Agency Bill Vs. Direct Bill: Avoid Confusion

When I started in the agency side of the business in 1975, direct bill was strictly a Personal Lines billing method, used predominantly in Personal Auto. Today, direct bill has found its way into the Commercial arena.

The claim involves a $200,000 lawsuit against both the agent and the carrier for improper cancellation of a Fidelity Bond. The agent had placed a Commercial package policy for a homeowners association. The premium was direct billed, except for the bond, which was agency billed.

When the client completed the application, the premium they paid to the carrier included the premium for the bond. The carrier then refunded the bond portion to the client on the basis that it was to be agency billed. Meanwhile, the agent, looking for payment of the bond, was following up with notices for the owed bond premium. When the client didn't respond, the agent requested that the carrier cancel the bond for non-payment of premium.

The homeowners association then reported an embezzlement of some $200,000 by a prior organization president. When they submitted a claim under the bond, the carrier denied coverage due to the cancellation. Questions of agency liability focused on the conversations and information communicated by the agency to the client, especially where there was a difference in the method of premium billing.

The case was resolved when the carrier accepted coverage on the basis that the loss occurred before the cancellation.

How might the agency have avoided the claim? This situation had the built-in problem of two methods of premium payment: Direct and agency billed. The client disputed the subsequent cancellation and claim denial. Documentation of the discussion between the client and agent would have assisted in the agency's defense. The matter turned out favorably due to the efforts of defense counsel and the carrier's acceptance of coverage for the underlying claim.

Could a situation like this arise in your agency? It could probably happen in just about every agency with options for direct bill or agency bill. Proper communication and documentation, not just to clients but also among your staff, are essential to avoiding problems.

When you send a policy to a customer, make it quite clear to them who they're supposed to pay for each coverage. Attach a note to the policy. If you change the billing method, be certain to bring this to the customer's attention. If you deliver the policy personally, put a note on it to avoid confusion.

Because your staff will be advising customers on billing methods, be certain to have a means of identifying the billing methods on each of the policies. Don't just put a note on the file jacket. If the billing method changes, someone might forget to change the notation.