During the decades we have represented insurance agents and brokers, no question has been asked of us more often than one relating to whether a producer should follow up with a customer when a cancellation has been sent based upon non-payment of premiums. Undoubtedly by reason of the length and depth of the nationwide recession, this inquiry and related questions are addressed to us on a regular basis by agents and brokers in New York and across the nation.

In a business climate where virtually every agent and broker is trying to increase market share and, at the same time, retain good business, there is certainly an argument for following up on every notice of cancellation for non-payment of premium in order to ensure a maximum stream of commission income. As many producers have stated over the years when discussing this topic, the best reason for following up with an insured on a notice of cancellation for non-payment of premium is that it is much easier to retain an existing customer than secure a new one.

Some agencies and brokerages classify in the category of “bad business” as opposed to “good business” those insureds that consistently cause the issuance of cancellation notices for non-payment of premium. The cost of calling, writing, emailing or even visiting a customer regularly sent notices of cancellation can easily exceed any profit to the agency or brokerage. Over the years, we have consistently advised that errors and omissions claims and lawsuits typically arise out of business that most agents and brokers would, in retrospect, agree is “bad business” as opposed to “good business.”

What then is the answer to the oft-asked question that serves as the basis for this issue of The E&O Report? In a single word, the answer is – CONSISTENCY. The insurance agent or broker best positioned today on this issue is probably the producer who never followed up with a customer regarding a notice of cancellation for non-payment of premium. Surely, you can’t beat this for consistency. However, during the past 20 years of representing agents and brokers, I can count on one hand those I met who never followed up with a customer regarding notices of cancellation for non-payment of premium.

If an agency or brokerage has adopted the practice of following up on notices of cancellation for non-payment of premium, we believe the practice must be followed consistently for every insured and not just select customers. As we have warned many times throughout the years, an agency or brokerage should not provide different levels of service to its customers. If there is follow-up for some insureds and not for others, a compelling argument can be made on behalf of an insured deprived of insurance for a loss resulting from the cancellation of the policy. The argument could be made that the now-uninsured loss is a result of the failure of the agency or brokerage to provide the same level of service to the cancelled insured that was provided to other insureds saved from cancellation by the action of the agency or brokerage.

In the same vein, if an insurance agent or broker has followed up with all insureds, an abrupt unannounced failure to do so on future notices of cancellation could create potential E&O liability exposure. We have experienced numerous instances when a customer takes the position that he or she never pays the amount due in a notice of cancellation until such time as their agent or broker contacts them to remind them that the amount is due and must be paid.

What to do on the question of follow-up is a personal business decision that must be made by each agency and brokerage after careful consideration. Increasingly, agencies and brokerages formerly in the business of following up have made the decision to bring an end to the practice. If ceasing this practice is something your agency or brokerage wants to do, we recommend that each and every one of your insureds be provided with clear and unequivocal written notice that, as of a certain date, your agency or brokerage will no longer follow up with insureds on notices of cancellation for non-payment of premium on direct billed (or, if you choose, any other) business.

Due to the legal presumption that arises with respect to items sent by the U.S. Postal Service, which we have discussed many times over the years, it is our recommendation that the notice be sent to all customers by regular mail and not by email. See The E&O Report, Volume 24 Number 7, July 2012 and The E&O Report, Volume 23 Number 7, July 2011. Providing written notification that the agency or brokerage is ending its practice of contacting customers who are sent notices of cancellation based upon non-payment of premiums will help reduce the likelihood of an E&O claim based upon an alleged failure to follow up.

The prudent insurance agency or brokerage should consider or reconsider this very difficult and most-often asked question of whether to follow up with an insured on a notice of cancellation for non-payment of premium. Whatever business decision is ultimately made by an individual agency or brokerage, the potential E&O exposure will be reduced by making certain that every agency or brokerage employee is consistently following the practice with regard to how cancellations for non-payment of premiums are handled.

Submitted by:
James C. Keidel, Esq.
Keidel, Weldon & Cunningham, LLP