Ethics Center: Customer Service

Policy Lapses Could Prove Costly to Agents

An insurance broker in Louisiana is being sued by a widow who claims her husband was not properly notified when it was time to renew his policy, which ended up lapsing before his death.

This real-life case, reported in the Oct. 8, 2015 Louisiana Record, brings up a fundamental question about whether or not the agent bears responsibility to make sure a client is made aware when a policy is in danger of lapsing.

In the actual case, the widow’s husband purchased a life insurance policy with a $1 million death benefit back in 2006. The plaintiff asserts that in 2012, the policy was set to renew but the defendants did not notify her or her husband about a payment needed on the policy. The plaintiff said it was only after her husband’s death in August 2014 that she found out about the missed payment, and the carrier subsequently denied her claim.

 She said the defendant had an obligation to notify her that the payment was delinquent but failed to do so, and the defendant is accused of negligence and breach of fiduciary duty.

While it may seem the carrier bears the responsibility to notify a policyholder when a policy is about to lapse, it isn’t necessarily that simple.

While primary responsibility for premium notices and reminders lie with the insurer, the agent shouldn’t totally wash his or her hands of the matter when a customer is about to lapse, according to experts at the National Ethics Association about this situation. Beyond looking out for your clients’ best interest in making sure they are fully aware in a potential lapse situation, it is usually in the agent’s best interest to make every effort to avoid a lapse as well, since every time a customer lapses, the agent loses out on renewal commissions.

“The broker has incentive to stay on top of this,” said Steven R. McCarty, Chairman of the National Ethics Association. “It means another commission, although renewal commissions are small in themselves. But that doesn’t necessarily mean they are ultimately responsible. I believe the insurance companies should factor in the costs of a mandatory and proven warning system.”

NEA Director of Operations Japheth Smellie said he’s been doing some reading on this very subject of late with respect to P&C insurance. “While it’s probably old news to you seasoned fellas, the insurance code requires that a company (i.e. insurance carrier) only needs to show proof of mailing; not proof of receipt,” he said.

Regardless, Smellie said it’s in everyone’s best interests for the broker to stay in the know and make sure his clients do, too.

McCarty said he believes that denied claims due to lapse is all too common, and that insureds who have lapsed have the right to know whether the insurance company sent premium due notices to the right address, giving clear warning of the pending lapse. “That’s why I think that insurance companies should send final notices certified mail with signed receipt and/or a live rep visit,” he said.

“Can the insurance company prove that the premium [notice] was sent and received by the person responsible to make the premium payment? If not, I believe they should pay the claim,” McCarty said. “Reform is needed here. But it will jack up the premiums on life insurance because lapses and denying claims are insurance company staples.”

Bottom line? While the carrier may have primary responsibility for notifying a policyholder of an impending lapse, remember that the carrier doesn’t necessarily mind when coverage (particularly for elderly policyholders) lapses, letting them off the hook for a big payout when the formerly covered person dies. The agent has a direct financial interest in preserving the business, not to mention looking out for the client’s best interests.

Plus, since the agent may well get sued along with the insurer, as in this case, it behooves him or her to make sure clients know when their payments are due and when they’re about to lapse.

“To this end,” said Harry J. Lew, chief content officer at the NEA, “I think they should pay attention to their insurers’ automated notice of non-payment and then reach out to customers who are about to lapse their policies.”

Originally published in Advisor Ethics on LifeHealthPro.com on 10/21/15. Reprinted with permission.

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