T H U R S D A Y ,  F E B R U A R Y   1 ,  2 0 0 7 

Big “I” National News

Legal Advocacy

Judge Senter Keeps Parties Guessing
Judge reduces punitive damages against State Farm, denies approval of class action settlement.

As IN&V reported on Jan. 18, State Farm lost a Hurricane Katrina-related decision earlier in January, with the jury awarding $2.5 million in punitive damages to Mississippi homeowners, Norman and Genevieve Broussard. On Jan. 31, Judge L.T. Senter Jr., the Mississippi federal court judge who presided over the case, reduced the jury’s punitive damages award to $1 million. This is the same judge who earlier ruled in favor of the Broussards, declaring that State Farm was liable to them for actual damages.

Mississippi law allows judges to scrutinize punitive damage awards and use their discretion to adjust them. The reduction was despite the judge’s acknowledgment that the punitive damage award was within legal limits and that he felt State Farm acted in a “grossly negligent way as to evince willful, wanton or reckless disregard . . .” He ruled that “a more appropriate punitive assessment against [State Farm] is the sum of $1,000,000.00, which is between four and five times the contractual/compensatory damages . . .” He based his decision on U.S. Supreme Court cases concluding that single-digit multipliers were more appropriate in determining the ratio between compensatory damages and punitive damages. In the Broussard case, the jury’s original punitive award was approximately 12 times the compensatory damages.

On Jan. 26, in another Hurricane Katrina related action, Senter denied preliminary approval of the proposed class and settlement of Hurricane Katrina-related claims between State Farm and 35,000 of its policyholders in three counties in Mississippi. As IN&V reported last week, State Farm reached a proposed settlement resolving the majority of its Katrina claims in Mississippi. That settlement was in two parts: one part would have resolved 639 lawsuits brought by clients of Richard “Dickie” Scruggs with State Farm paying approximately $80 million to those policyholders; and the other would have required State Farm to reopen and reevaluate 35,000 previously closed Katrina claims, paying those policyholders at least $50 million with no maximum cap. The judge’s denial just goes to the 35,000/$50 million part of the settlement, and did not address the settlement involving the 639 lawsuits. The denial was “without prejudice,” meaning that the parties can seek approval of a proposed settlement in the future. To do so successfully, they will need to address the concerns raised by the judge and demonstrate to the judge that it is in the best interests of the class members to be covered by it.

Senter described nine concerns he had with the proposed settlement, which were the basis of his decision denying it preliminary approval. They all go to the standard required to approve of such settlements that the procedures established be “fair, just, balanced, or reasonable.”  While some may perceive that such settlements routinely are approved with ease, that is not the case. Courts take seriously their oversight responsibility to assure that such settlements are approved only when the terms are established to be fair and reasonable.

The issues raised by Senter, resulting in his unwillingness to approve the proposed settlement, are as follows:

1. There was no demonstration of how the $50 million relates to the number of potential claimants, or showing of “how thinly this large sum may be spread among the class members.”

2. The complexity of the claims procedure and lack of commitment by counsel to offer any assistance to class members, precluding class members from participating effectively without counsel.

3. There was no basis provided for evaluating the work done to justify the attorneys’ fees sought by plaintiff’s counsel of at least $10 million and not more than $20 million.  (These fees would have been in addition to the $26 million in fees plaintiff’s counsel would receive from representing the 639 other policyholders whose claims are being settled by State Farm.)

4. The settlement participants would be required to give up all potential claims against State Farm as well as its adjusters and agent, but would not be guaranteed to receive any compensation from State Farm for releasing such claims.

5. There was no information provided to show how the payment figures proposed were determined or if they were arbitrary and without factual support. This was reinforced by the fact that the only class members “guaranteed” any payment would be those left with only a slab or pilings where their homes used to be, and offsets by other insurance could eliminate even those “guaranteed” payments. 

6. The requirement that claimants dissatisfied with the settlement offered resolve the dispute via binding arbitration. The Judge said that such an approach would diminish procedural safeguards for claimants, take away their right to a trial by jury and eliminate their right to pursue related claims beyond the insurance contract without any showing of “corresponding potential benefits for those policyholders.”

7. The proposed settlement would prohibit a declaratory judgment from being obtained interpreting the State Farm policy language, but that restriction appears to be inconsistent with the right of parties appealing lower court decisions since appellate court decisions can interpret language in a way that would serve as precedent for other cases. Also, the proposed settlement would have required that state court decisions govern the claims procedure, and the Judge said he would not approve any settlement that does not honor the state and federal court decisions on relevant law.

8. The proposed settlement would have limited the right of other litigants not in the class from expressing their objections or other views on the fairness of the settlement.

9. The state court lawsuits brought by the Mississippi Attorney General would incorporate an arbitration program administered by the federal court but there is no such arbitration procedure in place yet, and may never be one unless the judge is satisfied that “basic standards of fairness are met.”

The entire text of Senter’s opinion on the denial of the proposed class action and on the reduction of punitive damages in the Broussard case can be found on the members’ only Legal Advocacy page of the Big “I” Web site under IIABA/Industry Information and News.

For more information, contact Kathleen Graber, associate general counsel, at 703-706-5432; kathleen.graber@iiaba.net.

P&C Trends

Where's the Loyalty?
Report finds retaining policyholders goes beyond price and customer service.

When it comes to searching for an insurance agent, a number of factors come into play for customers looking to become policyholders. A competitive price and good benefits are both major draws for getting customers in the door, but what keeps them loyal to an agency?

According to the 2007 World Insurance Report, customers are becoming increasingly less loyal to insurers as the Internet allows them to be more self-sufficient and price-sensitive. This means agents now have to be more proactive in keeping a continuous dialog with their policyholders.

“Rising Internet use is increasing transparency in the industry, providing customers with better access to information on product specifications and pricing-–-and increased bargaining power,” the report says. “Moreover, insurers and distributors can no longer assume a satisfied customer will be loyal when the relationship is tested---whether by sub-standard claims handling or simple price-based poaching by competitors.”

Pricing remains the biggest draw for customers and it’s also what keeps policyholders from switching insurers, according to the report. But pricing alone is not what keeps policyholders from straying.

“Our research confirms a disquieting dynamic among insurance customers: even those that are satisfied cannot necessarily be considered loyal and may remain at risk of defection,” the report says. “It is up to insurers, then, to be proactive in identifying high-value customers, understanding why they leave and why they stay and defining a robust strategy to attract and retain them accordingly.”

Generally speaking, customers are satisfied with both the means and the number of interactions with their insurer, according to the report, which means insurers are having to optimize each interaction to avoid estranging customers. However, customers who rarely interact with their distributors/insurers are still more prone to see their insurance purchases as commodities. These same customers are the ones most likely to become dissatisfied and switch insurers.

At the Treutel Insurance Agency, Inc., in Bay St. Louis, Miss. the key to keeping its policyholders loyal is providing instant service to customers, according to Angelyn Treutel.

“The key to maintaining customer relationships is making time for them when they call or come into the office,” she says. “Insurance is complex and requires that we educate our customers on their coverages. We avoid having customers leave a message for a call-back because we work as a team, so any person on our team is able to assist them. We keep the personal touch and get customers through to a live person. We have many customers who have been with our agency for multiple generations because of our reputation for service and for being there when times are tough, particularly following the devastation of Hurricane Katrina.”

While pricing and customer service are both key in keeping insureds satisfied, the study also found that those buying life insurance products have a greater tendency to remain loyal in comparison to non-life policyholders. Jeanne Heisler, agency principal at the Ronan Agency, Inc., in Brick, N.J., has seen a similar trend at her agency.

“We absolutely agree…we do a lot of life policies and when we write an entire account we find people consider us their professional agency and they will tend to talk to us before going out and looking for information other places,” she says.

Heisler has a first-hand understanding of why some customers stay and why other’s stray---she’s experienced New Jersey’s progression from a struggling insurance market to one that’s more competitive. She’s seen many customers leave, but has also managed to regain some of those accounts.

“We’ve had a lot of turnover since we went from crisis model to a competitive mode. So many people did switch and, sure, it’s less expensive, but they’re getting less coverage because they didn’t understand what they purchased. What we’ve done is continue to write to them and encourage them to bring in their policy so we can get to the root of what made them switch…in some cases it was just because of the mail they got (offering lower prices),” Heisler says. “What happens a lot of times is they have a loss and realize they don’t have the coverage they need. We have seen some of those clients return…by not writing them off we are finding they come back.”

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

L&H Trends

Insuring the American Dream

New study shows public confidence in Social Security waning.

A recent MetLife study focused on the public's perception of “The American Dream,” which is the notion that opportunity abounds and that each generation will have an improved standard of living over the previous generation. The good news is that a majority (66%) of Americans feel that while they have yet to achieve the dream, they remain optimistic about the future and feel it's still possible to achieve it in their lifetime.

However, despite the optimism, the study also finds that many believe that the next generation will face significant obstacles to have a comparable standard of living.

“Across generations, an overwhelming majority of Americans feel future generations will feel more of a financial burden than they are experiencing now,” says Beth Hirschhorn, senior vice president and chief marketing officer at MetLife.

Some additional findings gleaned from the study are of particular interest to independent insurance agents. First, the majority of generations feel there is more at risk with respect to their financial future than in the past. This is particularly true for baby boomers and generation X. Secondly, the study indicates that nearly three in four Americans (72%)---and a strong majority of each generation---don't believe Social Security will be available in the future. Half (53%) of respondents no longer expect Medicare to be available. This suggests that the debate about funding these programs has registered with the general public, and there is little optimism of finding a solution. These sentiments are very interesting because over the past 70 years, the federal government has enacted significant "safety net" programs such as Social Security and Medicare. Clearly, many people are concerned about the viability of those programs and don't want to be dependent on them.

The best way to address this concern is through self-sufficiency and planning. The majority of your agencies’ customers most likely feel this way, so you should discuss with them how insurance and investment products can help transfer or meet this concern. Financial products are becoming more sophisticated and can satisfy a variety of needs through customization and riders. For example, life insurance can have a long-term care rider and annuities can provide a minimum guarantee of life income and allow for withdrawals to meet emergency living needs. More than ever, consumers need help in using insurance products to deal with their concerns.

Take a moment to review the study results and the next time there’s a break in a conversation with a customer, share the study with them to gauge their perspective. If they share the concern that the viability of government-provided programs, ask them what they are doing about it. Ask them if they would take an umbrella with them if a majority of people believed that it would rain that day. If they agree with that logic, then ask them what preventive steps they are taking with their financial security and if they need any help in achieving their goals.
To access the MetLife study, click here.

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

Agency Management

Producers, Lawn Chairs and Brothers-in-Law
Do you account for agency operating expenses?

Office space, electricity, desks, computers, coffee machines…all things necessary to open your doors every day. But how do you factor these expenses into your profit margin? They’re not line items you can attribute to a particular client, yet they’re necessary for your daily operations.

For example, take the owner of a company that builds fancy lawn chairs. His pesky brother-in-law wants a set of lawn chairs at cost. The owner agrees to sell them at cost, but how much does it actually cost to build a lawn chair?

Here are the company's expenses:
Materials - $60
Direct labor - $30
Operating expense (rent, staff, etc.) - $20
Transportation - $3
Sales commission - $5

That leaves an average profit of $5.

Which of these expenses would you include to determine the brother-in-law's price? Most would include materials and direct labor, and since the brother-in-law is going to pick up the chairs himself, no transportation expense or sales commission needs to be included. Also, most people agree that "at cost" implies no profit. Operating expenses, like rent and benefits, is the only category that is not clear cut. Should the brother-in-law be charged for these expenses?

To build the lawn chair, the factory has to have insurance. The company needs electricity, factory space and staff to manage the computers, answer the phones and keep the books. Benefits are necessary to attract and retain quality employees. It cost money to buy tools. Since these are required expenses, they should be included, right?

The owner’s wife says that he would need to spend this money regardless of whether her brother buys a lawn chair or not. Therefore, these costs are not directly attributed to his particular chairs. According to the wife, then, the at-cost amount should be $90. Setting aside the fact that the owner really doesn’t like his brother-in-law, the owner feels strongly the price should be $110. But, how does he convince his wife?

As the owner and his wife discus this over dinner at an upscale restaurant, he cites a recent Wall Street Journal article that detailed how restaurants often charge $5 to $10 for a salad that costs less than a $1 to make. They charge $22 for salmon that costs them $2.50. In fact, just to break even, they average a markup of 300% over their food costs. If they only averaged a 200% markup, they would likely go out of business. In other words, all those little things like rent and insurance really add up. Just because those costs cannot easily be attributed to one specific meal or one specific lawn chair does not mean those costs should be ignored.

The owner then uses another example closer to home. His wife works for a regional telephone company, so he asks why phone calls are not free. It does not cost the phone company anything extra for a person to make a call. The lines, exchanges and computers are already there.

“Yes,” she says,  “but we all have to pay collectively for the lines, the maintenance and staff to keep the system running.”

Exactly! Every customer also has to pay for all those behind-the-scene costs that enable him to build lawn chairs.

What do lawn chairs have to do with insurance sales? Not much, except operating expenses. Agencies, too, must consider operating expenses when making sales. Many agency owners would exclude operating expenses when selling to their brothers-in-law. In fact, most exclude these expenses when selling to strangers.

To see what the agency financials look like, click here.

Bill Wilson (bill.wilson@iiaba.net) is the Big “I” director of Virtual University. 

VIEW: Agency Management

Parenting Skills = Management Skills

Management guru Peter Drucker built an illustrious career based on a simple insight: Dedicated employees are the key to successful companies. The idea seems obvious, yet few employers get it. In short, employees are extensions of their employers.

How do you help employees become reliable team members? The answer is to treat them as if they were children. This does not mean adopting a condescending attitude. Rather, good bosses recognize their role as shepherd, teacher and coach---the traits of good parents.

Nurture and teach employees. Too often, employees find themselves tossed into the fray and expected to figure things out. A successful boss takes time to ensure employees are ready for whatever comes.

Employees want to understand what authority they have. Letting employees know their roles and where they fit is the most important first step in creating a team.

Pull out the parenting skills again. What should kids know about the future---everything, nothing or what they need to know? The answer: what they need to know. Tell them nothing, and you’re inviting insecurity and encouraging rumors. Telling them everything is more than they, or the business, can handle. Sharing too much information is easy to do in a close-knit small business. Employees need to know what they need to know, when they need to know it – and nothing more. Find the right balance and employees will feel secure.

With that in mind, use parenting skills to help improve hiring and firing styles.

Hiring is an intimidating task. After a short interviews and resume review, it’s decision time. The wrong choice could mean headaches and hassles…then firing time.

Pretend it’s a shopping trip. Those who can shop can hire. Know what’s needed, what can be spent and what to expect. Keep those things in focus when making a decision.

Attitude trumps skill. Skills can be taught, but attitude is inherent. A potential employee may be laden with skills, but if he has a bad attitude, the agency doesn’t need him. A bad attitude is like a malignancy, infecting and spreading to all it touches.

Unfortunately, hiring is an inexact science. Sometimes it’s possible to make the wrong call. As losing is part of winning, firing is part of hiring.

Firing someone is hard on the employer, the employee being fired and everyone in the office. A firing style is as important as a hiring style. Do it poorly and the cohesion of the office is undermined.

Understand it’s an employers fault when employees are fired. He or she hired them, trained them and provided their work environment. An employer thought they were the right people for the job. Learn, grow and improve from the situation. Become a better “parent.” Understand that while the employee didn’t fit in at an agency, it doesn’t mean the person’s no good. Leave his or her dignity intact and be sensitive to his or her feelings...unless the firing was for a legitimate cause (i.e. stealing, drugs, etc.), an employer can see it coming. When problems first appear, let the employee know and work to fix them.

Richard J. Sacks (rjs@twelvecommandments.biz) is author of “The XII Commandments for Small Business.”