Choosing a Trusted Advisor over an Insurance Salesperson
The complexity of the current insurance and risk management marketplace is changing the requirements of the broker-client relationship. The expectation of more astute clients and project owners is to engage a value-added strategic advisor, not just a salesperson who pedals insurance products. Insurance plays such an important role in protecting an organization from various risks that insurance (preferably, risk financing) knowledge, augmented by objective risk management advisory services, is the new calling card for today’s insurance brokers and risk management consultants. Choosing a professional who can provide objective unbiased insurance coverage advice is essential.
An organization’s financial security can depend on its insurance coverage if something goes wrong. Therefore, it is imperative for a project owner to have the right insurance coverages in place. However, sometimes it is difficult to obtain objective advice on the specific insurance coverages that are essential to sustain the financial security of an organization if the insurance broker lacks the requisite knowledge and understanding of a client’s business operations. Or, if they have conflicting motives because of legacy relationships with insurers providing incentives or commissions on annual placements.
Buying the right insurance can be a very complicated process. Most project owners will depend on their insurance agent or broker to advise them and help them to customize an insurance program that meets their specific needs. Otherwise, there will be gaps in the organization’s coverage, or the possibility of paying for unneeded insurance.
(Note: For purposes of this discussion, we will not get into a laborious differentiation of the terms “agent” or “broker” and will keep it simple. We realize that there is a technical difference between an agent and a broker. Agents are authorized by one insurance company to sell only the products of that insurance company that they represent, while brokers typically maintain numerous relationships with various insurance companies. However, in some cases, an individual can be licensed as both an agent for one line of insurance coverage and a broker for other lines of insurance coverages. Regardless of variations in terms used in the insurance vernacular, e.g. “agent/broker”, “producer”, “intermediary”, “wholesaler”, etc., remember one important thing. There is absolutely no difference in the duty of care that these insurance professionals owe to a client.)
Make Sure Your Broker Is Qualified to Meet Your Specific Requirements
The best way to ensure that a client obtains the insurance advice and coverage they need is to find an insurance broker who can help meet a client’s specific needs. The best way to accomplish this is to ask the right questions at the onset of the selection process to engage a competent insurance broker. A key consideration is to focus on the insurance broker’s construction industry experience, the professional services they can provide, and how much they will charge for their services. Obtaining answers to some basic questions about insurance brokerage services is just the start of the process to evaluate a broker’s value proposition and selecting the right broker and trusted advisor.
There are several key questions that should be asked to obtain substantive information that will assist a project owner with their broker evaluation process. It is also advisable to request that brokers complete and submit a statement of qualifications (SOQ) form.
The SOQ is basically a streamlined way of obtaining some preliminary prequalification information about the capabilities of a broker. It will also serve to compile a short-list for a project owner to use to contact pre-qualified brokers when it is time to go through the formality of a more time-consuming RFP process.
A cover letter should be sent to the brokers with the SOQ to provide a profile of what your organization does, its operations, organizational structure, and the type of projects that the project owner is involved with on an annual basis. It should also state that the project owner is evaluating making a change or working with a new insurance broker, and require brokers who are interested in this opportunity, complete the SOQ form and make formal submission to the project owner for consideration by a specific date.
Before we go any further, let’s take a minute to review some of the typical services provided by insurance brokers to meet a project owner’s operational requirements.
The Typical Basic Services of a Broker
The typical services most brokers provide are predominantly focused on the insurance placement process, and other assigned tasks. These services include the following:
- Have initial meeting with a client to review and assess the client’s operational, organizational, and project risks & loss exposures. (risk appetite/risk tolerance)
- Prepare an insurance specification and underwriting submission.
- Market insurance & risk management program to obtain quotes and proposals.
- Negotiate insurance pricing, limits, retentions, and terms with underwriters.
- Review and analyze draft insurance policies to ensure compliance with terms.
- Assist client with claims management on insured claims, and loss control tasks.
- Be responsive to facilitate processing of large or catastrophic losses, and lead negotiations with insurance carriers to ensure that claims are handled equitably.
- Conduct claim reviews, and advise on settlements or denials of insured claims.
- Respond to emerging issues, coverage questions, and review contracts.
- Provide client with administrative services for issuing COIs on timely basis.
- Inform client of any/all material changes to insurance policy(s), and make recommendations if policy(s) require changes, modifications, or endorsements.
- Prepare and process invoices, facilitate insurer policy(s) audits, as required.
The Broker Should Meet a Project Owner’s Requirements & Expectations
Now that we have stipulated the typical services and tasks that a broker should provide to a client, let’s discuss how a project owner can obtain the required information from a broker for the specific services the broker will provide by utilizing the SOQ request form. The objective is to obtain background and experience information for pre-qualification:
What Is the Broker’s Construction Industry Experience?
What percentage of the broker’s clients are in the construction industry? What types and how many construction projects have they worked with project owners, as part of their book of business, on annual basis? How large are their clients, (e.g. number of employees, number of office or project locations, annual revenue?) What types of insurance coverages do they spec, market, place, and manage for their clients, (e.g. workers’ compensation, general liability, excess liability, property, pollution liability, etc.)
What specific experience does the broker have with clients who have similar types of risk and liability issues as a construction project owner? What coverage lines, and limits, would be required to mitigate the potential for any losses or claims? Does the broker participate as a sponsor or member of any construction industry associations?
It is critical that your insurance broker have a fundamental understanding of how your class of business operations and is knowledgeable of its specific risks and exposures. Your broker should be familiar with the type of construction projects you are involved with (past, present, and future), and the types of contracts that are typically executed by contract management department. The higher the percentage of the broker’s business that is dedicated to construction project owners, especially project owners with a similar risk profile as yours and annual revenues, the higher the probability that the broker will understand your organization’s insurance & risk management needs and requirements.
What Is the Broker’s Practical Experience with Similar Accounts and Placements?
A project owner needs to consider the types of insurance coverage the broker normally places (e.g. if your organization is involved with design-build project delivery, find out if the broker is currently obtaining professional liability insurance or OPPI coverage for other clients.) The broker should be regularly placing property & casualty coverages for operations as well as coverages for construction projects, e.g. builder’s risk, CPL, etc.
As noted above, brokers who belong to construction industry associations, e.g. AGC, DBIA, CFMA, are probably a lot more knowledgeable on current industry trends and what project owners require and expect. A broker with an association membership may also be able to introduce their client to other project owners, which could be helpful.
What Professional Services Does the Broker provide?
What services will the broker provide in their normal course of broker-client services? Does the broker have adequate staff to make timely reviews of contracts and consult on a specific project’s coverage needs? Will the broker meet on a regular basis to review the project owner’s insurance and risk management program, and make any necessary changes if required? Will the broker be able to provide timely quotes from the insurance markets on construction projects that may have accelerated schedules? Can the broker obtain insurance quotes or rate sheets from the global insurance/reinsurance markets, or at least coverage indications to help price insurance costs for proposed projects?
Will the broker outline in a service agreement all their services?
From this information, a project owner can determine if a broker is going to provide the level of value-added services required for the anticipated level of broker compensation. There may be some real benefits to using a broker that has a responsive staff to provide quotes and review contracts. The size of the broker’s staff should depend on the size of the broker, e.g. global, regional, local, to meet a project owner’s service requirements.
The broker should be able to develop insurance specifications and contract language to ensure that contractors comply with a project owner’s insurance coverage requirements. It is beneficial to have a broker who is willing to review contractor compliance issues prior to award of construction contracts to determine if there are any insurance issues that require resolution ahead of time to mitigate or eliminate project risks & exposures. (e.g. the broker might recommend that a project owner include insurance requirements for the contractor to purchase project-specific professional liability coverage or an OPPI policy for the benefit of the project owner on certain projects.) This would provide design E&O coverage to mitigate the potential of the project owner being held liable for certain design failures on the construction project. (Note: Delegated design has always been a very problematic area for many contractors, and this risk requires an astute broker, and an attorney, to provide the appropriate council to mitigate any potential liabilities.)
The broker should be willing to review the certificates of insurance (COIs) received from contractors and subcontractors on projects (especially on a wrap-up insurance program; OCIP or CCIP, for the contractor-provided non-wrap-up insurance coverages) in order to make sure that contractors and subcontractors insurance is in compliance with the project owner’s contract stipulated insurance requirements. The broker should also be able to train a project owner’s staff on how to examine COIs against the contracts.
The broker should be willing to provide in the service agreement an outline of the base services it will provide, and any additional costs that would be charged for out of scope services. With a service agreement in place, it will remove any ambiguities and a project owner can check on any specific cost of services before the broker contract is executed.
A project owner can also use the rate sheet in the service agreement as a checklist to verify that the services are being provided by the broker are as proposed. Remember, when a broker is soliciting business and trying to get a new account, they can make all kinds of promises about services, but unless a formal executed agreement is obtained, it may be difficult to hold a broker to services if they are not stipulated in an agreement.
What Loss Control Support Services Does the Broker Provide?
Does the broker have construction risk management staff that can provide safety, loss prevention, and loss control services for a project owner’s construction operations? Can the broker’s loss control staff provide training and education to the project owner’s staff?
Brokers that have construction risk management staffs can assist project owners in controlling losses and keeping worker’s compensation rates as favorable as possible. Risk engineers can advise on safety measures that can reduce losses. Does the broker offer any construction safety seminars or OSHA training? Risk engineers can make periodic visits to inspect construction jobsites and recommend safety improvements.
Experienced risk engineers can advise project staff on what to do if an accident occurs. They can also provide loss prevention advice on how to mitigate more damage from occurring, review documentation to report a loss to insurers, and assist project staff to properly complete accident forms prior to being submitted to insurers’ claim processing units for investigation and disposition.
What Claims Management Support Services Does the Broker provide?
Does the broker have a claims department with dedicated claims professionals on their staff who are members of a department with construction claims experience? What type of accident and/or claims investigation services does the broker regularly provide?
The broker should have experienced claim professionals with a proven track record for the resolution and processing of construction claims. They should have the requisite skills and understanding of construction claims handling for similar project operations. An experienced broker will know how to effectively handle claims so that coverage is provided and payment is made by the insurer(s) in an efficient and timely manner.
At a minimum, the broker should have a responsive claims unit and be able to assign individuals who are experienced in construction claims to manage a client’s claims. If a serious accident occurs, the broker should be willing to meet with the project owner and their insurance company to develop a strategy for how claims are handled and settled.
What Are the Broker’s Service Fees?
How much does the broker get for remuneration for their services? What is the broker’s normal compensation structure, i.e. paid a commission or paid on a fixed-fee basis?
Many project owners are not big fans of broker commission-based structures. Typically, depending on the size of an account, commissions will vary. A broker will not be able to definitively tell you how much your insurance program will cost you until they have had a chance to review and access your insurance policy summary with coverages, policy and aggregate limits, retentions (deductible or SIR), and other subjectivities. Historically, the commission range on commercial general liability (CGL) and auto liability insurance is usually in the range of 10% to 15% of the premium. Worker’s compensation insurance can vary in the range of 2% to 10%, depending on the amount of insurance purchased for an annual policy, and if any premium discounts are applied by an insurer.
Despite the continued debate about the way in which brokers are compensated, many brokers continue to be paid by insurers a marginal commission on placements with certain insurers. The commission is a percentage of the premium on an account. When the premium increases, the dollar amount of the commission goes up. When premium goes down (sometimes due to effective negotiating on the part of the broker, changes in coverage, or because of a competitive insurance market), the commission goes down.
In addition to commissions, brokers may earn additional fees or other rewards from insurers based on the volume of business placed with an insurer. The commission percentage might be based on the volume of business a broker places with an insurer, e.g. the highest commission rates may be reserved for preferred brokers who these insurers consider to be placing a substantial amount of business through.
Are Contingent Commissions Still Alive and Well?
As noted above, insurance companies compensate brokers in several ways. They typically pay them a fixed percentage of the premium the insured pays. This varies depending on the type of insurance coverage involved. These fixed commissions can range from 2% to 20% depending on the type of policy and the insurer or reinsurer.
In addition to the above fixed commissions, insurance companies recognize a broker’s efforts through the potential for them to earn additional compensation, which is referred to as contingent commissions. These commissions are based on the profitability of the broker’s total book of business with that insurance company. The commission paid to the broker considers the amount of business the insurance company writes with that broker and the amount of business the insurance company retains with their insureds. This is basically the insurance company’s method of offering an additional incentive.
What Broker Compensation Structure is Better, Commission or Fixed Fee?
Many brokers are reluctant to disclose what portion of the premium goes to their brokerage firm and try to avoid broaching a subject that may cause a client to question the commission rate. However, the percentage of commission is as negotiable as the coverage and terms of the insurance policy. If the insurance buyer is savvy enough, what a broker is paid, and what a broker does for a client prior to and during the policy year, can be more effectively managed by using a brokerage service agreement.
A brokerage service agreement can be an important component of a risk management plan to establish the specific duties that will be performed by a broker. Also, changing the compensation structure from a commission-based structure to a fixed-fee structure.
With a fixed-fee broker compensation structure, a project owner can at least identify the amount a broker will be paid for their services to have a tangible compensation metric. Paying a broker, a fee instead of a commission takes the compensation question out of the equation when the broker is negotiating premiums and coverage. Since the broker is no longer enticed by higher premiums that generate higher commissions, the broker can focus more on obtaining the best coverage for a client at hopefully the lowest premiums.
Therefore, a project owner is probably better off paying a broker a fixed-fee for the broker’s services versus negotiating a lower commission. A broker getting a fixed-fee for their services will also eliminate an incentive to sell a project owner more insurance than is absolutely needed because there is no commission, and insurance placements will be purchased net of commission and invoiced accordingly. Whatever payment terms are decided, it is recommended these terms be stipulated in a broker service agreement.
Should A Broker Service Agreement Always Be Used?
As a risk management consultant and practitioner in effective risk-transfer mechanisms, I strongly advocate the use of a formal agreement that outlines the services a broker will provide to a project owner. More importantly, the broker and project owner should fully understand the specific services the broker will provide, the compensation that will be received for these services, and the established rates for any additional out-of-scope services. Remember Contracts 101? A contract is based on offer and acceptance of the terms, there must be consideration, and there needs to be a mutual understanding of the contract by both parties. (I’m assuming that everyone who is reading this article is of Sound Mind, i.e. so the Capacity requirement has been met by everyone being capable of understanding the terms and legalities of a contract agreement.)
Both parties will be protected by having either; 1.) a formal written contract signed by both parties, or 2.) a letter from the project owner to the broker stipulating the services. This will significantly reduce any possibility of disagreement in the future. Hopefully!
What are the Broker’s References?
It is important to obtain unbiased and objective references about the brokers who are being evaluated for their past performance with clients on similar accounts. Sometimes a phone conversation will do with past clients, but getting written testimonials is always better to include with the SOQs. At a minimum, obtain the names of contact people at three construction company clients who are highly correlated with your organization. Request as references the name of a person to contact, capacity, and relationship.
Since many references may be apprehensive of going on record in a written statement, because of all the legalities of our suit-happy and PC-overkill world these days, the best you might be able to do is to find-out about a broker from references is in a phone call. When you call a reference, ask them about their business risks and requirements. Also ask if the construction projects they are involved with are any different from the projects you are involved with. If they are totally different from the types of risks and exposures that you encounter on your projects, their broker may not be the right broker for you.
In addition, it would be informative to ask the broker’s references how satisfied they are with the level of diligence, responsiveness, and quality of services they are getting, and if the broker appears to be knowledgeable of their construction business operations and has good results with the global insurance markets in placing insurance coverage. Also, ask how long it takes for their broker to obtain indications, quotes, or pricing information. Ask if they are satisfied with their broker’s methods and results on how insurance claims are managed and dispositioned. Remember, you need a broker who is an advocate, not just an insurance salesperson. If your broker doesn’t provide you with adequate support against an insurer that may disputes your claim, then your insurance policy(s) are not worth the amount of money for the paper they are printed on. Claim advocacy is critical.
So, do you think you are better prepared to evaluate and select the right construction insurance broker who will fit the role of being your trusted advisor rather than dealing with another insurance salesperson? I’m sure you are more prepared now to be able to not only ask the right questions, but be more cognizant and strategic in your evaluation.
Remember one last thing. Caveat emptor! Let the buyer beware!
Some Additional Food for Thought
Regardless of all the dialog you have heard over the years from brokers who have told you they are client-focused, or they will provide you with a more consultative approach to manage your specific insurance & risk management program requirements. Unfortunately, the reality is that the insurance brokerage dynamic has not changed. It is still all about the insurance procurement transaction and the premiums earned. It is still a transactional business model for the sale of commoditized insurance products. Many brokers are still deciding who the client is. Is it the insurer or is it the insured?
The insurance brokerage playing field is still the same. Producers, a glorified title for an insurance salesperson. Evolving from being a sales-centric consultant is not the same as being a trusted advisor or an extraordinary advisor and unbiased client advocate. Project owners should consider obtaining some objective and unbiased advice periodically from an independent risk management consultant with practical experience who can provide a different perspective. It may be helpful and beneficial for strategic insights, especially with the review and evaluation of insurance & risk management programs and risk financing structures, as an alternative to off-the-shelf commercial insurance.
Hope you enjoyed this post. I will look forward to your comments. I will share more Insights in future posts.
Thank you for visiting and reading C-Risk Insights.
Until next time…
David Grenier is the Managing Director and Principal Consultant at C-RISK, LLC.
C-Risk is a risk management consulting company that provides strategies and insights on wrap-up insurance programs to help project owners in the public and private sector who are involved with large capital construction projects.
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