September/October 2008
Purchasing insurance, for most scrap managers, means venturing into the unknown. To get the right coverage, find an agent or broker you trust—but also shop around regularly for better deals.
By Lindsay Holst
"If you don't know diamonds, you'd better know your jeweler." Howard Glick, president of Tri-State Iron & Metal (Texarkana, Ark.), uses that adage to describe why, for most scrap companies, the insurance agent or broker is an essential part of the insurance-buying process. Each industry and company faces unique risks, and purchasers can struggle to fully understand the intricacies of the various coverages and endorsements each carrier offers. Further, there's the concern that the payments the agent or broker receives from the insurance carrier will affect the choice of policies he or she recommends. The insurance-selection process has the potential to be stressful and laborious, but it doesn't have to be, provided that you understand the coverages you need for your business, find an agent or broker you trust, ask questions about compensation, and reassess your coverage regularly.
Are You Really Covered?
Consider the typical buyer-seller relationship. The seller wants to maximize its revenue. An insurance carrier does this by analyzing a business's risks and charging premiums that cover potential claims and provide a profit. The buyer wants to get the maximum value for the lowest price. For a scrap company buying insurance, that means finding the best and most comprehensive coverage for its needs for the lowest premium. The two parties to any business transaction have opposing interests, and "things get slightly more complicated in the insurance arena because the product isn't exactly a bar of soap," says a management consultant to the insurance industry.
One complication is simply language: "Insurance policies deal with terms the carrier and agent use all the time, while the prospective buyers only deal with them when they're buying the insurance or when they have a claim," the consultant says. Buyers think they know what coverage they're buying, and agents or brokers think they've been clear about what policies they're selling. Unfortunately, any confusion typically manifests itself when it's time to make a claim, not during the purchase process. Everyone has heard horror stories about rainy-day coverage that didn't hold water. Perhaps it was a devalued piece of equipment that now costs double its initial price to replace. Or a policy that covered every natural disaster except the one you never saw coming.
To avoid realizing too late that it's been paying for inadequate coverage, a company seeking insurance must do some research to understand how much and what sort of insurance its business requires. "At the end of the day, policyholders simply must have a good handle on what sort of coverage they need based on their business," says a senior-level insurance adjuster. "Because by the time I arrive at the scene, I'm the one that has to tell the customers that they don't have coverage for their loss. And at that point, it's too late."
Joel Denbo, chief manager of operations at Tennessee Valley Recycling (Decatur, Ala.), remembers one particular close call involving one of his company's trucking subcontractors. "We were reviewing all our insurance to make sure everyone who came onto our facility—including the contractors—was properly covered, and we noticed that one of our long-term vendors was not properly insured," Denbo remembers. Knowing that Tennessee Valley could be liable for a claim made against that subcontractor in some circumstances, "our company got involved, for our purposes, to make sure the vendor was properly insured," he says. Shortly thereafter, an accident involving that subcontractor resulted in a fatality and a large claim. Fortunately, by that time the contractor had the proper insurance in place. The company still thanks him for helping to get it properly insured, Denbo says.
Protecting Your Interests
One person who can help a company determine the right insurance coverage is the insurance agent or broker. Most people use those titles interchangeably, but there's a difference between them that's important to understand. An insurance agent works for one or more insurance providers. A captive agent works for (and sells policies for) a single provider; an independent agent works for (and sells policies for) multiple providers. An insurance broker works for the company purchasing insurance, matching that company up with one or more insurance providers who meet its needs. Why does this matter? "A broker is concerned with the interests of the party that hired [him], which is you, the buyer," the management consultant says. "An agent's obligation is to the person who hired [him], which is the insurance company."
Further, "agents have no [legal] duty to conduct a thorough examination of your business or to make sure you have appropriate coverage," writes attorney Greg Boop of Lougovskaia Boop (Cleveland) in the article "Insurance Agents vs. Insurance Brokers" on About.com. "Rather, it is your obligation to make sure you have purchased needed coverage." In contrast, in most states, "brokers have the [legal] duty to analyze a business and secure correct and adequate coverage for the business." States also may require brokers to have more education and experience than agents.
That's not to say an agent can't analyze your business and select the proper coverage to meet your insurance needs. "Legally, all any independent agent has to do is give you what you ask for," the management consultant says. "The rest of his or her conduct is based on ethics and professionalism. Clearly, an independent agent works for the insurance company, but the agent also ought to create a situation where ‘independent' means he or she is working for you as well."
Glick, who has handled purchasing his company's insurance for 30 years, says Tri-State has had the same insurance agent since the early 1950s. "We've changed carriers over the years, but we've always had the same agent," Glick says. "It's a relationship. We just feel very comfortable with who we're dealing with because he's been with us through the good times and the bad times. When you sustain a loss, you really want somebody who is willing to go to bat for you."
This sort of trusting relationship does not develop overnight. To find the right agent or broker, says insurance consultant Joy Gander, principal of Gander Consulting Group (Madison, Wis.), start by asking a basic question: Exactly what services is the person going to provide? Will she assess your company to help you understand what insurance you need to purchase? (If not, the company can hire a consultant like Gander to analyze its operations and put together coverage specifications.) Will she merely place the coverage on your behalf? Will she issue a certificate of insurance—a document listing the types, terms, and amounts of insurance the company holds?
Next, Gander recommends that the insurance-seeking company understand exactly how the agent or broker will be involved in claim situations. "You have some agents who will fight tooth and nail for their insureds, and others who seemingly fall off the face of the earth if a claim goes bad," she says. An agent's commitment to the customer in claim situations may, in part, be an issue of experience, so Gander advises looking into the agent's professional training and expertise. "Ideally, you want someone who has diverse experience in [the insurance] industry, but also with a little bit of experience insuring our industry as well," says Frank Cozzi, president of Cozzi Enterprises (Burr Ridge, Ill.).
Though it works in some circumstances, Gander cautions those who select their agent or broker based on a friendly or familial relationship. "Just because they're a good friend or brother-in-law does not always necessarily mean they're going to give you any better service or protection than Jane Doe agent down the street," Gander says. "In fact, sometimes I've found that there is such a close emotional tie between the agent and the insured that things fall through the cracks. That's a generalization, but it does happen."
The Compensation Question
"The work of agents and brokers is something of an art form," says Tennessee Valley's Denbo. "That is, assuming they're working for you and not for themselves. Their [compensation] is important, yes, but it can't be the only reason they're doing their job." Denbo gets at a question many companies have about their agents or brokers: Are they recommending the policy that's best for my needs, or the one that's best for their wallets?
Compensation is a sticky subject for the insurance industry. Each type of insurance seller earns a living in a slightly different way. Captive insurance agents might earn a salary and/or receive a commission or bonus. Independent agents typically work entirely on commission. An insurance broker might charge the insurance-seeking company an administrative fee or a higher premium. A broker also can earn a commission from the insurance carrier. Though commission payments can be both legal and ethical, they have come under scrutiny for how they might influence the agent or broker.
Of particular concern are contingency commissions—incentive payments insurance carriers pay brokers or independent agents based on the volume of business they place with their company and/or the profitability of that business. Ethical guidelines from the International Risk Management Institute (Dallas) state that though contingent commissions are not necessarily unethical, "they do present conflicts of interest in that an agent or broker may receive more compensation for placing a customer with one insurer than another." Because brokers legally represent the customer and not the insurer, they typically receive the most criticism for accepting contingent commissions.
"Depending upon how juicy the contingency commission package is, it could [affect] the agent's recommendation to place coverage with insurance company X rather than Y," Gander explains. "And to take that one step further, an independent agent [or broker] may get bids from both X and Y, but if Y comes in with a lower price or the contingency commission isn't as great, [he] may not even put the Y quote in front of his customer." If a broker or agent is tasked with collecting competitive bids, make it clear that you, the customer, would like to see all of the bids, regardless of price differentials.
In 2005, the state of New York indicted eight former executives of the world's largest insurance brokerage firm, Marsh & McLennan Cos. (New York), for misrepresenting bids to clients, or bid-rigging. The executives allegedly accepted more than a billion dollars in contingency commissions from insurance companies in exchange for steering business their way and protecting them from competition. The lawsuit also accused the executives of soliciting and obtaining fabricated high quotes from insurance companies to trick its customers into thinking the bids were actually taken from a competitive marketplace. To date, two of the executives have been convicted of felony antitrust crimes; to settle a civil lawsuit over the allegations, Marsh paid the state $850 million and agreed not to accept contingency commissions.
"The best way a company can ensure it isn't a victim of a less-than-thorough bidding process is to do its own research," Gander says. She recommends that a company ask a prospective agent or broker what, if any, commissions he or she will be receiving. "It's not unusual for buyers of insurance to be reluctant to ask their brokers or agents how much commission they're getting," she says. "But forget about being apprehensive and just put the question on the table—and ask for both the percentage and dollar amounts."
If a company is uncomfortable with how a contingency commission might influence the agent or broker, it has the option of requesting that the person work for a straight percentage-based commission or flat fee instead. "If the company negotiates with the agent, offers a flat fee for [his or her] services, and ensures that the agent won't be accepting a commission from an insurance company, the hope is that the agent will be more true to the client, who is hopefully getting the best coverage for the lowest dollar," Denbo says. Not all agents or brokers will agree to this arrangement, however.
A Routine Checkup
The work of finding insurance isn't done once the policies are in place. Experts recommend that a company regularly reevaluate its insurance options to ensure that it has the right coverage and is getting the best prices for the coverage it requires. "Depending on its size, a company should revisit other agents and carriers every few years," Cozzi says, adding "it should let its current agent know it's looking at its options" to keep the agent in the loop.
"We rebid all of our insurance about every three years," Glick says. "We may have been with the same agent for decades, but we don't leave [our insurance] completely up to him. We've shopped it [around] and checked with other carriers ourselves, but we've found that he has always gotten us the best deals."
At Tennessee Valley, one of the company's owners is also in the insurance business, which helps the company ensure its coverage is adequate for its needs. "We do have a unique situation in that sense," Denbo says, "But that doesn't mean we don't still go out every year for quotes from various other insurance providers." •
Lindsay Holst is assistant editor of Scrap.
Purchasing insurance, for most scrap managers, means venturing into the unknown. To get the right coverage, find an agent or broker you trust—but also shop around regularly for better deals.