Situation: I am a P/C agency principal and I have been pursuing Life and group business for the past few years. The results have been good so far, but I'm getting nervous about liability exposure. First I read about Kentucky agents who are being held liable for unpaid claims written in an insolvent multiple employer welfare arrangement (MEWA). Then I read that employees and retirees whose pension and 401(k) funds were placed in annuities and guaranteed investment contracts (GICs) could sue their employers if the carrier defaults. The possibility exists here, too, that employers could sue their agents. Some of my friends have written for companies that went bust, which carried A or A+ ratings. Am I being overly concerned about my liability exposure in Life and Group business?
Solution: You're right to be concerned, as anyone should be about liability exposure in any activity. Whether you are being overly concerned is another matter.
You raise two different matters: MEWAs and pension and 401(k) plans. MEWAs are a form of self-insurance created by pooling funds from two or more employers. Many insurance commissioners have issued strong warnings -- even prohibitions -- against their sale. The majority of agents won't handle them. Agents who choose to write MEWA business presumably do so after weighing the risks, or perhaps under pressure from clients. They'd be wise to obtain strong disclaimers from clients. In any event, agents may be forced to cover uninsured losses in MEWAs for plans that they have sold. Employers, too, have taken legal action against agents. Compounding that problem is the exclusion in some E&O policies of losses related to insolvencies. It can get sticky.
Agents can prevent much liability exposure by avoiding the sale of products that are labeled as potentially dangerous by regulators or rating organizations. That might mean selling only insurers rated A or A+ by Best's, or carrying similar high ratings by other groups.
What about 401(k) and GIC funds placed with a carrier which (at the time of sale) did carry Best's A+ rating, but developed severe problems afterward? Shouldn't the P/C agency be concerned about all Life insurance sales as potential liability exposures?
Absolutely -- with caveats. You should be concerned, but not neurotic; careful, but not afraid to move.
The wave of lawsuits against Life insurance agents creates a good news/bad news/good news situation for P/C agencies. The good news is that Life and benefits producers are much in demand as employers face big pressures and heavy premiums in Health coverages, pension funding, and other benefits matters. They need the expertise that you or your associates can bring. The bad news, though, is that the field is strewn with land mines. One misstep can bring trouble, even disaster, for the producer. Some agents are abandoning the Group business, frustrated by its traps and blind alleys. But the good news springing from that bad news is that there is an important market left to producers who are motivated and competent: The P/C agency.
Look at the liability question this way: Suppose one of your best clients said to you, 'I'm going to expand my business into a related field which will double my income, and is important in other ways. I want you, as my P/C agent, to identify my liability exposures, set up loss prevention guidelines so that we avoid bad procedures, and then cover me so I don't have to worry about liability problems.'
Do you think you could handle it, if the reward were attractive enough? Of course you'd get it done.
In your case, the client -- your own agency -- wants to sell insurance. Don't tell us you can't handle that! As in any other case, you lay down basics, get additional expertise if necessary, address the subject, and produce the desired result.