T H U R S D A Y ,  J A N U A R Y   1 8 ,  2 0 0 7 

Big “I” National News

P&C Trends

Supreme Court Hears Oral Arguments in Credit Scoring Case

The manner in which insurance companies use credit reports was the focus of a highly anticipated oral argument before the United States Supreme Court on Tuesday, and the court’s ultimate decision in the months to come could have sweeping repercussions for the industry.

The cases at issue, Safeco v. Burr and GEICO v. Ado, involve insurance company use of consumer credit reports and the obligations that insurers using such information have to consumers under the federal Fair Credit Reporting Act (FCRA). The FCRA requires insurers to alert consumers when they take an “adverse action” based on information contained in credit reports. These are the typically pro forma notices that provide the affected consumer with the name and contact information of the reporting agency that provided the report to the insurer, a statement explaining the consumer’s right to obtain a free copy of the report and a description of how the consumer can dispute the report’s accuracy.

When it issues its opinion in the coming months, the first question the court will presumably answer is when and in what situations adverse action notices must be provided to consumers. On Tuesday, the attorney representing the insurers argued that federal law only requires a notice to be provided when a person’s credit information has a clear adverse or unfavorable impact on the insurance rates or terms provided. They argued that if credit information helps lower the rate a consumer would otherwise be charged---even if that rate is not the best rate offered by the company--- then a notice is not needed. The lawyer for the consumers countered that the notices are required more broadly and are to be provided anytime an insurance buyer could have received a better rate from an insurer if the person’s credit report was enhanced in some respect.

Many insurers have argued that it is overkill to issue adverse action notices to those that benefit from their credit history, and several justices wondered about the effect of an expensive interpretation of the FCRA adverse action notice requirement. Justice Breyer, for example, observed that a broad interpretation would result in “tens of millions of notices going out,” and he predicted the overwhelming majority would be meaningless statements that would be tossed in the trash by the recipients. He equated them to the privacy notices that so many Americans ignore.

If the court ultimately finds that the insurers in these cases were not appropriately fulfilling their FCRA disclosure obligations, then a second issue will emerge and the justices will be forced to determine whether the companies “willfully” violated the law. Under the FCRA, insurers who incorrectly adhere to the adverse action requirements or negligently violate the law are general liable for any actual damages that the consumers would incur . However, if “willful” noncompliance is found to exist, insurers can be liable to each consumer for damages between $100 and $1,000, plus punitive damages.

The lower court opinion issued by the U.S. Court of Appeals for the Ninth Circuit found that insurers who relied in good faith on interpretations of the law that were later determined to be unreasonable, implausible, creative or untenable could be deemed to have committed willful violations. The circuit court even found willful violations to occur when insurers were diligently attempting to comply and following the plausible (but perhaps incorrect) interpretations of the law provided by attorneys and even district court judges in previous opinions.

During the oral arguments, the justices focused extensively on what it means to “willfully” violate the standard, and the lawyer for original plaintiff Ajene Ado encouraged the court to accept the Ninth Circuit’s broad view of “willful” conduct. Counsel for the insurers, expressing a view supported by the United States, argued that willfulness is a standard that requires a showing of more than recklessness and observed that the adoption of a broad standard could force insurers to pay “billions of dollars” to consumers who suffered no actual harm. She noted that if the court allowed “a $1,000 penalty or the potential for a $1,000 penalty for every consumer who didn’t get a notice, simply because they may have gotten a better price if they had even better credit … then you certainly have the potential for very, very substantial liability.”

The court’s final decision will not be handed down for several months, but those in the insurance industry won’t be the only ones following this case closely. If the justices rule that the nation’s personal lines insurers have technically and inconsequentially violated the FCRA in recent years (with potential liability of $100 to $1,000 per consumer), the trial lawyer community might anticipate the ruling creating a new revenue stream for them.

Wes Bissett (wes.bissett@iiaba.net) is Big “I” senior vice president, government affairs and state relations.

P&C Trends

Upgrading Identity Theft Insurance

As technology advances, many carriers’ coverages evolve to protect consumers.

As laptops, cell phones and PDAs become smarter, faster and easier to use and the amount of information available via the Internet grows exponentially, many consumers are embracing the emersion into the digital world. These devices make tasks such as checking e-mail or looking up a Web site quick and simple. However, the public’s increased use of them has made many consumers more susceptible to identity theft.

The Identity Theft Resource Center is predicting an increase in check fraud, child/family identity theft and phishing, a form of Internet fraud that aims to steal valuable information through fake Web sites or e-mails, in 2007. The center is warning that, as technology advances make life easier, they are also making criminals’ jobs easier.

“The world of identity theft continues to evolve,” says Linda Foley, founder of the ITRC. “However, we are optimistic about the trends we are seeing in corporate America dealing with this crime.”

One of those trends pertains to the insurance industry, as more and more carriers step up and fight the onslaught of identity crimes by offering customers insurance that protects against the thefts. Identity theft insurance has been around for several years, however many carriers have chosen to upgrade their coverage recently in order to account for increased crime sophistication.

Launched in1999, Travelers’ identity fraud expense reimbursement coverage, offered as an endorsement to a homeowners, condominium or renters policy, was one of the first of its kind in the industry. The carrier has kept up with the times by modifying its coverage since its inception.

“The coverage has changed to better meet the needs of the people we help. We increased the available coverage limit to $25,000 from $15,000. We created endorsements to include spouse, family, increased lost wages and daycare and eldercare reimbursement,” says Joe Lester, Travelers identity fraud product manager. “We continue to educate our ID fraud claims team so they can better assist victims and understand what they are experiencing. One of the most important changes was the addition of the ID theft case management services.”

In 2004, Travelers expanded its identity theft coverage to commercial lines and today it covers more than 5 million people across both commercial and personal lines. But Travelers isn’t the only company seeing a high demand for the product, other carriers are also seeing their numbers go up. Liberty Mutual has also seen an increase since it introduced the coverage in 2004. Gary Fischer, Liberty Mutual Agency Markets vice president, underwriting and portfolio management, attributes the increase to the rise in the number of thefts and an increase in consumer awareness.

“This is an increasingly popular endorsement among our companies’ policyholders as we’ve added this coverage for nearly 31,000 policyholders since its introduction,” Fischer says. “ID theft and its ever-evolving manifestations is constantly in the news, but like many things, may be slower to register with individuals, until of course, it actually occurs to them or someone they know.”

The Ohio Casualty Group, which began offering identity theft protection in 2003, is also seeing an increase in the number of agents requesting the coverage for their customers.

“OCG includes this coverage as a single endorsement to its homeowners products or it is also included with several other endorsements, such as in a package for high-value homeowners. There has been a general increase in the number of requests and some agents ask us to add this coverage to all homeowners polices,” says John Linneman, Ohio Casualty Group personal lines assistant vice president for property.

While many carriers are updating their identity theft coverages, others are joining the ranks and launching coverages for the first time. Last September, The Main Street America Group began offering an identity theft resolution service as part of its identity fraud endorsement. Their coverage includes benefits such as notification to credit bureaus, ongoing fraud monitoring and $15,000 of expense coverage and, despite its short tenure; it’s already becoming a high-demand product, according to Bonny Parker, vice president of personal lines at The Main Street America Group.

“Since Main Street America introduced the new identity theft resolution service, the number of our personal lines policyholders with the coverage has increased 35%,” Parker says. “I think this illustrates that insureds are concerned about protecting one of their most important possessions – their identities.”

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.

Legal Advocacy

Judge Rules Against State Farm in Katrina Case

On Jan. 11, Mississippi federal trial court Judge L.T. Senter Jr. ruled against State Farm and in favor of a Biloxi couple on their claim that Hurricane Katrina wind damage destroyed their home. The homeowners, Norman and Genevieve Broussard, sued State Farm after the company refused to cover any of the damage to their home following the storm. In the lawsuit, they sought to recover the full insured value of their home, plus $5 million in punitive damages.

State Farm’s defense was that the Katrina’s storm surge caused the damage to the Broussard’s home. State Farm also took the position that damage caused by a combination of wind and water was excluded from coverage under the Broussard’s insurance policy, even if the wind damage preceded the water damage.

Following the closing arguments in the case, many were surprised when Senter decided not to let the jury determine State Farm’s liability to the Broussards. Instead, he exercised his right as judge to rule that, as a matter of law, State Farm was liable to the Broussards for their actual damages of $223,292. Senter said State Farm did not meet its burden of proof that the storm surge was the cause of all damage to the home. He also noted that the testimony did not establish how much damage was caused by wind and how much by water.

The liability decision left the jury with only the question of the appropriateness and amount of punitive damages to be awarded against State Farm, if any. The jury came back quickly on the same afternoon with an award of $2.5 million in punitive damages against State Farm.

State Farm has said it is likely to appeal the judge’s ruling and the punitive damages awarded. Kim Brunner, executive vice president, secretary and general counsel of State Farm said in a State Farm press release dated Jan. 11 that “We believe the ruling is inconsistent with the insurance contract and Mississippi law.”

Since this is a federal trial court decision, any appeal filed would need to be within 30 days. There are also other legal maneuvers State Farm could undertake in an effort to have the decision reversed or reconsidered.

There are hundreds of other cases pending before Senter (in addition to cases pending in Mississippi state court) that appear to involve claims against State Farm similar to the claims made by the Broussards. In the past, Senter issued several rulings in other Katrina cases that were favorable to insurers. In light of those rulings, Senter’s decision in this case came as a shock to many in the industry, so much so that he ordered a recess after announcing the ruling to give attorneys time “to get over the shock.” The key question is whether this ruling signals likely outcomes for future cases that go before Senter.

It has been widely reported in the press recently that State Farm is in negotiations with both the claimants and Mississippi Attorney General Jim Hood for a group settlement of as many as 639 Katrina-related claims in Mississippi. The Broussard case was not believed to be part of those settlement talks and it is unknown how this verdict will affect the possibility that such a settlement will be reached. Many observers believe this decision may spur State Farm to agree to settle pending cases rather than face the risk of losing hundreds of additional lawsuits in which punitive damages may be assessed against it.

The insurance industry is following this decision closely. In press reports, Robert Hartwig, president and chief economist for the Insurance Information Institute, was quoted as saying that any punitive damage award in this case would be “distressing” for insurance carriers. It is expected that carriers involved in similar litigation will carefully review the facts of the claims against them and the policy language in question to determine if they want to make efforts to settle the cases rather than risk trials that may result in an outcome like that of State Farm in the Broussard case. Many also believe it is likely that carriers will carefully review their policy language and its exclusions to determine if any changes should be sought to more clearly exclude claims for water damage, even if it is preceded by otherwise covered causes, such as wind.

Kathleen Graber (kathleen.graber@iiaba.net) is Big "I" associate general counsel.

L&H Trends

Education + Execution = Sales

The time is ripe for independent insurance agents to focus on financial services sales and on creating a strategy for growing their marketplace.

The recipe for successful sales is a combination of education plus execution---the desire for additional knowledge coupled with the motivation to seek out prospects and increase sales by solving their problems. Sir Francis Bacon, a well-known life insurance guru of the late 16th and early 17th centuries, said “knowledge is power.” And he was right.

Most insurance agents use third-party information during the sales process (as long as it meets compliance standards) because using objective, third-party information conveys credibility.

For example, take an insurance agent who wants to target the age 50+ market, which has a common objective of accumulating assets for adequate retirement income and having an adequate plan for dealing with one of a retiree’s biggest financial risks: health insurance and long-term care. An invaluable Web site for this agent is the National Council on Aging (www.ncoa.org), which represents more than 14,000 organizations that serve seniors. Agents who sell Medicare Part D/Medicare Advantage and long-term care insurance will find a wealth of information and statistics that seniors can use, including the typical long-term care insurance provisions (the average premium cost by age band). The Web site also provides information on government resources and very objectively discusses Medicare, Medicaid and other financial options. Agents should make a point to educate themselves on changes in the laws and demographic trends for older Americans.

Another valuable Web site for insurance agents that offers life insurance, annuities and mutual funds is the Center for Retirement Research at Boston College (www.bc.edu/centers/crr/), which provides insightful research into the accumulation patterns of retirees and people saving for retirement. While the center has corporate sponsors, including mutual fund companies and insurance companies, the quality of the research from the academic community is first rate and it appears the collective goal of the corporate sponsors is to have information regarding the looming problem of adequate retirement savings available to the public. Agents will definitely find the information eye-opening, as well as a siren call for Americans and public policy to support broad retirement savings. Agents should consider having a link to this Web site from their agency’s Web site.

Bacon also said that “a wise man will make more opportunities than he can find.” Keep this in mind when it comes to execution. Clearly, Bacon understood that success is more than luck and it takes determination and self-reliance to create opportunities. This can be translated into making appointments and seeing as many people as possible. If you do this, the production will be there. In fact, Francis really understood the motivation of the independent insurance agent when he said: “Hope is a good breakfast, but it is a bad supper.”

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and an IA l-h contributing editor.

Agency Management

Walking the Tightrope of Trust

Close the sale while still maintaining customers’ trust.

Earning a customer’s trust is crucial to the success of any insurance agent, but sometimes customers are blinded by the stereotype of the pushy agent only looking to make a sale. The result? Some consumers are wary of agents who are only trying to ensure that they purchase the proper coverage. However, there are methods of circumventing this problem while still getting customers the coverage they need.

Greg Bennett, author of the book “Consultative Closing,” understands the myth of the pushy, overly-aggressive salesperson, and has developed strategies for debunking the myth. The name for his book comes directly from his sales philosophy of consultative closing or the idea of taking the best consultative selling---a combination of questioning, listening and empathy---and mixing it with hard-sell closing. Bennett recommends developing a keen sense of awareness when it comes to customers’ needs and using fellow agents or colleagues as springboards to determine if a customer is really prepared to purchase a policy.

“Make sure you’re very clear with where the client truly is in the process; not where they say they are or where you assume they are, but where they truly are,” he says. “What have they really taken action on? Salespeople tend to believe every opportunity is real, mainly because we suffer from call reluctance and we don’t want to go find new ones. It can be helpful to grab a colleague or friend and ask ‘Can you go through this sale with me and please tell me if you think I’ve gotten too close to it or if I’m in denial about what I’m hearing or seeing.’”

According to Bennett, the biggest mistake salespeople make is not having a plan for closing the account and letting the client dictate what happens next. “Clients don’t know what is supposed to happen or even how to go about the buying process,” he says. “All they know is they don’t like conflict and they feel it’s safest to just do nothing.

“The second mistake is a total lack of process in the closing process,” he continues. “We need to break down the closing process into action-oriented mini-steps. Agreeing to take these steps will lock clients into a process with you and keep them away from your competitors.”

Developing sound, effective closing strategies is extremely important to agents and brokers in order to help solidify the sale of a policy, but it can take some fine tuning. Bennett offers the following tips on how to improve these strategies:

1. Make the client aware from the beginning of the intention to close on something. Setting the agenda actually puts the client at ease and makes closing much easier. Here is a sample agenda: “Ms. Jones, here is what I normally do on the first meeting. I’d like to ask you a few questions about your situation, then tell you a little about what we have to offer and then, at the end, I’ll ask you if you’d like to move forward, or not…and either one is fine, we’re not a fit for everyone.”

2. Redefine the word “closing” to mean yes or no and close for a decision because it’s possible to turn a no into a yes if the underlying issues are understood. 

3. Don’t get so excited about a “maybe” answer or “we’re interested.” Clients in a sales call can be deceptive and have no problem saying anything to avoid conflict.

4. Break the sales process into actionable steps or mini-steps. These smaller steps can be any number of things from free workshops for clients, to setting the date for taking information. Anything needed to begin working with a client put it down as a mini-step.

5. Be assumptive and confident during the close and start to march down the path towards completing the mini-steps.

6. Understand the client’s decision-making process prior to closing. Clients under pressure will make up whatever they have to in order to escape the potential conflict of the moment---this includes other people, other situations, schedule conflicts, timing, etc.

7. When encountering a removed decision maker or something that has to happen first before the sale can move forward, use the fast-forward strategy. Hit the fast-forward button and take the client to a place where what they’re waiting for has already happened, and then ask what they want to do next.

8. Don’t be too quick to leave a closing situation. Salespeople are just as uncomfortable about conflict as clients and often bolt out of a closing situation too early. Instead of hopping up with a quick, “Well, I’ll give you a call next week and we can start to put some things together,” take action right then and there.

9. Another way to improve closing is to make the after-sale process more defined and client-centered. There is a tendency to focus a great deal of time and energy on the before-the-sale process, but it’s after the sale that really matters to the client. It makes sense to schedule some post-buy meetings or perhaps quarterly account reviews, to make sure clients know you care about how the program is working for them.

10. Finally, don’t be afraid to ask for the business. Some people don’t like to come across as too pushy and end up doing nothing more than sharing information with the client and hoping the close will happen on it’s own. This is where having mini-steps will help. Those who are nervous about asking for the whole sale can ask the client to at least take action on something smaller.

For more information on Bennett’s book, click here.

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.