Last month, I had an interesting conversation with a construction company in California. We discussed their insurance marketing strategy and what they were doing to manage their costs. As with most contractors, there was a lot they weren't aware of, and I was happy to peel back the curtain and make the insurance procurement process a bit more transparent.
Of course, I did ask them to hire me via a broker-of-record letter, but ultimately, they decided they would need more time to think it over. They had been with their broker for 15 years and were not ready to make the switch. I gave them some advice on how to handle their upcoming renewal, and we agreed to talk more at a later date. Fast forward a month - I give them a follow-up call. Their renewal was in 10 days; I wanted to ask how the negotiation had gone, and whether they were able to implement any of the suggestions I had made in our prior meeting.
"It's terrible. We just got the renewal, and we have a $50k increase." Now, there are circumstances where an insurance carrier will wait until the last second to release renewal terms, but typically your broker should have tried to find you alternatives once it became clear it was running down to the wire. "We want to work with you."
Sweet! They signed over their policies to me, and I got to work immediately on putting together a last-minute plan to negotiate with the incumbent carrier or move the account somewhere more competitive. The insured sent me over the renewal quote, I prepared some applications, and then...
Then I noticed something weird.
Buried in the premium summary on their renewal, there was a 'Risk Management Fee' of $22,566. After checking in with the insured, it was clear that they had never been offered any Risk Management services at all. These were services they were desperately in need of - but didn't have. Something didn't seem right, so I brought it up with the underwriter for the current carrier while we were negotiating the premium. As it turns out, this fee wasn't attached by them.
It was attached by the retail broker.
And not only that, the incumbent carrier confirmed that this broker was also earning the maximum negotiable commission (12%) on the account. In total, this retail broker was going to earn almost $40,000 on $125,368 worth of premium.
I don't know about you, but I would call that a bit excessive!
Skipping forward to the present day, this company was able to save an immediate $22k in nonsense fees by switching to our firm. After negotiating with the incumbent carrier and another option willing to compete, we were ultimately able to reduce their premium to $114k - for savings of $44,358. That could be a new truck, or a new salesperson!
But despite this substantial victory, the celebration didn't feel quite right. Indeed, the damage had already been done. After a little digging, broker fees in excess of $10,000 were discovered to have been present on several proposals this company has signed going back a decade.
So, is this legal? Well, let's talk about broker fees and disclosure regulation. According to the California Code of Regulations,
A broker-agent acting in the capacity of a broker may charge a broker fee, provided that:
a.) The consumer agrees to the fee in advance of the agreement required by subdivision 2189.3(e), after full disclosure of all material facts surrounding the fee, including if true the fact that an insurer may pay to the broker a commission in addition to the broker fee
b.) The broker provides the consumer with the Standard Broker Fee Disclosure
c.) The consumer and broker sign a broker fee agreement that includes at minimum, and does not conflict with, the Standard Broker Fee Agreement.
The Standard Disclosure Form can be found here, and the Standard Broker Fee Agreement can be found here.
It should come as no surprise that no Disclosure Form or Broker Fee Agreement were ever presented to this client, and they had in fact always assumed that this fee came directly from the carrier.
Fortunately, the Department of Insurance takes broker fee disclosure very seriously. The first step for anyone facing a similar issue would be to file a complaint here.
As another insurance professional told me, "I would also encourage the insured to research the amount of loss in broker fees. $22k a year over a span of 5 years would absolutely justify a civil suit. In addition to maybe earning their money back, this suit would damage this agencies loss exposure for at least 5 years of increase E&O premium."
Now, I'm not a lawyer, and I don't want to pretend I know everything about the regulations here - but I do know this: you can never be too curious. Take a look at your next insurance proposal and inquire about the fees. They should never be this high relative to the premium, and there should always be a reasonable justification for them. If I had taken over this account and twiddled my thumbs without attempting to lower the premium at all, I would have still saved these folks $22k.
I am, however, bad at making money, thanks to having an internal moral compass and a shred of integrity. Darn!
In conclusion: read your proposals and ask questions.
The devil is in the details.
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