable that agents not intercede into contractual matters between the parties involved. However, this is the agency's client and what contact is made could depend on the nature of the cancellation. Below are some thoughts from the VU faculty.

I haven’t heard of any companies doing this but the problem of E&O exposure of NOT contacting the client after numerous contacts (just because the amount due was less than $750) is CERTAINLY an exposure. However, I respectfully disagree about the company’s exposure here. If the carrier has a procedure with an exception below $750, they have opened themselves to an interesting E&O exposure if a client was waiting for the call and was terminated not having received it and subsequently had a claim. The insurer has MUCH deeper pockets than any agent and this could be a cause of action.

The insurance company does not "own" the account receivable since there is no account receivable until premium is earned. Additionally, assuming this is not service center business, unless their contract permits direct contact with the client on this basis, they may be in violation of the agency/company contract.

I agree that this contradicts the practice I've heard my E&O defense attorney friend give in seminars we've taught together over the years. However, if it's the insurer making the calls, I'm not sure how that might impact an agency's E&O exposure, although it certainly sends the insured mixed signals.

Wow, this situation is ripe for disaster! 
 
Every E&O professional I know preaches "invariable practice." That means you treat all customers the exact same way. As far as calling customers who are late in payment, that means if you call them one, you call them all. If you elect to call no one, you don't even call "your momma" if she is late. If you treat customers differently, you open yourself to trying to explain why you called "Customer A" when you didn't call "Customer B." How can the company explain calling some customers but not all? They need not answer that...save it for the trial. The jury will love it when someone says, "Well, the client suing us wasn't as important as other clients."
 
Why does the carrier feel it necessary to get involved in the issue? If anyone should be contacting late pay customers (and I am not saying anyone should...I don't think anyone should), it's the agent, not the carrier. If I were an agent for this carrier I'd be standing on someone's desk at the company saying, "You will stop this now." The company may feel this is good for retention; it may be, but it's just bad business practice and an invitation to a lawsuit.
 
The defense rests.

This may be good for retention, but who wants to retain late paying customers? Marginal customers are precisely the ones most likely to sue you. If the company insists on this, ask for a holdharmless in the event a customer (contacted or NOT contacted) sues and uses this procedure as a basis for liability. If the carrier refuses to provide an indemnity agreement, then you have an idea of how dangerous they consider the practice.

I've always been skeptical of the advice against reminding clients to pay their bills. In my experience, the most common cause of E&O lawsuits is at the other end of the spectrum: failing to pay attention to the insurance needs of clients. In all the defense work I've done I've never seen the DB issue come up. Most E&O stems from a failure to systematically analyze an insured's needs and recommend the needed coverage.
 
In the agencies I've owned, we've always called our good clients to remind them if their DB premiums go past due. What about the not-so-good clients? If they got past due, we let the company cancel them. Is that inconsistent? Sort of, but we were always consistent within the two groups: We always called the good clients and we never called the not-so-good ones. Could that have resulted in an E&O? Sure, but we had all the insurance companies' procedures to fall back on as well as their DB indemnity agreement. In short, it wasn't a problem for us, and we felt we had a better relationship with our good clients as a result.

I know of many agents who have decided to take the extra risk and call all of their clients on no pay cancellations. To them the extra risk is a cost of doing business. They realize the E&O carrier does not like the practice. 

If the agency were brought into the suit, the E&O defense team would quickly move to have the agency released. I believe the courts would release the agency quickly from the suit. Hopefully the contract with the carrier would contain a cross-indemnification agreement so the carrier would ultimately hold the agency harmless. 

Rather than making courtesy calls on late pay, they might want to make regular contact with the insured not related to possible non-pay cancellations.

Related Article:

"Should Agents Follow Up on Pending Cancellations for NonPayment?"

Last Updated:  August 2015