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FALL 2013

BIG I The

Official Publication of the Independent Insurance Agents of Virginia

IIAV STAFF

Virginia

Nettie Ardler, CPIW, DAE, AIAM Insurance Account Executive aardler@iiav.com

Natallia Chyhryna Accounting Assistant natallia@iiav.com Sherry Grubbs, AISM Accounting Manager sgrubbs@iiav.com Joe Hudgins, CPCU Technical Consultant jhudgins@iiav.com cell (804) 929-4138 Bonnie Joyce Insurance Administrative Assistant bjoyce@iiav.com Melanie Kjar Communications/Website Director mkjar@iiav.com

Inside this issue

Robert N. Bradshaw, Jr., MAM President & CEO rbradshaw@iiav.com cell (804) 929-4134 Teri Chester Executive Secretary/ Receptionist & Membership Coordinator tchester@iiav.com

Linda Loving, CIC, AISM, AIAO IIAV Chief Operating Officer & VFSC Executive Vice President loving@iiav.com cell (804) 929-4133 Danny Mitchell Vice President Business Development dmitchell@iiav.com cell (804) 929-4135 Susan E. C. Perkins Membership/Education Coordinator sperkins@iiav.com Kristina Preisner IIAV Director of Education & VAIA Executive Director kpreisner@iiav.com Erin Taylor Insurance Account Executive etaylor@iiav.com Marie Toney Sales Associate mtoney@iiav.com cell (804) 929-4136 James West Director of Finance jwest@iiav.com

THE BIG “I” VIRGINIA • Fall 2013

The Big I Virginia is a publication of the Independent Insurance Agents of Virginia 8600 Mayland Drive, Richmond, VA 23294 Phone: 804.747.9300 / Toll-free: 800.288.IIAV (4428) Fax: 804.747.6557 / E-mail: members@iiav.com Website: www.iiav.com

IIAV is an organization devoted to promoting, enhancing, serving and assisting independent insurance agents.

Message from the Chairman of the Board - Robert Short

Message from the State National Director - James P. Bradner

Message from the President and CEO - Bob Bradshaw

After the Storm: Insurance Agents E & O Lessons Learned

Why You Need to Offer Excess UM/UIM to Every Client

The ABCs of Performance Management

Five Tips for Effective E-mail Prospecting

IIAV Young Agents Conference October 3-4, 2013

Offer Customers Coverage Options: A Growth and “CYA” Strategy

Misclassifying Employees is Serious Workers’ Compensation Fraud

Six Good Reasons for Personal Umbrella

IIAV Fall/Winter Education Calendar

IIAV extends our appreciation to the following sponsors of this publication: Amerisafe 10

Jackson Sumner & Associates

AmTrust NA

Johnson & Johnson

24, 25

Anderson and Murison

Millers Mutual Group

Atlantic Specialty Lines

Penn National Insurance

Builders Mutual Insurance

Preferred Property Program

Burns & Wilcox

RPS Rollins

FCCI Insurance Group

SIAA 20

GUARD Insurance Group

Southern Insurance Company of VA

Harford Mutual

TAPCO Underwriters

Harleysville Insurance

The Iroquois Group

ISU Agency Network

Utica National

JMWilson 23

WineryPak 43

For information on advertising please contact: Jim Aitkins, Blue Water Publishers, LLC / 22727 161st Ave SE, Monroe, WA 98272 phone: 360.805.6474 / fax: 360.805.6475 / jima@bluewaterpublishers.com

The Big I Virginia is a publication of the Independent Insurance Agents of Virginia and is published quarterly by Blue Water Publishers, LLC. IIAV and Blue Water Publishers, LLC do not necessarily endorse any of the companies advertising in the publication or the views of its writers.

Strong Agencies Made Stronger

For 35 years Iroquois has helped make strong, independent agencies even stronger and more independent. And it shows.

TEAMWORK As a group, Iroquois Member Agents have earned the following honors from our Carrier Partners: ACE Private Risk Services Chubb Personal Insurance Encompass Fireman’s Fund The Hartford MSA Group MetLife Auto & Home Ohio Casualty Safeco Travelers Zurich Small Business

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To learn more about how Iroquois could further strengthen your agency, contact Matt Ward at 804-320-6984 or mward@iroquoisgroup.com and visit our website at www.iroquoisgroup.com

Fall 2013 • THE BIG “I” VIRGINIA

Chairman of the Board Robert Short bob@shortinsuranceltd.com

It’s time to Celebrate and I bet you missed it. 115 YEARS OF CONTINUANCE SERVICE Yahoo! We’re goin’ to a celebration.

he year was 1898. Thirty years had elapsed since Virginia’s now valuable property was a heap of smoldering ruins following the Civil War. The Commonwealth was once again enjoying its prophesy of the past: a story of development, progress, and public spirit such as has few parallels. A nation once primarily made of farm land was swiftly becoming a world leader with growing cities, busy with manufacturing and commerce. Businesses were becoming so large that they were able to squeeze out all rivals in the field. The political climate was ripe for government control which had resulted eleven years earlier in the enactment of the Interstate Commerce Act and, eight years earlier, in the enactment of the Sherman Anti-Trust Act. The 45-state nation was enjoying a great business boom, while seeking to expand its dominion outside its borders through the Spanish-American War. It was during this period that two dozen founders of our present organization met to form the Virginia

6 THE BIG “I” VIRGINIA • Fall 2013

Association of Local Fire Insurance Agents. They had a need to form an organization to do together what one or two could not do. The times were geared toward big moves by big men with big money. What kind of men were they, who gathered in Lynchburg during the Fall of the final months of the waning century? What questions did they raise and what answers were they hoping to find? Answers to these questions are not easy to find. Records of the earliest days of the association were either lost, or destroyed, perhaps ironically by fire.

Fall 2013 • THE BIG “I” VIRGINIA

What we do know, is that this was not the first time that a group of insurance men came together to achieve a mutual purpose. The newspaper morgue of the December 13, 1895 “Richmond Dispatch” contains this brief article: “The fire insurance agents of the state of Virginia held a special meeting at the Exchange Hotel yesterday. Prominent men engaged in this line were present from all parts of the state, and a permanent organization was effected under the style ‘Local Agents Association of Virginia. “The object of this organization is to promote friendly interchange amongst members, and to forward correct practices in the state. This association has no authority or control as concerns rates.” The group convened for their third annual meeting in Roanoke’s Pythian Hall in the summer of 1901. At 11:00 A.M. sharp, the gavel sounded and the members warmed to their tasks by approving the financial report: Total receipts: $92.32; Total disbursements, $67.62; Balance on hand: $24.70. Then they settled down to hammer out a Constitution and Bylaws. That first paper reflected many concepts of how insurance men would work together for the first time as a unified statewide unit. Dues were set at $2 in towns or cities of 5000 or more inhabitants, and $1 for country agents in towns of less than 5,000. Membership requirements were stated without flourish: “Any local agent or agency of one or more insurance companies doing business in the state of Virginia may become a member of this association, provided he is not a general agent or special agent of any company.” Most importantly, these founders of our present day association had an innate feeling for the great principles on which the association would build and grow. First, they passed a bylaw allowing the president to appoint a committee on grievances which would investigate and take up “any complaints of bad practice on the part of either agents or companies doing business in the state of Virginia and endeavor to have same corrected.” It was a small wonder that these corrections were needed since, at the time, the industry did not have a State Corporation Commission, or an insurance commissioner, or any type of qualification law for agents. But these agents not only recognized that change was needed, they recommended, through a second bylaw, that “the president shall appoint a committee on legislation to consist of five members.” They were going after laws to help the cause and combat bad practices. In fact, one member offered this solution: “We believe it to be the best interests of 8

THE BIG “I” VIRGINIA • Fall 2013

the agents, companies, and insuring public to have a commissioner of insurance. If we can get the right man in office, he can be of incalculable benefit in getting wise laws passed by our legislature.” The business session concluded with the adoption of the slogan that remains only slightly altered today: “To support right principles and oppose bad practices in fire underwriting.” The day was done but what’s a convention without a little fun? So all two dozen Board members boarded a trolley car and enjoyed a ride through Roanoke - sucking in their breaths as they clipped along at 8 miles per hour! The following year, they met in Norfolk. The Secretary reported a membership of 74 agents - an 89 percent increase over the previous year. Some of the subjects discussed that year included the proposal to pursue a “Fire Marshall Law;” dual agencies, overhead writing, corrupt practices of every kind, paying brokerage of 10 percent to foreign brokers, and the credit system in which agents had to wait two or three months to collect their money. The words delivered at the 1902 convention reflect the spirit that was to be passed down throughout the next 100 years. “Gentlemen, I want to impress upon you three all-important factors in the successful prosecution of our business: loyalty to our brother agents, loyalty to our patrons, and loyalty to our companies.” Interestingly, these were the very audiences to which our national Code of Ethics was addressed - “To the public; To the companies; and To fellow members” - yet the national association did not adopt its Code of Ethics for another 27 years, in 1929. Another example of the foresight of our Virginia Founding Fathers! The outstanding achievement of the association in 1921 appears to be the fact that the name was changed to “Virginia Association of Insurance Agents,” a name that stood until 1978 when the Board of Directors, in an effort to maintain consistency with the national association, changed its name again to the Independent Insurance Agents of Virginia, Inc. On March 15, 1969, Virginia Financial Services Corporation (VFSC) was formed as a for-profit subsidiary of the VAIA. It was in November of that year when VFSC would announce its first incomeproducing program: Insurance Agents and Brokers Errors and Omissions Insurance. VFSC would continue to seek programs for the IIAV member, offering substantial discounts for programs which, secured individually, would have been prohibitively expensive, or perhaps unattainable. For 115 years, membership in the Independent Insurance Agents of Virginia has provided our members

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Enter exclusive markets for healthcare entities through our relationships with over 50 carriers. Whatever the diagnosis, our expertise delivers the fastest quotes. Take advantage of our experience to cover everything from medical malpractice to general liability without any gaps. Why let anything stand between you and the coverages your clients need? At Burns & Wilcox, we make the hard-to-place easy. Baltimore, Maryland | 410.891.4200 | toll free 800.729.1273 fax 410.540.9140 | baltimore.burnsandwilcox.com Charlotte, North Carolina | 704.525.1152 | toll free 800.999.3434 fax 704.525.7399 | charlotte.burnsandwilcox.com Morehead City, North Carolina | 252.726.8992 | toll free 800.498.1600 fax 252.726.9484 | moreheadcity.burnsandwilcox.com

the support they need to achieve success in a highly competitive insurance marketplace. Through advanced technological services such as electronic communications, agency and automation services including updates on Workers’ Comp issues and Company Customer Service Reports and Company Visits reports, conventions, meetings, and publications in which the latest industry products and trends are reported, the IIAV provides its members with cutting edge information and training. Our highly respected legislative presence maintains our voice in the Virginia General Assembly and in the Commonwealth’s lawmaking process. Educational services and continuing education courses continue to be our hallmark as we enter the next century. With our impressive array of insurance products such as Errors and Omissions, Accidental Death and Dismemberment, Group Life and Health, Personal Umbrellas, RLI In-Home Business, and Short and Long-Term Disability, our member agents can enjoy the cost-effective benefits their membership provides. Guiding consumers and the Independent Agency System in Virginia through the changing landscape of the industry, drawing on a century of experience and leadership... ...that is the job given to your staff, and I fully expect they will continue to master their tasks for the next 100 years and beyond with the same professionalism, respect and vigor that they have before.

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THE BIG “I” VIRGINIA • Fall 2013

5/30/13 3:33 PM

The ISU Insurance Agency Network ROI* The Numbers Speak for Themselves 2011

2010

527% ROI

542% ROI

2012

628% ROI

2008

458% ROI

2009

430% ROI

*Return on Investment (ROI) = total membership fees paid by members divided by total paid to members.

The average ISU Member earned 628% MORE than they paid for membership. PLUS ISU Agency Network Members :  Own 100% of Their Book and Client Relationships  Receive 100% of Policy Commissions  Earn Profit Sharing from first dollar with NO Minimum Requirements  Receive Direct Access to Carriers  Offer Enhanced Client Services  Suffer NO contract termination fees or penalties nor Carrier access restrictions  Benefit From the Strengths and Resources of a National Organization  ISU - The Power of Independence and the Strength of Unity.  Over 150 offices and 1,700 professionals accessing over 300 Carriers nationwide

Go to www.Join ISU.com or call 877-500-4478

The ISU Agency Network Fall 2013 • THE BIG “I” VIRGINIA

State National Director James P. Bradner

jbradner@towneinsurance.com

mall independent insurance agencies across Virginia make up the backbone of our organization. What are some of the things small agencies can do to compete? Doing personal lines well is one of the biggest things we can do to be profitable. What can we offer that most direct writers can’t? Comprehensive Personal Service. Too many businesses try to attract the customer to come to them…either by phone or website; but whatever happened to the “hug”? If you have confidence in your ability and your product, how about “cold calling”? It is a lost art, and looked down upon by a lot of our peers. While referrals and “warm” introductions are a vital tool to have, so is the cold call. And with Comprehensive Personal Service comes cross-selling and upselling. Although an E&O necessity, it also is a very profitable way to grow your business. And if you want it done, find a way to incent the person who takes on that responsibility. Too many agents fall back on “that’s what a salary is for”; but that same agent/owner will pay 1 X commission to buy a book of business. Since we make money on personal lines renewals, it seems to me we should pay/incent our people to produce “new” revenue as well.

THE BIG “I” VIRGINIA • Fall 2013

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DON’T WEATHER THE STORM ALONE! The 2013 Storm Season is upon us. Are YOU prepared? 2012 weather disaster estimates exceed $60 billion dollars. The National Oceanic Atmospheric Administration (NOAA) predicts that climate signals and evolving oceanic and atmospheric conditions indicate that an above normal Atlantic hurricane season is likely in 2013. This outlook calls for a 70% chance of an above-normal season. The 2013 Atlantic hurricane season is predicted to produce13-20 named storms, of which 7-11 are expected to become hurricanes, and 3-6 are expected to become major hurricanes.

How has Atlantic Specialty Lines prepared to ride out the storms and assist our customers? All of ASL’s servers are located off site in a bunker that has back up power and diesel generators.

We have an offsite location in Richmond, VA with backup generator power, should our home office be inaccessible.

GREG PROVENZO President - ASL of VA O: 804.474.1568 C: 804.338.2221

Two back up internet connections are available for access to our servers from anywhere in the world.

All policies and file documents are imaged (paperless), thus we can immediately access all files for you and your clients.

DAVE ADCOCK Vice President - Commercial Lines O: 804.474.1571 C: 804.398.0998

ASL CLAIMS : claims@atlanticspecial.com

800.368.2095 | www.AtlanticSpecial.com

President and CEO Bob Bradshaw rbradshaw@iiav.com

“Housing market conditions are better than last year” – so says the REALTORS ®

ey, I’ll take good news where I can get it. In a recent survey of members of the Virginia Association of REALTORS® in coordination with the Federal Reserve, 70 percent indicated that housing market conditions were slightly or significantly better in the first quarter of this year. “These survey responses indicate that the housing market conditions have improved notably, compared to last year,” Richmond Fed Regional Economist Andy Bauer said in a statement. This is of course great news as the more the REALTORS® sell, the more prospects you have for personal lines insurance. I think I’d be calling my local real estate professionals and letting them have my name and card. Don’t forget a number of years ago when the market was very hot people were coming to the table thinking that obtaining insurance was easy and then getting a rude awakening – thus delaying closing. Clearly the housing market can be fickle. A robust market though is clearly great news for our industry. I can’t tell you how many agents have told me recently…”thank goodness for personal lines because the commercial book of business has declined or remained constant.” We have a great story to tell. The independent agent – your Trusted Choice® is one of the best values on the market and

THE BIG “I” VIRGINIA • Fall 2013

continues to provide WAY MORE customer service than any on-line company. And we have many more choices then the captive market. Why would a consumer NOT want to utilize an independent agent who is going to find the right policy, the right protection from the right company – custom service for the client. What’s better than that? I used to hear agents say, “I’m going to write their life policy right through the garage door.” A curious sort of presentation but the implication was obviously that they would write the auto first, homeowners second and then the life policy. A classic example of upselling and cross-selling. The theme of this magazine is upselling and cross-selling. We have the tools to help make this possible in your agency. We have education classes on all matters related to personal lines insurance and we’re also giving you some industry research on what’s happening in the market. Expand your business and expertise with IIAV being your primary resource. Here’s your link to a successful cross-selling agency:

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Your Success is Our Policy.® Fall 2013 • THE BIG “I” VIRGINIA

After the Storm:

Insurance Agents E & O

Lessons Learned

By Sally Combs Technical Director, Professional Liability Claims Fireman’s Fund Insurance Company

ore often than not, a second wave of claims against insurance agents by their clients follows a natural disaster. As parties find themselves without the coverage they expected after a catastrophe, it appears to be a natural reflex for them to look to their insurance agents and brokers to fill the perceived gap. Sometimes, this second wave, for whatever reason, is just a ripple. Katrina, following on the heels of a year that saw four major storms sweep through Florida, generated a veritable tsunami, as did Ike. It is too early to predict what kind of E & O activity will follow Sandy. For the most part, the types of allegations and claims that surface after an individual loss (such as a house fire) are the same we see after a catastrophe, just on a greater scale because of the number of people impacted—failure to procure a certain kind of coverage, failure to place coverage at all, failure to obtain adequate limits, or failure to advise certain coverage was necessary. But there are certainly best practices that can minimize the resulting exposure and enhance the likelihood of a successful defense. To some extent, the claims following the string 16

THE BIG “I” VIRGINIA • Fall 2013

of hurricanes we experienced in 2004 and 2005, and particularly after Katrina, or Ike, have their own characteristics. The number, severity, and landfall of hurricanes vary from year to year, but certainly exposure exists in most eastern and Gulf coastal areas during every season. Therefore it is useful to look at the common causes of E & O claims, along with suggestions about possible ways to prevent or minimize the losses. It will be impossible to completely eradicate claims by clients who feel they lack the insurance coverage they needed to compensate them following a natural (or manmade) disaster, just because we operate in a very litigious society. The fact that a claim is made does not necessarily mean that there is liability on the part of the agent, as there are often viable defenses to such claims. Following certain “best practices” can help to eliminate some of the problems that lead to claims in the first place, enhance the prospect of a successful defense, and reduce the impact of the claims that are made. Before we embark on a discussion of the actual claims patterns, however, we want to ask the agency force:

We look for the best independent agents and build relationships that last the duration. We are committed to the independent agency system as the only means to deliver our products. Because of that, we work hand-in-hand to help our agencies grow profitably.

Our agents set us apart. Business • Surety • Auto • Home

www.PennNationalInsurance.com Visit our website to find out more. Fall 2013 • THE BIG “I” VIRGINIA

How Prepared Are YOU? Agents live and work in the same communities as their customers, and are just as vulnerable to the effects of a hurricane or other natural disaster. Not surprisingly, a number of agents saw their offices seriously damaged, destroyed, or made inaccessible after Katrina, Ike and Sandy. What was a surprise following Katrina and Ike was the number of agents that completely lost all of their records, did not have them backed up, and had no plan in place to resume business as rapidly as possible. This made defense of claims that were made against them particularly difficult, especially as key employees dispersed and were hard to contact. So far, we have not seen the same issues post Sandy. The key is planning for recovery. While many agents’ clients have disaster recovery plans, those same plans may be deficient among the agents. Disaster recovery planning is not new. There are many vendors available that provide temporary staff, technology, communications, connectivity, space, and power recovery after the unthinkable happens, relatively inexpensively. However, many agents don’t perceive an exposure because they “are not near a flood plain”, “don’t live near the coast”, or “have never been sued by a client”. The fact is an agency needs a recovery plan, including off-site data storage, to cope with post-disaster losses, not just to aid in their own defense, but to keep their business running efficiently. Wind and Flood Coverage Problems It can’t come as any shock that following a hurricane, most E & O claims arise from some problem with wind or flood coverage, especially as the standard market restricts its writings in hurricane prone areas, making it necessary to obtain coverage through special markets, wind pools and the NFIP. Let’s look at some of the specific issues:  No coverage in place at the time of the storm-delayed submission or failure to submit paperwork. Coverage is not effective in wind pools, the Fair Plan, or NFIP until the application AND premium payment are received by the Plan. Many of the claims we have seen involved instances in which the insured agent took an application and premium payment from their client, and then for some reason delayed sending it in, or simply failed to do so at all. In other instances, it appeared that the paperwork was mailed, but the Plan claimed to never have received it, and there was no proof of mailing in the agent’s file, or follow up to see what had happened when the policy was not timely received. By the time the problem was detected, either a moratorium was 18

THE BIG “I” VIRGINIA • Fall 2013

in effect (as the storm approached the area), or the storm had hit and the damage was done. Beyond making sure that clients understand exactly when their coverage is to become effective (such as when the carrier receives and accepts the risk, when premium is paid, after any applicable waiting period, etc.), having clear written (and enforced) procedures in place for processing, placing and tracking business is essential for any agency. It sounds simple, but breakdowns in communication and process are a frequent cause of E & O claims. What procedure is to be followed once a producer takes an application? Is it immediately entered into a tracking system? Is it clear who is responsible for taking the next steps to get the application (and premium) to the appropriate carrier or plan? What process is in place to follow up if the policy is not received in a timely fashion from the carrier, and transmitted to the client? Are efforts to follow up documented? Do you maintain proof of mailing when critical time-sensitive documents are transmitted? Who checks the coverage to make sure it matches what was requested, and follows up to seek corrections if there are errors? If you do not have written office procedures in place, there are vendors that provide off-the-shelf templates that provide an excellent foundation which can be customized to fit an agency’s unique requirements. Once the procedures are established, it is important that all employees within an agency clearly understand them and that full compliance is required. Many successful agencies have quality-control measures in place to track compliance with the processed applications to assure that everything is running smoothly.  Evidence of Insurance provided at close of escrow before premium paid and submitted. Banks or other lenders typically require that insurance is procured to protect their collateral, and want assurance that required coverage is or will be placed before they will proceed with closing on real estate transactions. In a number of instances, agents provided binders or other evidence of flood or wind coverage at the time of closing, before the premium was paid. However, while this practice is appropriate when a standard homeowner’s policy is involved (because coverage can be bound by the agent without payment of the premium), no coverage placed with the wind pool or flood plan is effective until the premium is actually paid and submitted to the Plan. Further, the agent has no authority to bind the Plan to coverage. Thus, when the storm(s) struck just a short while later,

there when it matters most there when it matters m

Direction

Southern Insurance Company of Virginia remains committed to our chosen direction for distribution — the independent agent system. Unlike many others in the industry, Southern has no interest in any other distribution channel. Instead, we focus our energy on consistently delivering greater value to our agents. Staying true to our chosen course of supporting the independent agent system… another way Southern is “There When It Matters Most.”

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there when it matters most

there was no coverage in effect and the Plan(s) would not honor the unauthorized binder. The banks and property owners claimed that the binders led them to believe that coverage was actually in place, and that they did not understand that coverage was contingent on premium payment. Had they understood this, they claimed, they would have immediately tendered payment so coverage became effective. The error made is understandable, and also preventable. The agent can provide the coverage quote and other evidence of coverage that will be in place once the premium is paid, with clear notice that the coverage will not, in fact, become effective until that happens and the application and payment are received by the plan. If there is a waiting period that may apply, this should also be noted. Of course, when the agent receives the premium, they should promptly submit it with the request for coverage to the plan, keep a record of the transmittal, and track on diary until policies have been issued and received.  No contents coverage on wind or flood policy. In some instances, the agent in question simply misunderstood that when a carrier moved to exclude wind coverage from the homeowners’ policies they

wrote in hurricane-prone zones that the restriction also applied to contents coverage. While they diligently replaced dwelling coverage in the applicable wind pool, contents coverage was not included, and when Katrina struck, the involved customers were consequently without wind coverage for their contents. More often than not, though, there was no record in the agent’s file of a specific request for contents coverage, or no indication this had been offered and declined. When the client found themselves without contents coverage after the hurricane(s), they looked to their agent, raising a variety of allegations: that a specific request was not acted on; that the agent should have pointed out the need for the coverage; that the agent should have understood the client wanted/needed the same coverage they had on their homeowners policy, etc. These claims are difficult, as while the reality may be that the clients only procured the insurance their lender required (the dwelling coverage), they rarely will admit that is the case. Likewise, the nature of the relationship an agent has with his or her client may not place them in a position of having any duty to advise the client of the coverage they should have. However, having no documentation at all to www.siaa4u.com

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THE BIG “I” VIRGINIA • Fall 2013

Call Jon Pappas in Northern VA / DC area 443-692-4000 www.pinsiaa.com Call Beth Roe in North Central VA 423-612-0683 1-866-264-1292 www.meaa4u.com

counter the claims by the client can impair the ability to defend the agent, especially given the propensity of juries to “side” with the party they perceive to be a victim when there is an uncovered loss. Therefore, legal duty questions aside, it may be advisable for agents to document offers of coverage, automatically provide quotes for contents coverage when dwelling coverage is requested, quote wind and flood coverage, and then maintain documentation when the client declines the coverage offered. In addition to greatly enhancing the chances of a successful defense of an E & O claim, this practice could also increase agency revenues as customers accept the additional coverage offered.  No flood coverage at all. This is very similar to the situation involving the lack of contents coverage. As has been highly publicized, many parties have claimed that they did not have flood coverage because their agent allegedly told them “they did not need it,” either because the homeowner’s coverage they had in place covered “hurricane damage,” or because it was not “required.” (Lenders require flood coverage to be in place typically only when property is in Flood Zone A). As in the case of contents

coverage, the agent may not have a legal duty to offer the coverage to their client. However, if a written offer was made to every client in areas potentially subject to flooding, with the rejection of the coverage documented, it is very likely that many of the suits that arose would have been easily defended. Most parties in Mississippi and Louisiana are no doubt acutely aware of the need for flood coverage in certain areas—even those that rarely saw flooding in the past. What about in other areas, such as the Northeast, that has not seen a serious hurricane strike for a long time? Would now be an excellent time to remind your clients of the potential exposure and provide quotes for the coverage? No coverage for other structures or pool cages. Citizens (in Florida), state wind pools, the Fair Plan and the NFIP have specific rules regarding how coverage applies to separate structures, docks, or as we most commonly saw, pool enclosures. In some instances, coverage must be separately applied for the structure to be insured, or specifically requested at the time of application. It is extremely important to stay on top of each Plan’s requirements and procedures, make sure that you ask the client the appropriate questions when Rated A+ (”Superior”) by A.M. Best Company

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taking an application, and document all conversations and transactions to avoid problems Inadequate Limits Insurance limits that are insufficient to cover the clients’ damage has long been one of the top causes of E & O claims, whether following on the heels of a catastrophe or not, but are magnified following a disaster because of the spike in construction costs that typically follows an event involving damage to many parties. There are a number of problems that commonly arise.  Inadequate dwelling or contents limits overall For the most part, we would like to say that it is the client’s obligation to assure that the coverage they purchase is adequate to meet their needs. When the client specifies the limits to be obtained, there is generally no responsibility on the part of the agent to confirm that the amount procured is inadequate. It is when the agent supplies the limits or assists in their calculation that problems can arise. Then, the agent will likely be held to a standard of using reasonable care to assure that the limits selected are “correct.” When they turn out to be insufficient, they are subject to attack by the client. Here are some of the more common problems we have seen in the limits arena: o Agents estimate the square footage used to calculate replacement cost without verifying the correct amount. o Agents calculate replacement cost using a replacement cost estimating system, and do not adequately account for upgrades in the client’s property, or using the short form calculator instead of the more detailed format. o We have had clients say they asked for higher limits, and instead of turning the request into the carrier, the agent has told them that the amount generated by the “cost estimating” system is the maximum the carrier in question would offer, without referring the request to the carrier. o Agents set limit based on purchase price, or ask for a real estate appraisal. The problem with this approach is that the cost to rebuild is not the same as appraised value, and the purchase price can be higher or lower than that cost. (This could also lead to limits that are too high, in that appraisals typically include the value of the land on which the property sits.) o Owners advise the agent that they have engaged in property renovations, but this information is not forwarded to the carrier, and the limits are not reviewed for the adjustment that may be 22

THE BIG “I” VIRGINIA • Fall 2013

necessary because of upgrades. o In other instances, the agent maintains higher limits were suggested, but were declined by the customer, yet there is no written documentation in the agent’s file of either the offer or the rejection.  The limits on the wind or flood policy are lower than those on the Homeowners policy We understand that the limits on the policies obtained are often the amounts the client requests, or are the minimum amount the client is required to carry by their lender. We also realize that while the homeowners’ limits may be automatically increased by the carrier over time, this is not the case with the wind or flood policy. We are not suggesting that there is necessarily a legal duty on the part of the agent to assure the limits are consistent, but a “prevention” best practice would be to have clear documentation regarding how the limits were established, sending a letter to the client that they should let you know if they desire higher limits at any time, asking whether an adjustment is desired on the wind or flood policy when adjustments are made to the HO limit, and documenting the response. The main point to keep in mind when it comes to assisting a client with the establishment of limits is that if they end up being inadequate, you will be the first party they turn to for recovery of the difference. Attention to detail, accuracy and documentation are all critical, as well as employing the assistance of the carrier are all practices that will help minimize the impact of the E & O claims that will inevitably follow. Coverage bound outside of carrier guidelines Because carriers tend to limit their exposure in catastrophe prone areas, it is very important that agents with binding authority be very familiar with their carriers’ guidelines and appetite to assure there is no violation of requirements. A fair number of the claims we have received over time are those by the carriers seeking recovery from the agent for the losses they sustained when the agent bound them to a risk that was ineligible for coverage and they were consequently required to respond to a claim. Confusion regarding how off premises power failure and sewer/water backup coverages apply. Commercial Claims: The majority of claims we see after a catastrophe have been generated by personal lines

accounts, but commercial account claims are on the rise. Many of the same issues present in the personal lines arena appear in commercial claims. Some of the more common additional problems leading to claims:  No, limited or inadequate business interruption coverage  No coverage for off premises power failure (and confusion regarding how the coverage applies, as well as the various endorsements/levels of coverage available in the marketplace). For example, some forms exclude coverage for loss due to damaged overhead power lines and many forms also contain flood exclusions. There are separate endorsements available for direct damage/food spoilage, etc.  Lack of flood coverage at a particular location  Application of a coinsurance penalty because limits were inadequate  Inadequate limits because a policy has been changed from a blanket limit to a specified location limit, and the specific location limit is inadequate. Do you employ the use of a written exposure checklist to aid you with identifying the coverage a commercial risk may require? Do you put all quotes and proposals in writing, and document any time the coverage is rejected by the client? Are all of the binders you issue authorized by the carrier, and if they are issued by an intermediary broker or the carrier, are they consistent with the coverage requested? Do you review applicable forms, and compare the policies issued with the coverage requested? These are all practices that may help minimize any E & O claim you may face. This is a very broad overview of the claims made against insurance agents after the hurricanes of the last decade. As we head into another hurricane “season” now is a good time to review your procedures to see what you can do to help you avoid the next “second wave.” This publication provides general information and recommendations that may apply to many different situations or operations. Any recommendations described in this publication are not intended to be specific to your unique situation or operation. Consult with your staff and specialists to determine how and whether the information in this publication might guide you in developing specific plans or procedures for your situation or operations. This publication does not substitute for legal advice, which should come from your own counsel.

RELATIONSHIPS IT’S WHY WE STAND OUT FROM THE CROWD

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Managing General Agency Since 1920 Property/Casualty • Professional Liability • Surety Commercial Transportation • Personal Lines • Premium Finance

800.538.4796

jmwilson.com

WHY YOU NEED TO OFFER EXCESS

e’ve all heard the stories. A family of five is burdened with horrific medical bills because of an accident caused by a drunk driver who couldn’t afford insurance due to his bad driving record. A child walking to school faces a lifetime of difficulty after being struck by a texting driver—a struggling college student with state minimum auto limits. A pair of retired sweethearts fall victim to a hit-and-run driver. As an insurance agent, you can’t physically protect your clients from heartbreaking situations like these… but they do rely on you to protect them financially when tragedy strikes. This is where excess Uninsured/Underinsured Motorist Coverage enters the picture.

UM/UIM TO

MOST PEOPLE WOULD BUY IT IF THEY UNDERSTOOD IT How effectively can you explain UM/UIM coverage to a client who doesn’t know much about insurance? In layman’s terms, UM/UIM coverage is insurance that pays for the client’s injuries from an accident caused by the owner or operator of an uninsured or underinsured vehicle. Excess UM/UIM from a personal umbrella policy pays after the auto policy’s UM/UIM limits have been exhausted. It’s important for a client to understand that UM/UIM coverage comes into play when an insured is involved in an accident and the person who caused it either doesn’t have any insurance or doesn’t have enough insurance to pay for your client’s injuries. It would also come into 26

THE BIG “I” VIRGINIA • Fall 2013

EVERY CLIENT

play if they were the victim of a hit-and-run (in a vehicle, on a bike, or as a pedestrian), leaving them with nobody’s insurance policy to collect against...making it an “uninsured” motorist claim. THE PREVALENCE OF UNINSURED AND UNDERINSURED DRIVERS According to recent estimates by the Insurance Research Council (IRC), roughly 1 on 7 drivers is uninsured. Add to that the number of drivers who carry state minimum auto limits, and it’s enough to make a person want to stay home for good. Unfortunately, this should come as no surprise, given the type of TV commercials we see these days from some auto insurance companies. Too often, the emphasis is on getting a cheap rate, and drivers are besieged with ads about that encourage them to buy “state minimum” auto limits in order to save money. There’s no denying that it can be a temptation in a struggling economy. All the more reason to make sure your clients are protected from the drivers around them, with UM/UIM coverage on both their auto and personal umbrella policies. IT’S ABOUT THE COVERAGE, NOT THE COST There’s no way around admitting that UM/UIM coverage can be expensive, and a tough sell if a client is trying to keep their premium down. One wise agent explains it to

his personal umbrella clients this way. If you’re buying an umbrella so that you can cover the injuries of strangers, wouldn’t you want to do the same for your own family, instead of blindly relying on someone else to cover your injuries...someone who might not have insurance at all, let alone enough insurance if you or your family members have serious injuries or need hospitalization? It certainly makes a lot of sense. When working up an auto or umbrella quote, do you merely ask “Do you want to add Uninsured/Underinsured Motorist Coverage”, and then wait for the simple “Yes” or a “No”? If so, try explaining what the coverage is first, and THEN ask if they want it. That way, the focus is on the value of the coverage, as opposed to its cost. PROTECT YOURSELF FROM ‘FAILURE TO OFFER’ E&O CLAIMS If your client is injured by an uninsured or underinsured driver and doesn’t have basic or excess UM/UIM limits of their own, you can bet that they’ll be asking (quite possibly through an attorney) why you didn’t offer them this coverage. Protect your client…and protect yourself and your agency from a ‘failure to offer’ E&O claim by always explaining and offering UM/UIM coverage. Consider documenting a client’s refusal of this coverage as well. This applies not only to auto policies, but also to personal umbrella policies. Just as a client needs excess liability above their auto policy limits, they need excess UM/UIM coverage above their auto policy UM/ UIM limits. While many home and auto carriers offer a personal umbrella, they may but not offer excess UM/ UIM coverage. Always offer an umbrella that includes that coverage. Hopefully this article will be a help to you as you quote and discuss excess UM/UIM with your clients. Keep in mind that the Big “I” offers your agency access to two umbrella carriers, including our endorsed market through RLI. Below are some of the distinctions between those two markets: Preferred Market with RLI • A+ rated and admitted nationwide • Limits up to $5 million available • Excess UM/UIM available nationwide • Stand-alone coverage - no need to switch home or auto carriers • New drivers accepted and no age limit on older drivers • DUI/DWI permitted 28

THE BIG “I” VIRGINIA • Fall 2013

• • •

Low maintenance – No need to report new exposures mid-term if required underlying limits are maintained. Simple, self-underwriting application E-signature and credit card payment options

Alternative Market with Anderson & Murison • Written on A rated Scottsdale paper • Limits up to $10 million available • Will consider high-profile personalities, such as athletes and entertainers • Will consider risks with prior liability losses exceeding $25,000 • Driver exclusion endorsement available

CLAIM EXAMPLE FROM RLI Mrs. Policyholder was on her way to work when she was rear-ended on the highway, causing her to run off the road and into a concrete barrier. She sustained multiple internal injuries, including a severely fractured ankle, which led to months of treatment and an infection that required additional hospitalization and more surgery. Unable to work during her recovery, she lost over $100,000 in income while racking up medical bills of over $120,000. She was no longer able to walk long distances or enjoy many of her favorite activities, impacting her life significantly. It was soon discovered that the driver of the other vehicle had state minimum limits of only $10,000 per person/$20,000 per accident. Mrs. Policyholder was paid the full $10,000 available, but the other driver had no other insurance and no assets. Mrs. Policyholder had UM/UIM limits of $250,000 per person/$500,000 per accident under her own auto policy, as well as $1M of UM/UIM coverage under her personal umbrella policy. She was able to recover the amount from her own insurors that she would have been entitled to recover from the other driver, had he carried enough insurance. If she hadn’t purchased UM/UIM coverage, her payment would have been only the $10,000 policy limit of the other driver.

To learn more about these products, visit www.iiaba.net/ umbrella or www.bigimarkets.com Or Call IIAV at 800-288-4428 / 804-747-9300. Printed with permission of Big “I” Advantage, Inc. and RLI. All rights reserved.

Some insurance policies get better with age.

The Big “I” offers its members access to Fireman’s Fund PRO GARD® Errors and Omissions coverage that waives your deductible if your agency has been claims-free and continuously insured by Fireman’s Fund for five years. Visit www.iiav.com or call 800-288-4428 or 804-747-9300 to learn more about this and other Fireman’s Fund PRO GARD® advantages.

Coverage is subject to the terms, conditions, and exclusions of the actual policy, which forms the contract between the insured and the insurance company. Available coverages, credits, and options may vary by state. ©2013 Fireman’s Fund Insurance Company, Novato, CA. All rights reserved.

Fall 2013 • THE BIG “I” VIRGINIA

‘

The

of Performance Management By Paige McAllister, SPHR, Contributor – HR Affinity Group

ne of the biggest challenges for managers is getting top performance from employees. While performance management can be a complicated process, there are three essential components: 1) establishing a clear definition of the position and an expectation of what is to be done; 2) providing feedback on performance as compared to expectation; and 3) rewarding success or correcting failure. Below is an ABC guide to help you define your expectations and manage performance. Accountability: What exactly do you need your employees to do? Think about this and capture it in a job description. To be effective, the description should take into account all aspects of the job. If you don’t have a job description for a position, a good starting point is to have the employee and his/her supervisor document what is actually being done. Even if the employee wears many hats or performs multiple functions, try to catalogue all of these functions – what you learn about how the employee is spending his or her time may surprise you. Basics: In addition to the duties and functions that are being performed, make sure to capture the basic requirements of the job, especially its mental, physical and environmental aspects. Then weigh how much time should be spent doing each of the functions in a work week and then rank the importance of each. If you find 30

THE BIG “I” VIRGINIA • Fall 2013

that someone is spending a significant amount of their time on a function that is not highly weighted, you may want to realign the duties of the job Consistency: One of the most important things to do when addressing employee performance is to establish a process that is applied across your workforce in a fair and consistent manner – to treat your worst employee the same as you treat your best employee. Once the standards are established and communicated, every employee should be held accountable to meet the standards for his or her job. Your goal should be to compare employees’ performance without bias or consideration of personal circumstances (and thereby you will very likely reduce your exposure to legal challenges down the road). Documentation: Document! Document! Document! We can’t say it enough. Job descriptions, goals and evaluations should be written in detail and signed off on by employees and their supervisors. This written documentation helps ensure that everyone understands the expectations. It also provides an opportunity for twoway feedback on past, current and future performance. (As a suggestion, if an employee refuses to sign this or any such paperwork, a non-confrontational response can be to call in a second supervisor, reiterate the discussion and have both supervisors sign as witnesses.)

Evaluation: After job requirements and employee goals are established, you and the employee should constantly monitor and evaluate progress. Formal annual evaluations should be supplemented with interim sit-down meetings. Touch base on what the employee has accomplished, what still needs to be done, any new duties and responsibilities and any obstacles keeping the employee from completing their goals. Each meeting should have an appropriate level of written documentation. But don’t stop there – you should also be providing informal feedback on a regular basis. Make it a habit of providing feedback once a day to at least one person you work with. Consider something like this: “Lisa, I liked how you handled that difficult client call. I liked the way you remained positive and promised to follow up on his order tomorrow. Please be sure to follow up. Good job.” This sort of feedback is timely, factual and effective. Follow-through: All of the work involved in creating and maintaining your performance management system is wasted if you do nothing with it. After evaluating the employee’s job performance, you must take action to reinforce the result. This is the time to reward your star performers in a personalized way and correct poor performers in a productive way. If the employee exceeded expectations, what can be done to reward a job well done – a monetary increase, recognition, additional responsibilities, further career development such as cross-training in another area, added perks such as more personal time off or a more flexible schedule? Want to get creative? Ask your employees to come up with some incentive programs of their own. If the employee did not meet expectations, what can be implemented to improve results next time – additional training, reassignment of duties, reduction in responsibilities (and perhaps in corresponding pay), disciplinary action?

800-226-3224 www.fcci-group.com

INDUSTRY EXPERTISE. PERSONAL SERVICE. “I have a sincere passion for helping FCCI policyholders manage risk and prevent loss. The best phone call I’ve gotten started with the words, ‘Brad, you saved my life.’ ” Brad Ross, ARM, AIS Loss Control Manager FCCI Southeast Region Duluth, Georgia Now, let’s talk about your business. General liability • Auto • Property • Crime Workers’ compensation • Umbrella Inland marine • Agribusiness • Surety Coverage available in 17 states. © 2013 FCCI

Performance management is a daunting prospect for many employers. While it does require an investment of time and commitment, a good performance management system will help you ensure the work employees perform align with your company’s needs and culture. And don’t forget, your Affinity HR team is here to help. Paige McAllister is a contributor for Affinity HR Group, LLC, IIAV’s affiliated human resources partner. Affinity HR Group specializes in providing human resources assistance to associations such as IIAV and their member companies. To learn more, visit www.affinityHRgroup. com. Fall 2013 • THE BIG “I” VIRGINIA BIV13_Ross_3.725x9.9875.indd 1

7/15/13 2:24 PM

Five Tips for Effective E-mail Prospecting by John Chapin

-mail prospecting is much more popular these days and is fast becoming an effective tool for finding leads. The problem is that very few people do it effectively. The five tips below will ensure your e-mails have the best chance of being read and acted upon. Five Ideas to Make Your E-mail Prospecting Pay Off 1. Understand the three-to-seven-second rule. You only have three to seven seconds to catch someone’s attention with an e-mail. Most people are looking to delete your e-mail as quickly as possible because they are busier than ever these days. A quick check of the “from” e-mail address and the subject line is all it takes to determine whether to keep or delete your e-mail. If neither of those strike an “interest” chord, you’re e-mail is gone. Even if you pass that initial check, you have to continue to pique the prospect’s interest at least every seven seconds to keep from being deleted.

THE BIG “I” VIRGINIA • Fall 2013

2. Have an effective subject line. If you have any leverage such as the name of a referral, or a company your prospect will recognize, use it. For example, your subject line might read, “Jim Jones suggested I contact you”, or, “We’re saving ABC Trucking Company 21.6% on truck/fleet insurance.” If you don’t have any names to drop, lead with your primary benefit. For example, “We’re saving trucking companies 21.6% on truck/fleet insurance.” 3. Your e-mail should be short, simple, and to-thepoint. The fewer words you can use to get your point across, the better. At most you want three or four lines with 15 to 25 words each. If your e-mail looks too long or too involved, people won’t read it, even if they are interested. At best they will save it for later; however, in 87% of the cases they will not get back to it. Again, you are writing to super-busy people trying to get through e-mails as quickly as possible.

4. Don’t expect one-and-done. It is extremely rare that a prospect will respond to you after one e-mail. Generally speaking, you must reach out to a prospect at least nine times before your name starts to stick with them and you build some credibility. To be most effective, combine your e-mails with other forms of communication. The most successful combination is: e-mail, phone calls, and physical letters. If possible, it’s also a great idea to stop by in person. Follow-up on the original e-mail is crucial.

The following is an example of a good e-mail: Subject: Jim Jones suggested I call you Hi Cindy, We’ve been saving Jim an average of 21.6% on his truck/fleet insurance per year over the past three years. All I need is ten minutes to see if we can do the same

5. Speak professionally and intelligently in your e-mails. Write your e-mails as if you are writing a professional letter to someone. Make sure that spelling and grammar are correct and don’t use abbreviations other than the standard accepted ones. Use black and white print and standard text, no fancy colors or backgrounds. Also, speak intelligently in your e-mail. Let the prospect know that you know your business and that you understand them, their concerns, and their issues.

for you. I will follow up with a phone call on Thursday or, of course, you can simply reply to this e-mail or call me at 1-800-123-4567. Thank you Cindy. My best, John Chapin

John Chapin Complete Selling, Inc. Helping you find and get all the business you want Cell: 508-243-7359 johnchapin@completeselling.com www.completeselling.com

7.5 x 4.625 Note: While it’s okay to use a link to an article, white jgs_brightfuture_7.4x4.625v1 paper, and the like, do not include any attachments in June 2011 People are very wary of attachments; also, your e-mails. attachments tend to get hung up in spam filters.

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Fall 2013 • THE BIG “I” VIRGINIA

THE BIG “I” VIRGINIA • Fall 2013

Offer Customers Coverage Options:

A Growth and “CYA” Strategy

Let Customers Make the Buying Decision and Document Accordingly

gents have all kinds of customers, from the ones that think they know more than the agent about their insurance needs to the ones that could not care less and insurance is a necessary evil to comply with contractual agreements. There are probably some commonalties among agency customers – most are focused primarily on price! This is completely understandable, but just because your customer is focused solely on price doesn’t mean the agency should. The number one way to grow agency revenue is to sell more coverage. Whether this is done through writing new accounts or account rounding, it is not an easy thing to do especially when dealing with price shoppers. However, selling more coverage is not just a way to increase revenue, it also allows the agency to CYA (“Cover Your Assets”) from potential E&O claims down the road. It’s a pretty simply formula: Offering Coverage = Increased revenue + Fewer E&O Claims Oftentimes producers are faced with customers that want the same coverage they’ve had for years or the minimum to meet the insurance provisions of contracts. There is

a preconceived notion that customers will not purchase coverage options and they are uncomfortable asking the customer to take the time to do a more thorough evaluation of their insurable exposures. The underlying unease of being a pushy salesman may prevent producers from offering additional coverages. This is a trap that producers must not fall into. Agents are best served by providing customers with their coverage options and letting the customer decide what to purchase. Coverages rejected by the customer should be documented in the customer file for when the customer’s memory fails after an uncovered claim. This documentation will allow your E&O carrier to provide the agency with a solid defense should an E&O claim occur. Believe it or not the agency will also have a stronger bond with the customer because of the professionalism of addressing insurance needs that have never been discussed in the past. Whether they buy the coverage is not necessarily the point, because at the very least you are addressing your own “CYA” factor. Reprinted with permission Big “I” Advantage. All rights reserved Fall 2013 • THE BIG “I” VIRGINIA

Misclassifying Employees is

serious Workers’ Compensation

Insurers lose billions of dollars a year to schemes that hide workers in shell companies.

Dishonest employers fleece workers’ compensation insurers out of billions of dollars a year by hiding employees in the shadowy netherworld of America’s underground economy. Employers sequester workers in often complex networks of shell companies. This reduces their payroll and staff size, and hence workers’ compensation premiums. These workers are falsely called, or misclassified as off-the-books “independent contractors.” Up to 30 percent of employers misclassify employees, says an aging 2000 federal estimate. Most states are taking aggressive steps to rein in widespread schemes. Strong enforcement is essential, and should be combined with better education and warnings to employers. But from a plaintiff employee’s perspective, it is hard to understand why the insurance industry sits on the sidelines while carriers are being blatantly defrauded. The industry can play a major role in combating this massive fraud: Increase onsite audits, and audits of insurance brokers. Track the number of insurance certificates issued to one employer. Declared payroll also should be made available to regulators. The insurance industry condones cheating when it ignores people who blatantly cheat the system. To stand by and watch the system being corrupted will come back to haunt those who do nothing. 38

THE BIG “I” VIRGINIA • Fall 2013

By Leonard T. Jernigan, Jr.

D U A R O

n a sunny but cold day last October, a 20-year-old worker was operating a forklift in North Carolina. It turned over, rolled on top of him, cracked his pelvis and left him partially paralyzed from the waist down. He had been fully employed with that company for two years, but the employer classified him as an independent contractor and gave him a 1099 tax form at the end of the year. His employer also had no state-required workers’ compensation insurance. The employer didn’t pay premiums, or deduct federal and state taxes, social security or unemployment. The worker was in a catastrophic situation, with horrific injuries and no workers’ compensation insurance, which should have been his right as an employee. The employer itself had broken numerous state and federal laws by paying the worker off the books. The goal was to illegally dodge paying full workers’ compensation premiums and taxes. This tragic workplace mishap was yet another day in the vast world of workers’ compensation premium schemes. Employers fleece insurers out of billions a year by hiding employees in the shadowy netherworld of America’s underground economy. This activity is especially true of high-risk, low-wage industries that pay workers minimum wages in hard-to-trace cash. Corrupt garment makers, restaurants and businesses in many other industries also milk workers’ compensation insurers, but construction firms are especially large players in a vast, subterranean job world. In this parallel financial universe, millions of workers — often undocumented workers toiling long hours in dangerous conditions — pound nails high on roofs of housing sites, pour concrete for new office buildings, or erect drywall in condo complexes. The operative term is misclassification of employees. Dishonest businesses sequester fulltime workers in often complex networks of shell companies. These workers are falsely called, or misclassified as off-the-books

“independent contractors.” This lie reduces the employer’s apparent payroll and staff size, and hence workers’ compensation premiums. For example, a home builder might lie to its workers’ compensation insurer that 95 percent of its high-risk roofers are merely desk clerks. Another con involves buying a minimum policy covering only one or two employees, then using that policy to illicitly win a bid on a job that may require as many as 50 employees. Dollar for dollar, the full national scale of premium fraud is unknown, but most observers agree that premium fraud has extracted a vast toll in stolen workers’ compensation insurance money and avoided tax dollars. More national signposts: Businesses classify more than 10.3 million workers as independent contractors (7.3 percent of the workforce), according to the U.S. Bureau of Labor Statistics. The number of misclassified workers has expanded by 50 percent in recent years, the Government Accountability Office says.1 Up to 30 percent of employers misclassify employees, according to an aging 2000 federal estimate.2 These numbers are fairly dated and are not necessarily determinative, but do suggest a significant subterfuge. In fact, workers’ compensation premium fraud is so vast that most states are taking aggressive steps to rein in the widespread schemes. Some 21 percent of Tennessee’s construction workforce was misclassified or paid unreported income in 2006, a 2010 study found. The losses were $14 million to the state unemployment trust fund, $91.6 million in workers’ compensation premiums and $115.4 million in federal income and unemployment taxes.3 “We’ve been calling this employee misclassification ever since I got to the statehouse (2005), but what this is really about is tax evasion,” one state legislator said.4 As many as 30,000 employers in North Carolina failed to buy workers’ compensation coverage,5 reveals an August 2012 study by the News & Observer in Raleigh. The fraud unit at the North Carolina Industrial Commission has just two fulltime investigators covering the entire state. Thus few, if any, fraud cases are prosecuted. Exgovernor Beverly Perdue created a task force in August 2012 to study the trend,6 and the legislature also formed a committee to examine fraud.7 The governor’s task force identified misclassification as a significant problem in its Fall 2013 • THE BIG “I” VIRGINIA

January 2013 report.8 Still, North Carolina lags behind several other states that identified this problem years ago and launched strategies to stop such schemes.9 Some observers mistakenly assume that most misclassification is done by small “mom-and-pop” operations such as landscaping, painting and small home-construction firms, but the evidence shows otherwise. Matthew F. Capece represents the General President of the United Brotherhood of Carpenters and Joiners of America. He has followed this trend since 1986. When asked if large-scale employers were involved, he responded, “Oh my gosh, yes. Either directly or willfully ignorant. We see violations on the job sites of the largest contractors in the U.S.”10 His union has tried to alert public officials and insurance companies about the severity of the problem for years. News headlines about employee misclassification are widespread, regardless of employer size. For example, four people who ran a large demolition company in California were charged in 2009 with multiple felony workers’ compensation violations involving their numerous employees, plus $12 million in tax fraud.11 Two business partners in a security firm pleaded guilty to a $9.5-million fraud scheme in 2009. They claimed the firm had only 20 workers. It actually had 1,500 employees.12 The co-owners of an Orange County, Calif. roofing firm dodged $30 million in premiums by grossly underreporting their payroll. Devon Lynn Kile and her business partner used the savings to buy a Bentley, two Ferraris and $500,000 in jewelry. It was one of California’s largest premiums cons ever. Kile even tried to appear on the hit reality TV show, “The Real Housewives of Orange County.” Partner Michael Vincent Petronella received 10 years in prison, and Kyle received 10 years of probation.13 A Florida construction firm funneled fully $70 million in wages to hidden workers through shell companies to avoid paying full workers’ compensation premiums, the state’s CFO charged last year.14 The co-owner of a Massachusetts temporary employment agency received 76 months in prison for avoiding more than $9 million in workers’ compensation premiums and taxes by paying at least $30 million in wages under the table.15 A Massachusetts roofing company misclassified half of its workforce as subcontractors in 2012. The state discovered more than $3.4 million in under-reported payroll during its annual workers’ compensation audit.16 Washington’s Department of Labor Industries’ Fraud Prevention and Compliance Program assessed $24.6 million in unpaid employer premiums plus penalties in fiscal year 2012. The program returns nearly $9.30 for every dollar spent fighting fraud.17 40

THE BIG “I” VIRGINIA • Fall 2013

Is the problem growing? Deeply concerned, the vast majority of states have responded. Misclassification task forces typically are a starting point. They are a state’s recognition that employers who cheat their employees also cheat insurance companies out of millions of dollars a year. They also rob governments of tax funds at a time when cash-strapped states are trying to balance stressed budgets. Defrauders also undermine honest employers who lose bids for jobs because they cannot compete with cheaters who lowball contracts by illegally lowering their workers’ compensation and tax costs. “I couldn’t understand why I was losing out on bids until a light bulb went off in my head. My competitors were cheating. One competitor told me the best thing he ever did was to get rid of his employees by making them independent contractors,”18 the owner of a North Carolina masonry company said. In fact, companies that misclassify their workers expect to reduce labor costs up to 30 percent in part by not paying workers’ compensation premiums, the U.S. Deputy Secretary of Labor said in quoting the Mason Contractors Association of America at a 2010 Senate hearing.19 Honest business owners thus have a simple choice: Make sure the laws are enforced and the playing field is fair, or join the cheaters. More must be done despite aggressive attempts in several states. Actions in one state can be undermined by another state that is a safe haven for cheaters, exports illegal employment practices, and tolerates the hiring of undocumented workers. New York created a task force in 2007 to study20 misclassification. Up to 10 percent of employees in the audit may have been misclassified, including nearly 15 percent in the construction industry, reveals a recent study. Misclassifying just one percent of employees would cost the state Unemployment Insurance Trust Fund $198 million annually, and 95 percent of New York workers who claimed they were misclassified as independent contractors were re-classified as employees after a state review.21 What will similar audits show in states like North Carolina, where no one seems to be going after premium fraud? It is likely that this crime is increasing significantly in most states. In part because of this concern, the Internal Revenue Service started a three-year employment tax audit program in February 2010. These audits include examinations of employee/independent contractor status, and the results should be published later this year.22 Employers can lose contracts and income to cheaters who underbid for jobs because misclassification had

lowered their operating costs. “I’ve been a skilled plumber for 27 years and I can’t get a piece of it,” Connecticut plumber Tom Lacovacci, a married father of two teenage boys and a four-year-old girl, told the Stamford Advocate in February 2012. “The contractors I work for can’t get the bids for these jobs ... I can’t cry about being out of work three months because there are guys, a lot of guys, who are out a year and a half, two years. Three months is nothing nowadays. And it’s not like things are good for the poor guys who get these jobs. They aren’t getting paid much, they get no benefits and nobody’s making sure they’re safe.”23 How are states fighting the problem? Government agencies are using new technologies to share information. SAS, a privately owned software company in Cary, N.C., developed software for the state of Washington several years ago to detect collusive patterns of fraud. The software helps uncover $274 million in lost revenue each year and has returned $8 for every $1 invested.24 The integration of data from revenue, labor, workers’ compensation, insurance and the state Attorney General’s office is essential to understanding and uncovering misclassification fraud. Louisiana and other states now are using the software as well. Stolen tax dollars create one of the biggest motivators for fraud detection and prosecution for individual states. Study after study shows that states lose millions of dollars each year through corrupt employers, and the amounts are staggering.25 Governments develop a sense of urgency when they see the size and scope of the income drain. Honest taxpayers, employees and employers should be outraged at the illegal windfall profits made at their expense. Some states impose stop-work orders on construction sites. If the construction supervisor cannot produce a valid insurance contract in a timely manner, the offending employer can be shut down and penalties imposed. New York executed more than 1,000 stop orders in the first 14 months of its crackdown beginning in 2007. The effort resulted in $5.49 million in fines.26 Special white-collar investigative units have been created and funded. Operation Dirty Money is a joint effort by the fraud bureau of the Florida Department of Financial Services and the Broward County Sheriff’s Office. This task force has shut down 27 shell companies and identified $300 million in fraudulent transactions involving shell firms in which employers hide workers from workers’ compensation insurers. By hiding workers, contractors can run large construction firms but still avoid paying the full workers’ compensation premiums. This deception leaves

employees at risk of being injured but without coverage. Honest businesses also lose out.27 Ohio roofer Steve Nesser lied to his comp insurer that employees were subcontractors. Unfortunately, one of his workers was killed in a fiery vehicle crash, and death benefits were claimed under his presumed workers’ compensation policy, but he was uninsured. Nesser was convicted of felony workers’ compensation fraud in February 2013. States sometimes pass special legislation to stop fraud in its tracks. In Utah, LLC corporations typically labeled workers as managers, not employees who would raise a firm’s workers’ compensation premiums. The state passed legislation to ban this corrupt tactic.28 Government construction contracts also should verify that all employees are covered by workers’ compensation, and prohibit competitive contract bids without such proof.29 Aggressive enforcement is essential to stopping the rising tide of misclassification fraud. It should be combined with better education and warnings to employers. Some employers believe they can declare an employee an independent contractor without even understanding the legal distinction. Some states are considering creating statutory definitions. The insurance industry always has been concerned with the conduct of employees who file bogus workers’ compensation injury claims. Insurers show no tolerance for this type of fraud, nor should they. The industry appears to spend unlimited amounts of money to make sure employee fraud is reduced to the lowest percent possible. Among the tactics are media campaigns ... hiring private detectives ... investigating claims thoroughly from the beginning ... taking recorded statements using welltrained adjusters ... cross-referencing claim histories ... sending claimants to independent medical exams ... reviewing past medical records ... hiring skilled attorneys to represent employers ... and always being alert to fraud. Employee misclassification steals huge amounts of money that dwarf bogus employee injury claims.30 Yet this crime appears to be seen in a lesser light even though the industry loses untold millions of premium dollars annually. A single scam can illegally avoid hundreds of thousands of dollars in premiums, or more. From a plaintiff’s employee’s perspective, it is hard to understand why insurance companies sit on the sidelines while they are being blatantly defrauded. There are several possible explanations: • Raising rates offsets stolen premiums, so the industry thinks it bears no real loss; • Insurance agents do not want to insure an employer after the employer has been caught cheating; • Severely injured workers probably will get medical Fall 2013 • THE BIG “I” VIRGINIA

•

care and benefits through social programs, so the employee’s financial loss is not total; and Insurers do not want to offend employers to whom they may sell lucrative policies — including current clients the insurer suspects or knows are cheating (but see second reason above).

Some, none or all of the above reasons may apply for a given insurer. Most cheaters of any stripe do a simple risk-reward analysis, David Callahan writes in his book The Cheating Culture. Is the punishment worth the reward if they are caught.31 So far, thousands of employers are making that riskbenefit assessment, and they are profiting handsomely. Unless insurance companies take stronger steps to investigate, expose and prosecute misclassification, the problem will keep growing until cheating on premiums becomes the norm, not the exception. It’s a spreading cancer. What can insurance companies do? The insurance industry can play a major role in combating this massive fraud: • Increase onsite audits, especially in construction and especially with small construction companies. Many are paying workers off the books; • Increase audits of insurance brokers; • Track the number of insurance certificates issued to one employer. Why should a small company need hundreds of certificates? • Employees, the public, government and honest employers should be able to easily determine if an employer has workers’ compensation coverage. If employers know anyone can check quickly to see if coverage exists and what is covered, they will lose the ability to hide. Insurance companies should make public the policy dates (including cancellation dates), number of employees covered and employee classification status. Declared payroll also should be available to regulators. All added names and locations covered by one policy must be clearly identified, as must the claim code for each insured. Basic coverage information is easily accessible, for example, on a website in South Carolina;32 • Ghost policies or minimum-coverage policies can be legitimate, but the abuse of this coverage far outweighs the benefits. These policies should be abolished. If not, agents should be required to ask basic questions of a prospective insurance buyer, such as: “Do you intend to hire any employees in the future? Do you work for several different companies, or just one? Do you have complete control over 42

THE BIG “I” VIRGINIA • Fall 2013

•

how you do your job? Do you plan to hire any independent contractors?” Upper-level management of insurers should be held accountable, given the millions of premium dollars stolen each year. Rank-and-file insurance personnel should be encouraged to report potential misclassification fraud to their supervisors; and The industry should use its influence with state governments and law enforcement to prosecute employers and their conspirators who cheat the insurance and tax systems. The industry also should develop training programs to help law enforcement identify premium fraud.

Conclusion Misclassification fraud is alive and thriving. Think about it the next time you pay your taxes. Think about it when you hear of depleted unemployment funds. Think about it when you pass a construction site and wonder how many employees are working without insurance. Think about the values we try to instill in our children, and how honesty is usually at the top of the list. Finally, think of the young man in the forklift accident, or anyone who suffers a catastrophic injury on the job. Could this be your child, your spouse, or the child of a friend? The insurance industry condones cheating when it ignores people who blatantly cheat the system, and to stand by and watch the system being corrupted will come back to haunt those who do nothing. About the author: Leonard T. Jernigan, Jr. is founder of the Jernigan Law Firm in Raleigh, N.C. The firm specializes in workers’ compensation law and civil litigation. Jernigan is one of the few U.S. attorneys the National Football League Players Association has certified to represent its members. He also is author of the definitive text North Carolina Workers’ Compensation Law and Practice, and is an adjunct professor at North Carolina Central University. “Republished with permission of the Coalition Against Insurance Fraud, www.InsuranceFraud.org.” Endnotes: [1] Employee Missclassification. Improved Coordination, Outreach, and Targeting Could Better Ensure Detection and Prevention. United States Government Accountability Office. August, 2009. http://www.gao.gov/new.items/d09717.pdf [2] GAO-09-717 and Planmatics, Inc. Independent Contractors: Prevalence and Implications for Unemployment Insurance Programs, February 2000. Lalith de Silva et al., Independent Contractors: Prevalence and Implications for Unemployment Insurance Programs, prepared by Planmatics, Inc., for U.S. Department of Labor, Employment and Training Division (2000) iii. [3] Misclassified Employees in Tennessee, Dr. William Canak & Dr. Randal Adams, pp. IV and VI (January 15, 2010). [4] Dan Carden, Worker Misclassification Costs State Big Bucks, The Times of Northwest Indiana, Oct. 17, 2010. Available at www.nwitimes.com/business/local/ worker-misclassification-costs-state-big-bucks/article_adf3cda0-f5ec-5fb9-97a5886d17349961.html

[5] Mandy Locke & David Raynor. When N.C. Employers Dodge Workers’ Comp Costs, Employees Pay the Price, NEWS & OBSERVER, Apr. 1, 2012. Available at www. newsobserver.com/2012/04/01/1972200/when-nc-employers-dodge-workers.html [6] Governor’s Exec. Order No. 125, issued Aug. 13, 2012. Available at www. wageandhourcounsel.com/uploads/file/NorthCarolinaExecutiveOrder125.pdf. [7] H.B.237, ratified July 1, 2012. [8] First Report of Governor’s Task Force on Employee Misclassification, issued by Wayne Goodwin, Commissioner of Insurance for the State of N.C. and Task Force Chair (Jan. 23, 2013). [9] For example: CA, CT, FL, LA, MA, MI, NJ, NY, SC, TN, TX, UT, VA, WA . [10] Telephone Interview with Matthew F. Capece, Representative of the General President of the United Brotherhood of Carpenters and Joiners of America (Feb. 17, 2013). [11] Keith L. Martin, Four Charged With 144 Felonies in Alleged Workers’ Comp. Fraud, INSURANCE & FINANCIAL ADVISOR WEBNEWS, May 13,2009, available at http://ifawebnews.com/2009/05/13/four-charged-with-144-felonies-in-allegedworkers%e2%80%99-comp-fraud [12] Ruben Vives & Andrew Blackstein,Security Chief, Two Executives Plead Not Guilty to Workers’ Compensation Fraud, Los Angeles Times blog, Apr 17, 2009. At http:// latimesblogs.latimes.com/lanow/2009/04/securitychief.html [13] News Release, Woman Sentenced for $30-Million Premium Insurance Fraud Scam, Orange County (Calif.) District Attorney, November 30 , 2011. http://www.orangecountyda. com/home/index.asppage=8&recordid=2727&returnurl=index.asp%3Fpage%3D8% 26pagenumbe%3D1%26pagesize%3D30000%26deptid%3D%26archive%3D0%26 sl_month%3D12 [14] Sun Sentinel (Fla.), 8 charged in $70-million Workers’ Comp Scheme, Sun Sentinel, July 27, 2012. http://articles.sun-sentinel.com/2012-07-27/business/fl-dirtymoney-20120727_1_comp-scheme-compensation-fraud-construction-companies [15] U.S. Department of Justice, Former Owner of Temporary Unemployment Agency Sentenced for Under the Table Scheme, news release, U.S. Department of Justice, November 3, 2011. http://www.justice.gov/usao/ma/news/2011/November/ MahansentPR.html [16] Attorney General of Massachusetts, Watertown Roofing Company and its Owners Plead Guilty and are Sentenced for Labor Violations (Jan. 10, 2012). www.mass.gov/ago/ news-and-updates/press-releases/2012/2012-01-10-newton-contracting-plea.html [17] Washington State Department of Labor & Industries’ Fraud Prevention and Compliance Program. www.Lni.wa.gov/Main/Fraud. [18] Presentation to Governor Perdue’s Taskforce on Misclassification by Doug Burton, a commercial masonry contractor, October 29, 2012, in Raleigh, N.C. [19] Statement, Seth Harris, Deputy U.S. Secretary of Labor, before the U.S. Senate Committee on Health, Education, Labor and Pensions, June 17, 2010. www.dol.gov/_sec/

newsletter/2010/20100617-2.htm [20] The Cost of Workers Misclassification in New York State, Linda Donahue, James Ryan Lamare and Fred B. Kotler, J.D., Cornell University ILR School, February 2007. http:// digitalcommons.ilr. cornell.edu/cgi/viewcontent.cgi?article=1009&context=reports [21] Annual Report of the Joint Enforcement Task Force on Employee Misclassification to Andrew Cuomo, Governor, State of New York, Feb. 1, 2012, p. 3. [22] Construction Labor Report, IRS on Track for Targeted Audit of Employers; Bulk Will Be Small Businesses, Official Says, (Feb. 11, 2010). www.bna.com/construction-laborreport-p6002/ [23] Stamford Advocate, Angela Carella: Labor officials target ‘flat-out fraud,’ February 4, 2012 http://www.stamfordadvocate.com/local/article/Angela-Carella-Labor-officials-targetflat-out-3036093.php [24] Corporate Compliance Insights, A Look at Washington L&I Efforts to Beat Down Fraud, Daniel W. Draz, December 2, 2011. http://www.corporatecomplianceinsights.com/ fraud-flashpoints-a-look-at-washington-department-of-li’s-effort-to“beat-down”-fraud-losses/ [25] Size and Cost of Payroll Fraud: Survey of National and State Studies by Matthew F. Capece, February 11, 2013. [26] Workers’ Comp Board Issues 1,000th Stop Work Order, New Release, New York State Workers’ Compensation Board, September 3, 2008. http://www.wcb.ny.gov/content/main/ PressRe2008/1000stopwork.jsp [27] Press release: CFO Atwater Announces Arrest of Ringleader in “Operation Dirty Money.” www.myfloridaafco.com/sitePages/newsroom/pressRelease.aspx (accessed Feb. 27, 2013). [28] Utah, S.B.35, available at http://le.utah.gov/~2011/bills/sbillamd/sb0035s01.htm. (accessed March 1, 2013). [29] For example, a news reporter discovered one employee who had been injured while working on a $125 million Wake County Detention Center in Raleigh, N.C., yet the employer had no workers’ compensation coverage. Mandy Locke, Tax Dodging Companies Hid Among Layers of Subcontractors, News Observer, Aug. 19, 2012. Available at www. newsobserver.com2012/08/19/2278458/tax-dodging-companies-hide-among.html [30] According to Texas Mutual Insurance Company, in 2005 there was $446,826.00 in employee fraud, and $12 million in employer fraud. The average claimant fraud in Texas 2006-2009 was $2,152.00 per claim. http://web.archive.org/web/20080801153218/www. texasmutual.com/fraud/fightfraud.shtm [31] David Callahan, The Cheating Culture: Why More Americans are Doing Wrong to Get Ahead, Harcourt, Inc., (2004). [32] www.wcc.sc.gov/Pages/default.aspx

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