潘金莲传媒映画

The fairly recent ruling on how realtors are paid seems likely to dramatically alter real estate sales. I’m not in that business so I don’t know all the ins and outs, both the obvious and the not so obvious, unintentional effects. The crux of the ruling seems to be that sellers should not have to pay the buyer’s realtor’s commission. On the surface, this makes sense. Each party should pay for their own advisor.

Why shouldn’t the same logic apply to insurance? Agents are paid by insurance companies, but the insurance contract is between the insured and the carrier. The agents’ contracts are with the insurer, not the insured. (Depending on the state, the applicable legal definition, the applicable standard of care, and other factors, a “broker” may, or may not, work for the insured but the vast majority of insurance distributors are agents.) Why should the insured not have to pay for insurance advice?

It is much easier to hide the commission in the premium and then for the agent to pretend to work for the insured, and a large proportion of agents pretend to work for the insured. Consider captive agents. They literally work for the carrier. While they may be independent contractors, or not, on paper they can only represent one de facto carrier. They are “captive.” They work for the insurance company. One such carrier even quit training these independent contractors because by training them, the agents might no longer be considered independent contractors. So now you have untrained people selling insurance simply because they have a license. They pretend to work for the insured.

From this perspective, captive agents should be forced to give a disclosure to insureds they are working for the carrier and that if they want true, unbiased advice, they should hire an advisor.

Independent agents have far more flexibility and the opportunity, if accepted, to truly work for the insured but the majority do not. Many are peddlers and order takers.

And most errors and omissions (E&O) carriers, consultants and defense attorneys promote the safety of being peddlers and order takers. In classes they frequently tell audiences: “Don’t offer coverage advice.” “Don’t tell them you are an expert.” “Don’t tell them you are a professional.” To not be a professional is to be an amateur.

Independent agents have an advantage of being paid by the carrier while suggesting, if not outright promising, to work for the insured. Not a smart promise from an E&O perspective, but it is a competitive advantage.

But it leaves the insured out in the cold because they think someone is looking out for them when no one really is. Hiring one’s own advisor is important because it’s not only the carrier/agent relationship that works against insureds, the law also generally works against insureds. The laws in most states require the insured to read, and it may be unsaid, but it also requires them to understand their insurance policy. Unless the agent has created a “special” relationship, the burden is on the insured to read and understand their own insurance. That is a ridiculous standard.

The insurance guru Bill Wilson recently posted a claims situation involving a rented car. His example involved how if you rent a car and let someone else drive, and that other person does not have their own insurance, there is likely coverage in some situations, but not in other situations. His point was that everyone reading insurance policies must understand the policy language in context with the situation. This is why black and white coverage questions are rare. As he wrote, “And consumers are expected to handle their insurance decisions without the assistance of an educated professional?” Exactly!

Agents that offer no real advice are not worth 13%, 14% or 15% commission. Carriers are wasting their money and insureds are being overcharged. Instead, the carrier should pay for their distributor and insureds should pay for their advisor. Minimize the conflict of interest.

For all the agents who want to offer advice but are scared based on what they’ve heard in E&O classes, really good news exists. First, agents that truly offer quality advice have fewer E&O events. You’ve been scared into believing the wrong thing (mostly because the rest of the class consists of order takers and the speaker doesn’t want to deal with all the bad reviews he/she would get by speaking the truth). Second, you can make a lot more money by offering quality advice. The business model must change but you are being shorted by insurance companies at 14% commission. The carriers, like carriers always do, prefer to strike a solution based on the law of large numbers. This law is dead today on a claims level and commission level. The logic is that order taker agents are worth 8%-9%. But quality agents are worth around 18%. So, they pay in the middle.

Professional agents are worth around 18% and if you change your business model to be a true advisor, clearly and legally on the side of the insured, you can make 18%. The business model must change because this model requires more education (for example, you must be able to succinctly describe why the uninsured driver in the rental car example would be covered under some instances and not others), more time, and a much higher standard of care. The 18% commission is not a free ride, but it is close because competition is much less. Most agents may want to offer advice, but they won’t put the work into being able to offer competent advice.

The process for building your business model to make 18% varies depending on the state, the line of business involved, and the peculiarities of your agency. High quality legal advice is required (let me know if you need references) but I’ve never had a client fail when going to this model and none have seen additional E&O claims. In fact, their E&O exposures have decreased. And they go home every night feeling much more fulfilled and that they have done well for their customers.

It will be interesting to see if the realtor ruling opens the door to similar suits in the insurance industry. It makes sense that at the least, additional disclosures should be required to identify for whom the agent is truly working.