Summer 2013

Tennessee Edition/Summer 2013

What’s your plan leaving to chance?

Professional Insurance Agents/Summer 2013

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or provisions may vary or be unavailable in some states. Policies have exclusions or limitations which may affect any benefits payable.

ProfessionalPolicies Insurance Agents/Summer 2013 Underwritten by Unimerica Insurance Company, Portland, ME. Insurance Program Administered by Lockton Risk Services

Dedicated to the advancement of knowledge and informed opinion for the professional enlightenment and growth of the men and women of the insurance industry.

Cover Story

D epartments

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Plan your agency’s future Mold your agency’s direction with short- and long-term plans

Feature

4 7 9 13 24 26

Update

Readers’ service & advertising index

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Officers and directors directory

Personnel matters In your corner Legal services Your best defense

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Employee Stock Ownership Plans A business-perpetuation planning tool worth considering

Cover design: Roberta Lawrence Statements of fact and opinion in PIA magazine are the responsibility of the authors alone and do not imply an opinion on the part of the officers or the members of the Professional Insurance Agents. Participation in PIA events, activities, and/or publications is available on a nondiscriminatory basis and does not reflect PIA endorsement of the products and/or services.

President and CEO of PIA Management Services Inc. Mark LaLonde, CPIA, CIC, AAI, Communciation Director Mary E. Christiano, Senior Magazine Designer Sue Jacobsen, Member Information Manager Jaye Czupryna, Advertising Sales Executive Susan Newkirk.

“Professional Insurance Agents” is published quarterly by PIA Management Services Inc. PIA Management Services, 25 Chamberlain St., P.O. Box 997, Glenmont, NY 12077-0997; toll-free (800) 424-4244; email publications@pia.org. © 2013 Professional Insurance Agents. All rights reserved.

No material within this publication may be reproduced—in whole or in part—without the express written consent of the publisher.

Professional Insurance Agents/Summer 2013

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Association news 2013 Convention and Trade Show

Complete information about PIA’s 78th Annual Convention and Trade Show is found on the convention web page at www.piatn.com.

Schedule Sunday, July 28 State Legislative Panel, 3-5 p.m.

State legislators, who also have an insurance background, will discuss legislation (i.e., the new workers’ compensation law, health-care reform and the exchange program and uninsured motorists) and how to address the rising number of uninsured drivers in Tennessee.

Reception honoring PIA Partners, 6-7 p.m.

Reception recognizing PIA’s 2013 partners; open to all registrants Opening Night Dinner & Entertainment, 7-10 p.m.

Dinner and entertainment by comedian Keith Alberstadt Monday, July 29 Agency Staff Day Agency Staff Day focuses on CSRs and producers.

Breakfast and Annual Business Meeting, 8:30-10 a.m.

Concurrent Education Sessions, 10:15 a.m.-12:15 p.m.

• Mastering Your Internet Presence presented

by Steve Anderson, CIC. Being found on the Internet takes much more than having an old agency website and a simple Facebook page.

The good news is that it cost little to nothing to get started. This presentation details what you need to do to get started.

• Cyber Liability Insurance: the Importance of Data Privacy and Security presented by Janet Smith. This course will explain where data privacy claims occur and how a cyber-liability policy provides coverage for a commercial insured. Participants will leave with a better understanding of the types of exposure, where claims arise and the financial loss to an insured.

YoPro Leadership Luncheon, 12:30-2:15 p.m., featuring Vanderbilt University’s Athletic Director David Williams II

Trade Show, 2:30-5:30 p.m., featuring Insurance Expo and Technology Fair The Trade Show offers traditional agency products from insurance companies, MGAs, and wholesale brokers, as well as the opportunity to view demos from technology-based companies.

Happy Hour in the Trade Show, 4-5:30 p.m.

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Professional Insurance Agents/Summer 2013

Tuesday, July 30 General Session & Keynote Speaker, 9-11:30 a.m., featuring Maj. Dan Rooney Installation of the PIA board of directors and president, presentation of the Agent of the Year and Company Representative of the Year awards, recognition of convention sponsors, awarding of agent and company grand door prizes and keynote address.

In the keynote address, Maj. Dan Rooney will share his inspiring story of combat and serving others, while highlighting the importance of faith, teamwork, accountability and finding your life’s mission. Maj. Dan Rooney, patriot, philanthropist and professional golfer.

Speakers Maj. Dan Rooney is an inspirational patriot, philanthropist and professional golfer whose dedication to his military brethren led him to found an organization in their honor, Folds of Honor. Rooney flew three tours of duty in Iraq and exemplifies the best of the American spirit. Rooney was the only motivational team speaker for the U.S. Ryder Cup team in Wales, an amazing opportunity that has been historically reserved for presidents.

Steve Anderson, CIC, provides information to insurance agents on how to use technology to increase revenue and/or reduce expenses. He speaks professionally across the country on the future of technology, the social web, and how insurance agencies can establish their Internet presence. He has more than 30 years’ experience in the insurance industry.

Janet Smith is president of Bailey Special Risks Inc., in Hendersonville, Tenn., a specialty wholesale insurance brokerage founded in 1989. Bailey’s offers coverage for professional liability, management liability and privacy and security. She is a frequent

Association news speaker on the subject of cyber liability and EPLI and has conducted training seminars, workshops and convention seminars for several state insurance associations.

David Williams II is Vanderbilt University’s vice chancellor for athletics and university affairs. Firmly placing his stamp on Vanderbilt Athletics, he has positioned the program among the most innovative in the nation. Commodore athletics is more fully integrated into the total Vanderbilt student life experience, and under his tenure, the grade point for Vanderbilt student-athletes has reached its highest level in more than two decades.

Keith Alberstadt grew up the son of a Vanderbilt professor and a craft artist. The result is a clever comic with sharp perception, creative sarcasm and a treasure trove of unique material. While performing, Alberstadt takes pride in laughing at himself and his “inner dork,” which he attempts to prove is something in all of us.

Platinum partner profile CMS Insurance Service Inc. Ripley, West Virginia (304) 372-1138 www.cmsinsurance.net

Doing business in Tennessee, Kentucky, West Virginia, Indiana and Missouri

Senior executives

Conn Johnson, president and CEO Mark Johnson, vice president and COO Tyler Siddens, regional marketing manager

History Conn and Joyce Johnson began an independent insurance agency in a little town in West Virginia 36 years ago—Johnson Insurance Agency. Today, Johnson Insurance is a family-owned agency that has grown from the ground up. Sons, Mark and Brian, who were literally raised in the agency, are active in the business today.

In addition to the responsibilities of running an agency, Conn ran a small farm mutual company for five years and earned the respect of many insurance professionals throughout West Virginia. The knowledge and perspective gained from his “real-world insurance agency” experiences provided the inspiration for CMS Insurance Service Inc. Having been agency owners, Conn and Joyce understood the challenges and true needs surrounding the independent agency.

Thus, CMS developed its unique philosophy out of need within its own agency and with a strong desire to help other independent agencies facing similar needs & challenges.

Philosophy

CMS Insurance Service’s philosophy is: “Our partnerships are built on trust. We value the independent agency system because we are independent agents just like you. At CMS, we take pride in doing business the right way and with integrity. We continuously ask ourselves: ‘How would we like to be treated as agents?’ Our company philosophy was built on these principles and we’ve been doing it this way for more than 30 years—that’s our commitment to you. We want to partner with agencies that share the same values and are looking for a ‘real’ partner who can truly help.”

Appetite

CMS Insurance Service provides commercial- and personal-lines markets with a wide variety of companies. “We are a general agency; however, we are not a broker. We partner with agencies to provide markets and services to help each agency that has a need. If you partner with CMS, there are no fees or dues, you are the agent and you own your book of business.”

“As the market place becomes more difficult for the independent agency, we at CMS offer a very cost effective way for the smaller to mediumsized agency to stay competitive. Our business model is unique to the industry—we feel that it perpetuates a true partnership between us and our family of agents. In this ‘modern age’ where it seems that certain principles do not matter, we still believe that insurance is a business of relationships and trust.” —Mark Johnson, vice president and COO PIA of Tennessee and CMS Insurance Service proud partners for independent insurance agents

Professional Insurance Agents/Summer 2013

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Platinum partner profile Argos Group Inc.

2200 Resource Drive, Suite 101 Birmingham, Alabama 35242 Doing business in Tennessee, Alabama and Mississippi

Senior executive

Todd Larry, president and CEO

Tennessee staff

Deb Greene, underwriter Renetta Hawkins, underwriter Ron Murphy, senior underwriter Diana Tabor, field auditor Ivan Gunn, claims supervisor Kristi Gant, claims adjuster Annette Smith, benefits claims specialist Gene Josey, loss control Tommy Bills, loss control Brenda White, marketing representative Janet Cornett, marketing representative Maxine Long, marketing representative

History

Argos Group was formed in August 2007 as a General Agent for Benchmark Insurance Co. and SteadPoint Insurance Co. in Tennessee.

Philosophy

Argos Group’s philosophy is: “At its essence insurance is a relationship business and our continuing goal is forge a strong relationship with each one of our agents. We strive to be consistent and disciplined in our underwriting so agents can consistently rely upon Argos year in and year out.”

Appetite

Workers’ compensation.

“We continue to aspire to become Tennessee’s premier small-account workers’ compensation provider by offering Tennessee independent agents and their clients’ workers’ compensation coverage backed by unmatched product and claims support and user friendly technological operations.”—Todd Larry, president and CEO

PIA of Tennessee and Argos Group Inc. proud partners for independent insurance agents

Astonish

www.astonish.com (877) 905-1999

Senior executives

Adam DeGraide, CEO and founder John Boudreau, COO and founder Tim Sawyer, president and founder Rishi Bhatia, chief technology officer Dino Cattaneo, digital marketing officer

History

Over the past 15 years, Astonish has built a complete digital marketing system. The Astonish system has been successfully installed in more than 3,500 businesses across the country in three different industries. In 2007, Astonish had incredible success in the insurance industry, decided to move exclusively to serve the insurance industry and acquired more than 750 agency clients that range in all types, sizes and product specialties.

About Astonish

The Astonish system is changing the way insurance is bought and sold in America. Founded upon our proven “find, see, keep” methodology, the system will help your business: find a higher quantity and quality of sales opportunities for less cost; sell a higher percentage of the sales opportunities generated; and keep more customers for life.

More than 85 percent of insurance consumers look online for their next insurance or financial product. Agencies need a strategy to leverage the Internet to capture people when they are looking for the products you sell, to engage your current customers automatically and to increase the effectiveness of your sales team. Astonish has created that strategy—called “the complete system.” The Astonish system combines digital marketing, coaching and training and the Virtual Profit Center into a comprehensive solution that increases profit.

Astonish uses a blend of digital marketing tools, strategies and processes to increase the effectiveness of your marketing, sales and renewals. The system includes tools like websites, search engine marketing and optimization, social networking, email marketing, mobile technology, blogging and more.

The Virtual Profit Center—the backbone of the Astonish system—was built to do one thing, increase profit. It is a customer-relationship marketing tool built specifically for the insurance and financial industry.

Our coaching and training program sets the Astonish system apart. We train insurance and financial executives, salespeople and service representatives on how to grow businesses quickly, effectively, and easily.

PIA of Tennessee and Astonish proud partners for independent insurance agents

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Professional Insurance Agents/Summer 2013

Personnel Death in an agency Matters

Burand is president of Burand & Associates, LLC. He may be reached at (719) 485-3868 or email at chris@burandassociates.com.

By Chris Burand

I have unfortunately worked with the families, estates and partners of several agency owners who have passed away. Most, but not all, of the deaths occurred unexpectedly. In all cases, the person who passed left their families, estates and partners with far more problems than necessary. So my question to you is this: If you passed away tomorrow, would you leave the people around you with unnecessary problems?

Agency value

One of the worst situations I absolutely dread is when I have to tell a family the agency is not worth anything near what the recently passed relative told them it was worth. Agency values are not what they once were. So, telling your family they can get two times the current worth is wrong and, while possibly innocent, it is still cruel.

Get your agency valued using real-world values so everyone’s expectations are realistic. Put yourself in their shoes. The income from the agency will be eliminated upon the sale. Will the agency’s sales price be enough to support their standard of living?

Being proactive also brings to light things that can be done to increase the value. One of the saddest examples is bad debt. I have seen a number of agency owners die with sizeable accounts receivable that were totally uncollectible and quite old. I have seen these debts total 20 percent, 25 percent, even 30 percent of the agency’s commissions. Even if an agency is worth some high multiple, those bad debts have to be deducted.

Another horrible situation is a widow(er) learning that his or her spouse did not really own all the business on the books. The agency owner always meant to get around to fixing the producers’ contracts, but died before doing so. Also, there have been situations when all the important accounts are written by the deceased and there is no one in the agency to take over those accounts. Those key accounts most likely will not stay with the agency and, therefore,

the value is not going to be what the estate may have thought.

Or another example: keeping lousy books. It is not imperative for an owner to keep good books and good data. It is smart and it is a good business practice, but it is not imperative. However, if a person dies and the books are poor, the agency is not going to sell for full price. Who will pay full price for an agency for which no one knows the true income and the true state of its balance sheet?

I know many readers are thinking these things never happen, but they do. How do you know you do not have similar issues if you have not gone through the process of having your agency valued by a competent agency appraiser? As one client said not long ago, “I did not realize I had so many holes in my data until you valued it and I understand now why you need that information.”

Agency ownership

Do you really own your agency? I have seen a number of situations when the agency’s contracts were so poorly written the agency did not clearly own the business on its books. Maybe the owner knew this at one time and had forgotten because nothing bad had happened. On a day-to-day basis, it didn’t really matter. But when the agency is being valued, especially when it is being valued because the owner has died, it does matter, and that is not when anyone wants to discover the problem. As more and more clusters develop and even age, this is going to be a bigger and bigger problem.

Buy-sell agreements

What happens when a person dies with a bad buy-sell agreement with their business partner?

Unless luck and goodwill are in plentiful supply, nothing good happens. The partner may have been the greatest, most unselfish person on earth, but is his or her family just as unselfish? This is important because

Professional Insurance Agents/Summer 2013

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Show your true colors

at least for a time, the dead partner’s family will be partners, too.

For example, what happens when the surviving partner realizes the buysell agreement poorly defines value?

This may leave the door open for the dead partner’s estate to claim whatever value they desire. I have seen, more than once, claims of two times premiums! It is not always that the other side is greedy; often they are just uneducated about the insurance world. Combine that with grief and a feeling of immense vulnerability, and it may mean they won’t want to settle for a reasonable value.

Another great example is when the agency’s balance sheet is poor and the estate’s trusted adviser discovers some rule of thumb that agencies are worth some multiple of commissions, but fails to understand that balance sheet deficits, especially trust ratio deficits, must be

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Professional Insurance Agents/Summer 2013

deducted. If you have ever tried to buy out a partner at full price while the agency has a trust ratio deficit, you will know how difficult it is to make payroll and other payments.

Last but not least

The readers of this article have the opportunity to fix a wrong before it occurs. The pain survivors feel when a loved one and partner dies is already immense. Why exacerbate it by leaving them a business in a mess?

None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article.

Regulated individuals/entities should also ensure that they comply with all applicable laws, rules and regulations.

In Your Summer reading: Corner Thoughts on E&O

Sullivan is senior partner of The Sullivan Law Group, LLP. He can be reached at (212) 695-0910.

By Robert M. Sullivan, Esq.

The lazy, hazy, crazy days of summer are upon us and as our thoughts turn to vacation plans and time with families, we know that the topic of insurance agent and broker errors and omissions will never be far from our thoughts (kidding).

As light reading for the summer, we thought that it would be helpful to select a couple of fact patterns to use as “talking points” to reinforce some concepts that we have discussed in our column in the past.

Something for everyone

In a recent case decided in the Supreme Court1 of New York sitting in Manhattan, the court was faced with a fact pattern that looks like it was devised by an instructor at an E&O seminar.2 It has a little of everything and serves as an excellent foundation to facilitate a discussion concerning loss control and E&O avoidance. While the case was decided in New York, we believe that the legal issues raised apply to Tennessee.

The case had a simple fact pattern. The plaintiff, a recruiting and search firm specializing in high-level financial services employees, placed an E&O policy through its insurance broker. The policies were placed for the 05-06 and 06-07 policy years and again 08-09 and 09-10.

For the 07-08 year, the broker forwarded an application to the insured to obtain a quote for 07-08. Of course, the insured returned the application 12 days after the 06-07 policy expired. The application was forwarded to a wholesaler, which also was the program administrator authorized by the insurer to issue a quote, and upon payment of the premium, issue a policy effective as of the date of the acceptance of the quote.

The insured sent the broker the premium for the proposed policy and the broker deposited the check into its bank account (presumably its premium account) and issued a check to the wholesaler/program administrator. As luck would have it, the broker’s bookkeeper sent the check to an invalid address for the wholesaler (it closed that office) and the wholesaler never received the check. The check was never

returned to the broker and apparently is forever wandering in a void in the postal system. Upon renewal date of the policy for the 08-09 year, it was realized that no policy had ever been issued for the 07-08 year. However, the broker never advised the insured of the gap.

Naturally, during the gap, the plaintiff entered into certain recruitment contracts, the nonsolicitation clauses of which it was alleged to have breached, and a lawsuit ensued. According to the court’s decision, the policy was written on an occurrence basis.

To add to the confusion, the insurer, unaware of the policy gap, mistakenly appointed defense counsel for the insured. When it realized its error, it entered into an agreement with the insurer to continue the defense subject to a reservation of rights including the right to recover its attorney fees if it was determined that the insurer owed no duty under its policy.

Payment of premium to a broker

One of the arguments advanced before the court by the broker was that there should be coverage for the claim because neither the insurer nor the wholesaler issued a notice of nonrenewal as mandated by the New York State Insurance Law.3 Under that provision, if applicable, the 06-07 policy would have been deemed to have continued in force for the 07-08 policy year. However, the court rejected the application of that statute because it found that the provision did not apply to policies issued on an excess-line basis, which was the case here.

While we are not privy to the details of the court record, we query as to whether an argument could have been advanced that the 07-08 policy was actually in force, as a matter of law, because the insured actually accepted the offer of insurance and made payment to the broker.

Some states, including the states of New York, New Jersey and Connecticut,4 have little-known but powerful statutes that deem a broker to be the agent of an insurer for the limited purpose of receipt of

Professional Insurance Agents/Summer 2013

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the premium. Put simply, payment to the broker is deemed payment to the insurer.

Tennessee does not have statutes directed specifically to receipt of premium, but does have statutes, which in our view, would have the same effect.

In Tennessee, a producer is deemed to be the agent of the insurer in any “controversies” relating to the application.5 In New Hampshire, there is no statute dealing with receipt of

Celebrating 30 Years

premiums, but there is one in which an insurer is charged with facts known to a broker at the time of issuance.6 A colorable argument could be advanced that knowledge of receipt of premium would be imputed to the insurer.

New York’s statute, which is in substance identical to New Jersey and Connecticut’s, provides that any insurer that delivers a policy within the state to a broker or any insured represented by a

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broker is deemed to have authorized that broker to accept premium payments on its behalf.

Thus, we would urge in this case that, because of the statute, the payment of premium to the broker created coverage, thereby relieving the broker of any liability to the insured for lack of coverage.

The wholesaler’s liability

Another aspect of the court’s decision was a finding of no liability on the part of the wholesaler to either the insured or the broker. In its decision, the court found that insofar as there was no direct contractual relationship or common law duty owed by the wholesaler to the insured, the wholesaler could not be cast in damages to the insured.

Moreover, the court dismissed the claims of the broker against the wholesaler finding that the failure to issue the policy was due solely to the negligence of the broker in failing to ensure that payment of the premium for the policy was made to the wholesaler.

Assuming that the statutory agency of the broker discussed in the previous point is not applicable, on the fact pattern presented here, the court would seem to be correct. However, where the claim against a broker is in negligence as opposed to solely in contract, in our view, a potential claim over and against the wholesaler may be viable.7

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Professional Insurance Agents/Summer 2013

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Another issue decided by the court, which adversely affects the broker, relates to the mistaken assumption of the defense of the underlying insured by the insurer when there was not a policy in force.

Under the law of New York, and the argument can be urged in other jurisdictions as well, when an insurer assumes the defense of an insured in the absence of the existence of a policy, an insurer is “stopped” or prevented from arguing that there is no coverage. The doctrine of estoppel is a doctrine in the law that prevents a party from taking a particular position when, by its conduct, it has caused harm to another. Because

control of the defense in a lawsuit is such a fundamental right, when an insurer takes over that control, even mistakenly, the insurer can later be precluded from developing liability.8

Here, the court rejected the estoppel argument based upon a finding that there was a timely reservation of rights and disclaimer by the insurer, rejecting any finding of prejudice suffered by the insurer in the control of the defense.

Nonetheless, such an argument always can be considered and, if successful, can eliminate liability on the part of the broker as coverage would be in force.

The bottom line, and message of this case, is that even where an apparent error has been made, there are always defenses available.

Old emails never die

Finally, and a topic unrelated to our discussion above, we thought we could use a lawyer story to make a point regarding the evil of emails.

In this true story, a large and respected law firm got into a dispute with its client over unpaid legal fees and sued the client. The client claimed that the fees were unreasonable. During the course of the suit over the fees, the law firm was required to produce 245,000 pages of documents, including emails. Contained in the emails were some “unflattering” communications between some associates of the firm regarding the projects being handled for the client, stating in part: “I hear we are already 200k over our estimate—that’s team (law firm)!”

“… and now (partner) has random people working full time on random research projects in standard ‘churn that bill baby!’ mode. That bill shall know no limits.”

Apart from lacking familiarity with the name Webster Hubbell, the movie “The Firm” and statutes regarding mail fraud, the firm should have taken note of a few modest principles of loss control in connection with email communications.

First, if involved in litigation, extensive investigation of the case, including the retrieval of all pertinent emails and evidence, is crucial.

In preparing a defense to an E&O suit, documents and communications that could be detrimental to the case need to be found. If the case is sunk by such documents, it’s time to reconsider the defense and even consider settling the matter before it is too late. We wonder if the law firm would have brought the suit for fees or let it get so far had it known about the existence of the abovecited emails.

Second, emails are like sound bites on the evening news. Exercise caution in what is written, even in jest, because they can come back to haunt you when defending a claim.

Enjoy your summer reading!

The IDW Group LLC v. (agency name omitted), ____ N.Y.S.2d ____, 2013 WL 1607798 (N.Y. Sup., 2013) 3 N.Y. Ins. Law §3426(e)(1)(A) 4 N.J.S.A. 17:22-6.2(a) (New Jersey); C.G.S.A. §38a-715 (Connecticut); N.Y. Ins. Law §2121 (New York) 5 T.C.A. §56-6-115(b) 6 N.H. Rev. Stat. 405:43 7 See Abetta Boiler & Welding Service Inc. v. American International Specialty Lines Insurance Co., 76 A.D.3d 412, 906 N.Y.S.2d 540 (1st Dept., 2010) 8 Indemnity Ins. Co. of America v.

Charter Oak Insurance Co., 235 A.D.2d 521, 653 N.Y.S.2d 135 (2nd Dept., 1997) 2

For non-New Yorkers, and for New Yorkers who do not know, New York’s “Supreme Court” actually is the state’s lower trial court. It is called the “Supreme Court” because under the state constitution, it can hear jurisdiction over all legal matters.

1

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Legal Q&A on health-care exchanges Services By Campbell H. Wallace, Esq.

Health-care exchanges are getting national coverage. PIA has compiled the following questions and answers to help professional, independent insurance agents understand how they will be affected by these exchanges.

Wallace is PIA of New York, New Jersey, Connecticut and New Hampshire’s government affairs counsel.

Q. In general, what can you tell me about exchanges?

A. A good broad-based working definition is an organized marketplace designed to help people shop for and enroll in health insurance coverage. Going beyond that, what most consumers, brokers and insurers will experience as “an exchange,” as related to Patient Protection and Affordable Care Act health-care reform, is some version of a web-based portal on which people will be able to purchase health insurance.

Q. Is that all there is to the exchange—just a website?

A. The exchange is more than just the immediately visible web interface. Some commentators have analogized it to online shopping. While this is not entirely inaccurate, there is substantially more going on in the background of an online exchange that presents a prospective purchaser with insurance options than an e-commerce site selling widgets. Exchanges are IT-intensive creations that pull in data from a number of existing databases related to a purchaser’s health insurance profile. They must be able to coordinate a number of factors such as, but not limited to, the applicant’s citizenship status, Medicaid eligibility and life events to determine premium subsidy eligibility and assist in simplified enrollment. For more, read here: http://1.usa.gov/qG3GgB.

Q. I’ve heard that different states took different paths with regard to setting up an exchange—what can you tell me?

A. Some states took the opportunity to create and build an exchange from scratch, some partnered with the federal government, some rejected any active role in creating an exchange and opted to let the U.S. Department of Health and Human Services operate the exchange in their state, and others refused to cooperate at all, initially.

Tennessee announced in 2012 that it would default to a federally facilitated exchange (www.tn.gov/nationalhealthreform/exchange.shtml).

Q. What are the plans that will be available on an exchange?

A. “Qualified health plans” will be sold through the exchange. They are designed to be easily compared in terms of what is covered and what the overall value of the plans are. Healthcare.gov defines a QHP as “a plan, certified by an exchange, which provides essential health benefits, follows established limits on cost-sharing (like deductibles, copayments, and out-of-pocket maximum amounts) and meets other requirements. A qualified health plan will have a certification by each exchange in which it is sold.”

Individual and small group plans (exchange and nonexchange plans alike) must offer 10 essential health benefits. They are: 1.) ambulatory patient services; 2.) emergency services; 3.) hospitalization; 4.) maternity and newborn care; 5.) mental health and substance use disorder services, including behavioral health treatment; 6.) prescription drugs; 7.) rehabilitative and habilitative services and devices; 8.) laboratory services; 9.) preventive and wellness services and chronic disease management; and 10.) pediatric services, including oral and vision care.

For more, read here: http://1.usa.gov/XZyfrL and http://1.usa.gov/sfgzym.

Q. What about the “metals” I’ve been hearing about?

A. Metal tiers (platinum, gold, silver and bronze) represent a plan’s actuarial value. Actuarial value, as described on the Center for Consumer Information and Insurance Oversight site, represents “the percentage of total average costs for covered benefits that a plan will cover.” Platinum plans cover 90 percent, gold covers 80 percent, silver 70 percent and bronze 60 percent.

Q. Will I be able to sell through the exchange?

A. If you would like to, most likely, yes, you will be able to. Producers looking to sell through

Professional Insurance Agents/Summer 2013

13

the exchange will need training and certification, the details of which will vary by state.

Q. Will there be education by the exchange or by PIA about the exchange?

A. Absolutely. PIA is in contact with the departments of insurance of various states regarding the necessary training, and PIA is working to be an authorized provider of this education. PIA National also is working with the HHS to present education on other exchange issues.

dis•tinc•tion di-’sti[ng](k)-shen e

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et your business the distinction—and the attention—you need to prosper.

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Professional Insurance Agents/Summer 2013

Q. Can brokers sell through an exchange? Can they be compensated?

A. Yes. Brokers and agents are allowed to sell plans offered through an exchange. However, the compensation models vary by state. Some states have reported that they plan to allow agents and brokers to receive commission directly from the carrier offering the plan, while others are considering paying commission from the exchange, which first collects it from the carrier. Federally administered exchanges will not pay commission to brokers, but allow them to continue their existing compensation with carriers. The Center for Medicare & Medicaid Services’s statement on it is as follows: Federally facilitated marketplaces including state partnership marketplaces will not establish a commission schedule or pay commissions directly to agents or brokers. As is the case in the market today, we expect that the amount and terms of any commission would be negotiated by the issuer and the agent or broker. However, we note that HHS has established a QHP certification standard for issuers seeking certification in federally facilitated marketplaces and federally facilitated SHOPs that would require QHP issuers to pay the same agent and broker compensation for enrollment through the federally facilitated marketplaces and FF–SHOPs [Federally facilitated Small Business Health Option Programs] and for enrollment in similar health plans offered outside the federally

facilitated marketplaces and FF-SHOPs. Q. I’ve heard a lot about navigators, what are they, really?

A. The role of a navigator helps to best describe what a navigator is. The body of regulation regarding navigators, (45 CFR 155.210, available at: http://bit. ly/1095wBO) states what a navigator’s duties are. Paraphrased, they are to: • maintain expertise in eligibility, enrollment, program specifications and conduct public education activities to raise awareness about the exchange; • provide information and services in a fair, accurate and impartial manner, and in a manner that culturally and linguistically is appropriate to the needs of the population being served by the exchange.

• facilitate selection of a QHP; and • provide referrals to appropriate bodies responsible for resolving enrollee grievances, complaints or questions regarding their health plan.

Q. But aren’t navigators just going to sell plans to my clients?

A. No. Navigators are intended to assist those in need of understanding the changes brought about by the PPACA, specifically their ability to access coverage through an exchange, and to help with enrollment into the exchange. In various states, the specific details about the forms of the navigator programs are still being finalized. Regardless, the general concept behind navigators is that they will work to increase awareness of the availability of exchange-based coverage, and to assist people looking to purchase coverage through the exchange. Ultimately, the enrollee will purchase his or her coverage through the exchange, not through the navigator. Furthermore, every state’s laws hold that any person who sells, solicits or negotiates insurance is required to be licensed as a producer, a requirement that applies whether a person or entity is operating as a navigator or not.

Q. How will navigators get paid?

A. Federal law states that navigators may not “receive any consideration directly or indirectly from any health

insurance issuer in connection with the enrollment of any individuals or employees in a QHP or a non-QHP.” Similarly, navigator programs may not be funded from federal funds received by the state to establish the exchange. With these limitations in place, the federal government, through HHS, has released special grant funds to the states to train and hire navigators.

Q. Do navigators need to be licensed? How about E&O? A. Under federal law, navigators cannot be required to be licensed as producers, nor required to carry errorsand-omissions coverage. However, states are permitted to require navigators to be licensed as such, and many states are working out the details of what a “navigator license” will entail. Some states are requiring similar, currently existing entities to “assume full responsibility” for risk or injury related to the application assistance, whether caused by their negligence or otherwise. PIA has communicated the importance of licensing, training and oversight to the National Association of Insurance Commissioners and the federal government alike. A copy of the NAIC communication can be seen here: http://bit.ly/16OYWnM.

Q. What would disqualify me from being a navigator?

A. The regulation states that a navigator must not be: • a health insurance issuer; • a subsidiary of a health insurance issuer; • an association that includes members of, or lobbies on behalf of, the insurance industry; or • an entity that receives any consideration directly or indirectly from any health insurance issuer in connection with the enrollment of any individuals or employees in a QHP or a non-QHP.

Q. Should I consider being a navigator?

A. Again, it depends. However, the answer is probably not. As was described in a preceding section, a navigator cannot be an entity that receives “any consideration directly or indirectly from any health insurance issuer in connection with the enrollment of any individuals or employees in a QHP or a non-QHP.” This effectively precludes existing health producers from being able to be navigators. Since this is the standard way that most producers are paid for their services in the sales and servicing of health plans, opting to become a navigator would require a producer to give up acting as a health insurance broker.

Online Education

• Pre-Licensing • Training and Education for the New Employee • Continuing Education from CEU.com

www.piatn.com/education Education at your convenience

www.piatn.com/education For more information, call Pam Cass, CPIA, at 800-875-7428

Professional Insurance Agents/Summer 2013

15

What is the PIA/Penn National Insurance agents’ umbrella program?

Written by agents for agents.

■

Comprehensive excess insurance protection

■

Packaged in one easy-to-manage policy

■

Affordable rates

Coverage

Payment Plans & Fees

Coverage limits (higher limits may be available)

Flexible payment plans for any policy

■ Up to $10 million for commercial and professional liability

■ Full payment (no installments)

■ Up to $5 million for personal exposures of owners and officers

Core Coverage ■ Business operations — broadened coverage and excess limits protection for agent/agency’s business and employees for liability incurred as a result of normal business activities. Policy provides coverage over an agency’s commercial general liability or businessowners, employers liability and commercial auto.

Key Features

Coverage features

■ Excess over underlying E&O

■ Personal injury

■ Personal umbrella coverage for owners, partners and officers, including members of their families. Sub-limit does not affect total limit.

■ Libel, slander and advertising offense

■ Employment practices liability providing excess limits on a following-form basis.

Sub-limit does not affect total limit.

■ Excess over business coverage ■ Defense coverage outside policy limits ■ Affordable minimum premiums for 9 employees or fewer ■ One source for all excess coverages ■ Blanket protection for most risks ■ Flexibility to meet the needs of any agent, including flexible pay plans

Rating ■ Staff rating for agencies with 9 or fewer employees ■ Excess rated for agencies with 10+ employees or special acceptance categories ■ Refer to state rate pages

16

■ First-dollar legal defense provided for claims not covered by underlying insurance ■ Professional liability — excess limits protection on a following-form basis for errors and omissions in the course of the agency’s business as an insurance professional. Coverage can be written over occurrence or claims-made forms of a variety of primary E&O carriers.

Coverage features on a following-form basis ■ Full prior-acts coverage ■ Covers any person acting in a capacity as a real estate agent or notary.

■ Options unique to this program: • Personal coverage — broadened and excess personal protection for owners, partners and officers, including members of their families.

(Submit ACORD Personal Umbrella Application.)

• Employment practices liability — excess limits protection for liability incurred by named insured or employees for wrongful employment practices.

Coverage can be written on a claims-made basis over a number of approved EPL carriers.

Maximum available as a sub-limit is $2 million.

(Submit a copy of underlying EPL application.)

Professional Insurance Agents/Summer 2013

■ Two payments — 50% down, one installment of 50% due three months later ■ 40/30/30 — 40% down, two installments of 30% each due every other month ■ Quarterly — 25% down, three installments of 25% each due quarterly ■ Monthly — 20% down, five installments of 16% each due monthly

Available payment plans by premium level ■ Premium up to $1,000 — full payment or two payments ■ Premium of $1,001 to $5,000 — full payment, two payments, 40/30/30 or quarterly ■ Premium greater than $5,000 — any payment option

Applicable fees ■ Service fees: No service fee will be added to the initial payment. A $4 service fee will be added to each installment billing.

Contact Us Contact your local PIA producer. To find yours, visit the PIA Main Street Store at www.PIANET.com

Plan your agency’s future Mold your agency’s direction with short- and long-term plans

By Daniel P. Menzer, CPA

W

e’re halfway through 2013.

Do you know how your independent insurance agency is doing relative to its 2013 budget, or its 2012 strategic plan, or even whether you’re making headway toward your long-term-exit strategy goal? If the answer to any of these is something other than “Yes,” it’s time to think about putting more emphasis on planning for the business, not just running the dayto-day business. In the words of that great American philosopher and former baseball player, Yogi Berra: “If you don’t know where you’re going, you will wind up someplace else.”

Planning isn’t just for the Fortune-500 companies. In many ways, effective planning is much more important to the long-term success of smaller, privately owned businesses because it often addresses some personal issues of the principles. The problem is most small businesses are run by salestype entrepreneurs, which can be a good thing for growing the business, but often not the best skill set for the development and management of the strategic aspects of the business model.

Studies have shown that less than 2025 percent of professional, independent insurance agency owners plan for the perpetuation of their agency. This often results in the owner(s) having to sell to a third party in order to reap any final rewards from their lifelong business pursuit. Planning for the business doesn’t have to be overly involved or confusing, but it should dig deep enough into

Professional Insurance Agents/Summer 2013

17

the business and the principal’s needs and goals to create some objectively measureable points of reference. If budgets are one end of the planning process, succession planning and retirement considerations are at the opposite end. As the average age of agency principals continues to increase, for many, retirement is much closer than expected.

Sound business planning includes short-term plans (annual budgets), two- to five-year plans (strategic plans) and long-term planning (more than five years). These individual plans should all be linked together and continuously monitored and adjusted over time as goals are met, circumstances change and new goals are established. Many agencies establish budgets for the revenue and expenses anticipated in the upcoming year, but little else. While this is a good start, it is one step in the whole planning process that helps businesses prosper and principals accomplish their long-term goals.

The short-term planning for tactical and budget issues primarily is an operational function, often handled by the controller in conjunction with the sales team in larger agencies, or the agency principal(s) and other key employees in smaller agencies.

Answers to the following questions should be incorporated into the budgeting process: • What are renewals likely to be next year?

• How much new business can we honestly expect to book?

• What are our costs going to be to produce and service the business and meet the needs of our customers?

• Are the revenue and expense projections consistent with the goals of our long-term plans and our stakeholders, or does something need to change?

However, the opposite end of the spectrum requires a more insightful thought process by the senior management and ownership team.

These questions are independent of the ones listed above: • When I/we are ready to retire, do I/we want to sell externally, or perpetuate internally?

18

• When do I/we want to begin and/ or end the retirement and business transition process?

• What should I/we be doing now to facilitate accomplishing these goals?

In between these two time horizons lies the strategic-planning component, when questions such as the following need to be addressed by both the operational and stakeholder perspectives in conjunction with each other: • Do we have the resources needed to continue meeting the needs of our customers and accomplish the long-term goals of the agency and its owners, in terms of financial, personnel, operational efficiencies and technology, etc.?

• What potential changes in the core industry structure do we need to evaluate to determine the impact on our customers and our operations?

• Which segments of the business do we need to invest in, and which do we need to consider adjustments to in order to maximize profit returns?

The budget should be a reasonably detailed analysis of current-year revenue and expense information from which to base next year’s financial projections against. The budget process generally can be segregated into four major components: 1.) Revenue

a. Renewals by producer by account

by month

b. Identification of known new and

lost business

c. Projections of unknown new and

lost business 2.) Compensation

a. Staff salaries

b. Producer compensation based

on revenue projections

c. Employee benefit costs 3.) All other operating expenses

a. Employee direct expenses

(e.g., travel & expenses, auto,

communications, etc.)

b. Controllable operating expenses

(e.g., supplies, postage, equipment, etc.)

c. All other overhead expenses

(e.g., rent, insurance, IT, etc.)

4.) Capital and operational investments

Using this level of detail as the basis for revenue and expense budget

Professional Insurance Agents/Summer 2013

information can provide management with great insights into the agency and set forth the foundation for longerterm projections. Review of the budget assumptions and sensitivity analysis of changes to internal or external factors (e.g., staffing levels, investment alternatives, economic and insurance marketplace forecasts, etc.) helps management to stay on top of the keyperformance indicators.

Budgets should not be “pie-in-thesky” projections; as that serves little purpose for management or measuring progress toward longer-term goals.

Realistic projections and goals, in particular new and lost business targets for each producer, are critical to building a successful plan. As the planning process extends beyond the annual budget, being able to project when new producers and support staff should be brought on board to supplement the growth, as well as supporting the long-term exit strategy, becomes an important business management tool. As the planning horizon gravitates from next year to two to four years and beyond, obviously the level of details in the plan have to change, but the mindset of using realistic assumptions and careful identification of needs becomes even more important.

What many agency owners may not consciously realize is that the sale of their agency is more often than not the result of a poorly planned and implemented perpetuation strategy, leaving them no other option but selling. Certainly, this is not true in all cases, as many of the best planning strategies for a successful perpetuation also are key strategies owners can use to maximize sales proceeds. However, not positioning the agency for perpetuation properly all but guarantees a sale will be required for the agency principal to capitalize on his or her value.

The key to proper planning for the principal(s)’ exit strategy is to prepare the agency for the next set of owners, whether it’s an internal buy-out or external sale. The No. 1 priority of any perpetuation plan is people—having the right people in place to take over the leadership, management and sales engine of the retiring principal(s). This is not something that happens overnight, and

without it, the perpetuation plan cannot succeed. Similarly, for an external sale, there is nothing a buyer wants more than to feel comfortable that there is a viable replacement for the selling principal.

Agency owners must plan well ahead of their target exit date to accomplish this goal.

Another important consideration is always financial: How can the agency owner maximize his or her investment return given the choice of buyers?

Agency owners must understand that an internal perpetuation almost never will yield as high a purchase price as an external sale, so it has to be a conscious decision to sell internally and walk away with less cash in the bank.

Regardless of the buyer, the value of any professional, independent insurance agency is directly related to the level of profitability of the business, so the more that can be done over time to improve the pro-forma earnings of the agency, the more valuable the agency becomes. In a perpetuation scenario, agency owners also should consider the amount of capital retained in the business. Future owners need to have sufficient financial resources in place to meet the obligation of a buy-out just in case the ideal projections and plans don’t materialize exactly as anticipated.

Establishing the long-term goals and plans, supported by the tactical budgets and strategic planning is critical for agency principals to be able to position their agency for their exit. Proper planning and execution for an internal perpetuation often will create the best opportunity for an external sale. Failure to build a viable perpetuation strategy will leave only one exit strategy, selling to or merging with a third party. The difference of having exit options versus one path really comes down to whether agency owners took the time and effort to plan ahead.

Menzer is a principal with OPTIS Partners LLC (www.optisins.com), a Chicago- and Minneapolis-based investment banking and consulting firm providing M&A, valuation and strategic consulting services to firms in the insurance distribution sector.

He can be reached at (630) 520-0490 or via email at menzer@optisins.com.

Don’t lose grounD in a tough economy The fact is, this is the time to invest in advertising. Now, more than ever, you need to retain existing clients and attract new ones. And, while you may lack the bottomless pockets of direct writers, well-crafted, well-placed, affordable marketing can punch through the noise and get your message out. Whether you’re looking for brand new marketing materials, our customized consumer materials or Spanish-language pieces, Think PIA first for the marketing advantage you still need to succeed.

logon to www.pia.org or call (800) 424-4244.

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www.piatn.com Professional Insurance Agents/Summer 2013

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Employee Stock Ownership Plans A business-perpetuation planning tool worth considering

By Chuck Coyne, ASA

T

he following article will provide a basic overview of what an Employee Stock Ownership Plan is, and how it aids in agency perpetuation planning.

Why consider ESOPs?

ESOPs have been around for many years. Unfortunately, they remain one of the most misunderstood financial tools available to closely held business owners and their advisers.

ESOPs provide a powerful and flexible mechanism for planning a business’s internal perpetuation. The special tax benefits they provide are attractive to the selling shareholders, employees and the business. Often agency owners would prefer to sell their business to certain key employees/management. However, these key employees typically lack adequate personal financial resources to buy the agency at a fair value. In some cases, these key employees would most likely manage better with a sale to an ESOP than if the agency was sold to a competitor. With an ESOP in place, key employees can continue to grow the business and be rewarded with allocations of company stock in their own ESOP accounts. Often, key employees are provided with an additional incentives outside the ESOP (i.e., stock, stock options or stock appreciation rights).

Furthermore, because ESOPs make all eligible employees beneficial owners of the agency’s stock, these agencies can experience increased productivity driven by employees who are motivated by sharing in the resulting stock value increase.

What is an ESOP?

An ESOP is a special kind of qualified plan governed by the Employee Retirement Income Security Act and the Internal Revenue Code (the “Code”).

Although there are some exceptions, generally all full-time employees older than 21 participate in the ESOP. A company that wants to create an ESOP sets up the plan and a trust qualified under the Code. An ESOP trust is designed to hold annual company contributions that are monitored by a trustee. These contributions can be made by the company in the form of cash, shares of company stock, or a combination of cash and company stock.

Unlike all other qualified plans, ESOPs can and must invest primarily in stock

Professional Insurance Agents/Summer 2013

21

of the sponsoring company and are permitted to hold 100 percent of the stock of a company. An ESOP provides the company’s employees the opportunity to become beneficial owners of company stock through annual allocations in the plan. It is important to recognize the distinction between being beneficial owners of company stock as opposed to actual shareholders of the company.

The ESOP’s trustee votes the shares held in the plan (with few exceptions) and employees do not gain access to any additional company financial information as beneficial owners. As with other qualified plans (e.g., profit-sharing plans), ESOPs must be operated for “the exclusive benefit of plan participants.”

What price can an ESOP pay for stock?

An ESOP can pay “fair-market value” for shares of the sponsoring agency’s stock. This requires that a qualified and independent business appraiser value the stock. This is because the IRS and the Department of Labor both require that the ESOP not pay more than fair-market value for company stock.

Once the ESOP holds company stock, an annual updated company valuation is required for plan administration purposes.

How does a leveraged ESOP work?

Leveraged ESOPs are those that borrow to finance the purchase of their sponsoring company’s stock. The chart below shows the flow of a typical Graph #1leveraged ESOP.

22

Allocation of shares to employee accounts

leveraged or not. Aggregate contributions to 401(k)’s and other defined contribution plans will count toward this limit as

As the ESOP’s internal loan is will the interest paid on the ESOP loan. repaid, the shares purchased are released However, when made to either allocated within the trust from a suspense account or unallocated shares in the ESOP to individual participant accounts. trust, distributions on shares in the S Allocations in the ESOP generally are corporation paid to the ESOP can be used allocated to individual participants based Graph #1to repay an ESOP loan without limit. For on a ratio of their individual pay to the example, if an ESOP purchases stock total of all eligible plan participants’ from selling shareholders of the agency pay. There are limits on the amount of at a fair-market value of $2 million, the contributions that can be made to the tax savings realized by the agency plan, as with other qualified plans. will be $700,000. This is assuming, As employee-participants continue for illustration purposes, a combined to work at the company they vest in federal and state tax rate of 35 percent the shares that are allocated to their ($2 million x 35 percent = $700,000). individual ESOP accounts. Employees This is possible because the ESOP must be 100 percent vested within three contributions, which are used to pay to six years, depending on whether the loan principal, are deductible by the vesting is “cliff vesting” (100 percent company as a benefit-plan expense. The after three years) or gradual (20 percent table below illustrates the repayment of per year beginning the second year). an ESOP loan using pre-tax dollars.

Tax deductibility of loan payments

One of the most beneficial and unique aspects of using an ESOP to finance the purchase of company stock is the pre-tax payment of the financing.

That is, both the principal and interest paid by the sponsoring company are tax deductible. There are different annual taxdeductible contribution limits depending on the company’s tax status (e.g., S or C corporation). In general, companies can deduct up to 25 percent of eligible payroll contributed to their defined contribution plans (e.g., ESOPs, 401(k) plans, profitsharing plans and stock bonus plans).

This is a combined limit that aggregates all these plans. However, leveraged ESOPs in a C corporation are allowed a separate 25 percent contribution level to repay principal on an ESOP loan. As with any corporate loan, interest expense is fully deductible and does not count toward this 25 percent contribution limit in a C corporation. Reasonable levels of cash dividends paid on ESOP stock used to repay the loan or passed-through to participants also are tax deductible. On the other hand, S corporations have a 25 percent limit on tax-deductible company contributions whether the ESOP is

Professional Insurance Agents/Summer 2013

Additional S corporation tax benefit

In addition to being able to pay the ESOP loan principal with pre-tax dollars, S corporations pay no federal income taxes (and most states income taxes) on the earnings that flow through to the ESOP. Therefore, if the agency has an ESOP that owns 50 percent of the stock of the sponsoring company, the agency pays no income tax on 50 percent of its annual earnings. This is why there is such a prevalence of 100 percent ESOP owned S corporations today. Imagine having 100 percent of the earnings generated by the agency without paying any income taxes.

Defer taxation using Section 1042 ‘rollover’

Under Section 1042 of the Code, an owner of closely held C corporation stock (not allowed in S corporations) can defer capital gains tax on stock sold to an ESOP if certain minimum requirements are meet. This capital gains tax deferral benefit has become even more advantageous in 2013 as the Bush tax cuts expired.

The maximum long-term capital gains tax rate is 21.2 percent (20 percent plus the extra 1.2 percent is due to the return of the 3 percent disallowance of itemized deductions for income earned above a threshold). In addition, the new federal health-care program includes a 3.8 percent tax on the investment income, including capital gains, of high-income taxpayers. Therefore, a high-wage earner will be looking at long-term capital gains at approximately 25 percent. So for example, if the selling shareholder(s) of the company sold $2 million worth of stock to a newly formed or existing ESOP in 2013, they could potentially defer under Code Section 1042, $500,000 of capital gains tax ($2 million x 25 percent). In addition, many states that impose their own capital gains tax will be eligible for additional deferment under Code Section 1042.

An additional benefit for estate planning is the potential to avoid the capital gains tax forever in a Section 1042 rollover. Based on today’s laws, if a seller holds the qualified replacement property until death, the qualified replacement property is passed to his or her estate with a stepped-up tax basis. This can effectively eliminate the original deferred capital gains tax on the company stock sold to the ESOP.

While the Section 1042 rollover is not available for S corporation ESOPs, there is no required length of time that a company must be a C corporation to receive the benefits of the Section 1042 rollover. This means a company can revoke its S corporation election to become a C corporation and the seller(s) can elect to receive the deferred tax benefits of Code Section 1042 immediately.

Conclusion

The main advantages that a leveraged ESOP can provide to a closely held agency and its owners can be summarized as follows: 1.) The agency’s ability to finance the acquisition of its shareholders’ stock using pretax dollars because of ESOP loan payments.

2.) The seller’s ability to defer capital gains tax (potentially forever) on the sale of C corporation stock to the ESOP. 3.) The agency’s retention of income tax payments because of ESOP stock ownership in S corporations.

4.) The employees gain a motivating retirement benefit that can potentially increase the value of the company by leveraging an ownership mentality.

As with any complex corporate finance structure involving the Code and ERISA, it is important to get qualified and experienced professional advice and assistance before considering an ESOP as your company’s perpetuation solution.

Penalties for violating Code and ERISA requirements can be serious but are easily avoided with the proper planning and advice.

Coyne is a managing director of Empire Valuation Consultants LLC, a national independent business valuation firm with offices in New York City, Rochester, N.Y., Cleveland, Ohio and West Hartford, Conn.

He has provided independent insurance agents with agency valuations, ownership perpetuation planning assistance, mergers & acquisition assistance and ESOP transaction analysis for 25 years. He is an accredited senior appraiser with the American Society of Appraisers and has an MBA in finance and accounting from the University of Hartford.

Agency E&O

Has a market for your agency Utica National Business Risk Partners PIAPRO Navigators Rockwood E&S markets Contact Sandy Clive, CPIA, 800-875-7428

Professional Insurance Agents/Summer 2013

23

Your Best Your agency’s personal Defense E&O commitment

Pearsall is president of the Pearsall Associates Inc. and a special consultant to the Utica National E&O Program.

His blog is agentseotips.com.

By Curtis M. Pearsall, CPCU, CPIA, AU, ARM, AIAF

The scenario: You manage an agency with 10 staff members, eight of whom have a strong commitment to errors-and-omissions loss prevention. The other two don’t seem to have the necessary commitment.

One day, an E&O claim is made against your agency.

Which employee(s) do you think made the alleged error or omission?

If you believe one or both of the two employees who are somewhat lacking in their commitment are the likely focal point of the summons and complaint, you are probably right. In some respects, an agency’s E&O commitment is like a chain—only as strong as its weakest link. To improve the overall strength of the chain, it is crucial to strengthen that weakest link. So, each agency staffer should perform a self-assessment of his or her personal E&O commitment.

Define the commitment

How strong do employees feel about their commitment to meeting agency expectations and to doing their job in a professional and ethical manner?

Quiz yourself on the following topics regarding clients’ needs: Do you know the products you offer? Are you honest when answering questions about coverages?

Do you understand your clients’ questions? Do you advise your customers promptly when you are unable to provide them with the requested coverage?

Quiz yourself on the following topics regarding your agency’s procedures: Are you using your agency management system in the manner expected by the agency and consistent with how other agency members are using it? If a co-worker looks into one of your files, will he or she understand the notes you entered?

Are you documenting back to customers the essence of their conversations with you to ensure there are no misunderstandings? Are you securing the sign-off from customers on those coverages/options they are rejecting? When you move a customer’s coverage to another carrier, are you advising the customer of the areas when the “new” coverage is more restrictive than the prior coverage? Are you signing a customer’s signature to an application or other key document?

These are just some of the questions every staff member (at all levels within an agency) should answer. While many agencies would think solely of the producers and customer service representatives, receptionists and claims staff also generate E&O

24

Professional Insurance Agents/Summer 2013

claims through their interactions with customers and via the way they perform (or don’t perform) various tasks.

A positive result

If you had answered these same questions a year ago, how would you have scored? Do you believe you made progress over the last year? A recent industry survey asked the question, “Is your agency’s E&O culture and commitment stronger today than it was last year at this time?”

Survey results indicated that 85 percent of the agencies responding reported an improvement over the previous year, with 70 percent of that 85 percent indicating a substantial improvement was made—a positive result indeed!

Those agencies deserve a huge pat on the back. If you asked them how they did it, there’s a good chance you would hear “one person at a time.” Many agencies probably went through the process of ensuring that staff members were aware of the agency expectations and used tools, such as auditing, to verify how well those expectations were being met.

No better time

An agency’s staff members must be honest with themselves—or this process will not bear much benefit. For the staff that realizes they are in need of improvement, this is a positive step by itself and should be appreciated and rewarded. The key is for those agency staff members to have a plan to improve their commitment. However, bottom line is that it won’t happen by itself. Their commitment should be documented and reviewed to ensure the expected growth and progress are a reality.

Management also must realize the role it plays. The culture of the organization starts with management/leadership. The staff will follow suit to the degree that management “walks the walk” and “talks the talk.” Thus, when it is readily apparent that agency management is committed to a strong E&O culture, that message will drive staff behavior.

The E&O world is changing, so there is no better time than now for agencies to understand where they are and what changes are necessary to ensure a greater E&O commitment.

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Direct Insurance EMC Insurance Cos. Farmers Mutual of Tenn.

Genesee General GMAC Guard Insurance Group Hanover Excess & Surplus J.M. Wilson Kentucky National Lemic Insurance Co. Mapfre Insurance

Oak Street Funding Risk Innovations Safeway Insurance Co. South and Western Southern Cross Underwriters Southern Pioneer P&C Southern Trace Underwriters Southern Trust Insurance Co. Tapco Underwriters Tenn. Agents Alliance Group The General

Professional Insurance Agents/Summer 2013

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explore the benefits of thE CErtifiEd ProfEssionAl insurAnCE AgEnt designAtion Earn E&O credit while earning Tenn. credit.

Plot your course below.

The CPIA program is an excellent way to earn your state‑mandated CE credits; participants need not pursue the designation to receive CE credit. The CPIA designation is approved by Utica Mutual for E&O loss prevention credit. This credit is applied once the designation is achieved. To earn the designation, developed by the American Insurance Marketing and Sales Society, candidates are required to complete all three, one‑day Insurance Success Seminars (in any order.) Participants leave with fresh ideas that will produce results.

CPIA 1: Position for suCCEss 3/14/2013 Nashville, TN CPIA 2: imPlEmEnt for suCCEss 5/16/2013 Nashville, TN CPIA 3: sustAin suCCEss

CE CrEdit guidE

9/26/2013 Nashville, TN

CPiA 1: Position for suCCEss 7 hours CE

*The CPIA designation is approved by Utica Mutual for E&O loss prevention credit. This credit is applied once the designation is achieved. Please call PIA for details.

CPiA 2: imPlEmEnt for suCCEss 7 hours CE

timEs

Sign-in: 8:45 a.m.; Class 9 a.m-5 p.m.

CPiA 3: sustAin suCCEss 8 hours CE

rEgistrAtion fEEs $135/$155 for members; $175/$195 for non‑members, per session.

Registration fee includes refreshments, instruction & materials.

to register, call piA at (800) 875-7428 or log on to www.piatn.com/images/stories/pdfs/2013CpiA_registration.pdf.

Readers’ service & advertising index ❏ 20 ❏ BC ❏ 10 ❏ 11 ❏ 10 ❏ 12 ❏ 19 ❏ 14

Amerisafe Arlington/Roe & Co. LEMIC Insurance Company M.J. Kelly of Tennessee NAI OfficeMax PIA Creative Services PIA Magazine Advertising

Check advertisers of interest, complete form and fax or mail to: PIATN magazine, 504 Autumn Springs Court, Suite A-2, Franklin, TN 37067.

❏ 16 ❏ 2 ❏ 23 ❏ 26 ❏ 15 ❏ 8, 27 ❏ 8

110297 2/13

Show your true colors

PIA/Penn National Insurance PIA Trust Insurance Plans PIATN Agency E&O PIATN CPIA PIATN Online Education PIATN True Color Advertising Summit

Name____________________________________________________________ Agency__________________________________________________________ Address__________________________________________________________ City/Town & State________________________ZIP_____________________ Phone Number____________________________________________________

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Professional Insurance Agents/Summer 2013

Enhance your ad with the impact of color.

Reach our sales representative at lgaines@piatn.com. .

Directory PIATN officers and directors OFFICERS

President Steve Peay Boyle Insurance Agency Inc. Memphis, TN (901) 766-0200 stevep@boyle.com President-elect Tina Hutsenpiller, CPIA Hutsenpiller Insurance Services LLC Mt. Juliet, TN (615) 773-2886 tina@hutsenpillerinsurance.com Vice President John Keisling, CPIA, CISR Keisling Insurance Agency Inc. Byrdstown, TN (931) 864-3116 john@keislingins.com Secretary Herbert Montgomery Clay and Land Insurance Agency Inc. Memphis, TN (901) 767-3600, ext. 107 hmontgomery@clayandland.com Treasurer Donnie Hogan, CIC Fred M. Smith & Son Inc. Springfield, TN (615) 384-2543 donnie@fredmsmith.com Immediate Past President Elaine Morton, CPIA Morton Insurance Agency Inc. Bartlett, TN (901) 382-4600 elaine@mortonagency.com

NATIONAL DIRECTOR

June Taylor, CIC, CPIA, CPIW, DAE Wilkinson Insurance Agency White House, TN (615) 672-4439 june.taylor@wilkinsonins.com

DIRECTORS

Carl Butcher, CIC, CPA C.L. Butcher Insurance Agency Knoxville, TN (865) 689-5482 carl@clbutcher.com Joe Kerr, CIC, CPIA Kerr Insurance Services LLC Brentwood, TN (615) 360-7524 joe@kerrinsurance.net Andrea Bond Johnson, CPIA Golden Circle Insurance Agency Brownsville, TN (731) 772-9932 abjohn@bellsouth.net

EXECUTIVE VICE PRESIDENT

Brennan J. Paris, CIC, CRM PIA of Tennessee 504 Autumn Springs Court, Suite A-2 Franklin, TN 37067 (615) 771-1177 bparis@piatn.com

STAFF

Pam Cass, CPIA Convention, Education, Membership (615) 771-1177 pcass@piatn.com Sandy Clive, CPIA E&O, Member Services (615) 771-1177 sclive@piatn.com Lochiel Gaines Communications, Trade Show (615) 771-1177 lgaines@piatn.com

Britt Linder, CIC Peterson Insurance Services Inc. Bartlett, TN (901) 386-4777 britt@peterson-insurance.com Chris Mills, CPCU, CIC Mills Insurance Agency Nashville, TN (615) 620-4452 chris@millsinsuranceagency.com Bill Oglesby, CIC, CPIA Brown Insurance Group Inc. Crossville, TN (931) 484-5103 bill@brown-insurance.com Barry Wilson, CIC Mid-South Insurance Office Inc. Memphis, TN 38104 (901) 276-6388 bwilson@mid-southinsurance.com

Professional Insurance Agents/Summer 2013

27

IT’S THE RIGHT THING TO DO. Arlington/Roe. You have our word on it.

“Whether you choose Arlington/Roe for our breadth of knowledge, product line diversity, market access or industry know-how, you may be assured we are in business primarily to serve you. We will do our best to earn and keep your trust. You have our word on it.”

– James A. Roe, CPCU, ASLI, President

Managing General Agents and Wholesale Insurance Brokers

800.878.9891

•

ArlingtonRoe.com

Aviation | Bonds | Brokerage | Commercial Lines | Farm | Medical Professional | Personal Lines | Professional Liability | Transportation | Workers’ Compensation

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Professional Insurance Agents/Summer 2013