The Marketing and Selling of Insurance DIRECT WRITERS

As our economy and markets have changed, other insurance marketing channels have developed. While these alternate marketing channels for insurance initially focused on motor vehicle insurance, more recently they have expanded to include homeowners insurance as well. The problem with these direct marketers is that there is no practical ability for the average insurance buyer to compare the terms and conditions of the policies offered in order to determine whether or not the coverages offered meet the needs of the insurance buyer. And there is no one to provide any counseling with respect to decisions involved in the purchase. You do not have the ability to call on the services of an agent to help you choose the policy limits appropriate to guarantee that you have sufficient coverage to repair or replace your residence and possessions in the event of a major loss. Many of the 800-number or Internet sellers of insurance have engaged in widespread television advertising of their policies. These TV commercials frequently emphasize potential premium savings as the inducement to buy that company’s policies. Premium savings does not mean much without advice about variations in optional coverages or how much in limits the average person needs to purchase for adequate protection. These direct sales operations present a potential trap for the unwary by creating a serious risk of uninsured or underinsured loss exposures. A particular disadvantage of many such direct marketing insurers is that there is often little or no opportunity to review the policy forms utilized to determine whether they contain unanticipated restrictive terms. Certainly, in order to be licensed to sell policies in any particular state, the policies’ terms necessarily will be in compliance with that state’s minimum requirements. However, that does not ensure that such policies will necessarily provide the best coverage for your particular needs. Compounding this problem is that most insurers charge a penalty if a policy is issued and then cancelled at the insured’s request midterm. EXAMPLE: You purchased a one-year policy and cancelled it after two weeks because you discovered it contained restrictive terms that did not provide coverage for a particular loss exposure. In this situation, you will receive a refund that is less than fifty-weeks worth of the premium. Unless a direct marketing insurer offers the opportunity to examine the policy in advance or offers a no-charge return policy, you might want to pass. Instead, avail yourself of the services of a local agent you can meet in person and discuss your insurance needs with to obtain the best compromise between cost and extent of coverage provided. RETAIL VERSUS WHOLESALE BROKERS Many insurance consumers will never need to deal with the concept of retail brokers versus wholesale brokers. An insurance broker is the agent of the insured and can submit applications for coverage to insurers for which the broker does not have an agency appointment. Some insurers will only accept applications from a broker with which they have an agency relationship. In addition, coverages can be placed with nonadmitted insurers only through an excess or surplus lines broker.A wholesale broker is a broker involved in the procurement of a policy that does not have a direct relationship with the insured. For example, an applicant for a personal auto policy might not be an acceptable risk to standard carriers due to a variety of underwriting factors, such as age or poor loss history (i.e., excessive number of citations or accidents). The problem is, in many states, surplus lines regulations and statutes are not scrupulously observed. And, when they are not, it is usually to the average consumer’s disadvantage. If an insurance agent you may have turned to suggests that he or she is going to provide you with a quote or recommends that you purchase a policy through a nonadmitted insurer (a surplus lines broker), you should start asking some pointed questions as to why. A policy issued by a nonadmitted insurer in your jurisdiction is not protected by your state’s insurance guaranty fund. In the event that insurer becomes insolvent, your policy is worthless. For the sake of some premium savings, you are completely unprotected in the event of insolvency of a nonadmitted insurer. When you place insurance with an admitted insurer, you are protected up to the limits established by your state’s insurance guaranty fund in the event your insurer becomes insolvent. In general, that means you get a lawyer appointed to defend you if you get sued and a covered judgment or settlement will be paid up to the covered statutory limits of your state’s guaranty fund. It also means that your covered automobile physical damage claim or claim for damage to your house or possessions will be paid, subject to the statutory limits. For example, in California, under Insurance Code section 1063, the maximum amount of a claim payable by the California Insurance Guaranty Fund is $500,000. That is an amount sufficient to cover most serious liability claims that the average homeowner is likely to face. It also is an amount sufficient to cover many partial losses to a residence and contents, even though, in the face of escalating construction costs, it may not, in some cases, be sufficient to cover total losses. There is a reason why one of an insurance agent’s most essential functions is to place coverages on behalf of their customers with insurers that are financially strong. This is because the amounts typically available in the event of insurer insolvency under the various states’ insurance guaranty funds may be less than the loss exposures of many insureds. State laws exist that require warnings to the insurance purchaser of the risks involved in purchasing insurance from a nonadmitted carrier. However, few, if any, brokers involved in the sale of such policies generally warn of or explain these risks and the trade-offs involved to their customers adequately. This is particularly true in the personal auto liability coverage context, where these abuses are most prominent. A far too common circumstance, particularly in major urban areas, with large numbers of substandard risk insureds, is for high-volume brokers to run mass-marketed commercials, promising to be able to provide auto insurance to anyone, and at great savings. Such mass marketers of insurance often emphasize that coverage can be available for low down payments, and low monthly payments. These representations are often highly deceptive. Such operations often sell ridiculously expensive, low-limits policies, often issued by nonadmitted insurers. Rarely do such operations inform their customers of their state’s assigned risk programs, which, if applicable, usually provide better coverage than that from a nonadmitted insurer. Unfortunately, the fact is that while certain high-risk insureds may need to consider purchasing insurance from nonadmitted insurers, these insureds are usually commercial insureds with higher exposure to risk and loss histories—individually or as an industry classification. This leaves them perceived as high-risk from an underwriting standpoint. The average personal auto or homeowners insured should rarely be in such a position. Other disadvantages exist using a nonadmitted insurer. Nonadmitted insurers prey on persons who have been advised that they are substandard risks, particularly in the personal auto context. The claims service offered by nonadmitted insurers is generally poor or nonexistent. They offer and sell policies that are often apparently cheap (compared with the premiums that would be charged by an admitted insurer) and they let the insured nominally satisfy their state’s financial responsibility/proof of insurance laws. However, their promises are often functionally smoke and mirrors. An insurer that does not pay claims promptly or does not step in and defend an unsured when he or she has been sued has given none of the protections expected by someone who has purchased an insurance policy. It does you little good when you are faced with a lawsuit resulting from an accident to find yourself having to fight a two-front war—one against the person suing you and a second against your insurer to obtain the coverage that you paid for. Brokers that routinely place personal lines policies with nonadmitted carriers may argue that they are saving their customers money. These claims are usually illusory. In most cases, however, the premium savings do not offset the risks of an uncovered loss in the event of insolvency of the insurer, or in the case of a nonadmitted insurer simply failing to observe its policy obligations. Many nonadmitted insurers are domiciled outside the United States, making suing them and recovering an uncertain proposition. There is almost never any need for an individual or a family to turn to a surplus lines/nonadmitted insurer for personal auto or homeowners insurance. Many states have what are called alternative market mechanisms. Examples of such alternative market mechanisms are automobile assigned risk plans, and FAIR plans. (FAIR refers to fair access to insurance requirements, under the plan established under the California Insurance Code.) Under such plans, all admitted insurers writing automobile or property insurance are required to participate or fund these plans. In the case of most assigned risk auto insurance plans, when a person qualifies (usually by virtue of proof of refusal to issue a policy by a certain minimum number of insurers), he or she is assigned to an insurer that must issue a policy. This is subject to such policy limit and premium limitations as may be established by the plan. Nonetheless, the ability to purchase a policy through an assigned risk plan guarantees that an individual is going to be able to obtain coverage from a standard lines admitted carrier. Assigned risk plan policies are more expensive, but the insured has the security of coverage with an admitted insurer. If the policyholder cleans up his or her loss, violation, or infraction history, he or she can eventually purchase coverage in the standard insurance markets and will no longer need to rely on coverage through an assigned risk plan.

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