Getting the Right Fit [Collector]

Educating prospective clients about legitimate insurance needs can decrease excessive coverage and reduce costs.

Have you ever found a prospective client's insurance requirements inappropriate or excessive? Many members of the collection industry have been faced with this dilemma. Unfortunately, collection agencies must often navigate insurance requirements that simply don't fit.

There are two reasons this occurs:

* Clients are unsure what coverage to request. Some clients may ask you what is standard, but a few will simplify the process for themselves by asking for the kitchen sink. They know there are unique exposures involved in the services you provide, but many don't understand how the insurance industry has addressed them.

* Standard requirements. This scenario is most common with municipalities, utility providers and universities. They have standard insurance requirements that go to everyone regardless of the applicability to the services provided. Some of the requirements read as if you'll be building a bridge, with excessive limits or coverage that doesn't apply.

In a competitive industry, agencies are sometimes reluctant to negotiate the insurance requirements in a contract. Doing so, however, reduces the cost of the services you would provide to your clients. Many times it's simply a matter of education.

It's prudent of any prospective client to make certain a future business partner is adequately insured and has all the standard commercial insurance policies in place. For example, your prospect is unlikely to be at risk for a workers' compensation claim brought by one of your employees. However, having such coverage is an excellent measure of how you operate your business, so prospects may want to make certain you are properly insured. You should anticipate this when selecting insurance.

Specific Insurance Requirements

Following are some of the more questionable insurance requirements and how you might discuss them with your client.

Excessive limits on general liability: Your client may not know that what you do for a living isn't covered by your general liability coverage. Unlike the plumbing contractor down the street, you carry professional liability in the form of errors and omissions coverage. You'll want to explain that, as a result, your general liability exposures are limited to items such as a slip and fall on your premises, and it doesn't cover liability for your services.

Excessive limits on workers' compensation: You'll see this request most often from municipalities that routinely deal with contractors where severe injuries might occur. Simply pointing out that your workers' compensation exposures are limited to those of an office should assist with your negotiations.

Excessive limits on commercial crime/employee dishonesty: Because you are responsible for your clients' money, having to show proof that you carry crime insurance is reasonable. What can be unreasonable is the amount of coverage clients often require. For example, a $1 million limit for employee dishonesty may be excessive if, on average, you will only have $10,000 of their money in your care at any one given time.

Fidelity bond: This is antiquated terminology for employee dishonesty coverage found on a commercial crime policy.

Commercial automobile coverage: This is a common request found on standard requirements from municipalities or universities. Very few collection agencies have commercially owned vehicles. Have your agent certify - offer proof of - your hired and nonowned automobile liability coverage instead. If you don't have this coverage included on your business package policy, have it added. It is inexpensive and important.

Umbrella liability: An excess liability or umbrella policy is an affordable way to obtain higher limits for your clients. However, this policy should be instead of excessive limits and not in addition to them. The umbrella should increase the coverage for your general liability, workers' compensation/employers' liability and your hired and nonowned automobile liability.

Excessive limits on your errors and omissions policy: It's helpful to discuss the coverage in this situation. For example, a $10,000,000 limit found on a policy that doesn't include vicarious liability for your clients won't be of much help at the time of a loss. The limit should be in line with the size of your agency and the amount of work you will be providing to the client.

A performance bond: This is a surety product used by contractors to guarantee a completion date and costs of a construction project. Your client may be unaware of the statutory bond requirements for your industry. If your statutory bonds are not sufficient, you might consider a contract client bond. It provides client-specific coverage for the appropriate "failure to remit'' indemnification and a larger limit.

Insurance Carrier Considerations

Insurance carriers have a limited capacity of the amount of insurance coverage they can write before seeking reinsurance. The necessity of the coverage will be part of the insurance carrier's decision process when increasing limits on a policy.

Also, many creditors will specify a best rating requirement for the insurance company you use. If you're unsure of your insurance company's best rating, ask your agent.

Larger creditors require an "A" rating or better. Some may not accept a nonadmitted carrier (surplus lines) as the state will not have approved the coverage forms or guarantee the carrier's solvency.

The Indemnification Clause and Your Insurance Contract

It's vital to have a full understanding of the indemnification agreement included in the contracts you sign. Is the hold harmless agreement mutual or is the indemnification clause unilateral in favor of your client?

Insurance is not the only contractual method used to transfer risk to someone else. Some companies will include onesided indemnification requirements in their contracts to shift their liability to your agency.

Deciding to accept liability that isn't yours doesn't mean your policy will do the same, lb the contrary, you will find contractual liability falls under the exclusions section in your policy contract: "This policy will not respond to any loss or claim that is based upon or arising out of the liability of others that you have assumed in a contract unless that liability would have existed without the contract.'"

In other words, your policy will not provide your clients with coverage for a claim for which they are responsible, whether actual or alleged.

It is, however, reasonable for your clients to require that your insurance coverage will be extended to them if they are sued for an error or omission made by your agency. If your policy doesn't include your clients under the definition of insured for their vicarious liability, you will need to make certain they are added as additional insureds.

When collection agencies familiarize themselves with their policies and know what to expect from clients, they will be able to make informed, reasonable suggestions to clients and lower costs for everyone.

The issues surrounding contractual indemnification are extremely complex. These are only a few examples of why it is vital to have your attorney review the contracts you are considering.

Regardless of where you are insured, please contact the insurance representatives at Collectors Insurance Agency if you have questions regarding your client's insurance requirements. They can be reached at (952) 926-6547 or [email protected].

Janis St. Martin is vice president of Collectors Insurance Agency, a subsidiary of ACA International.