When your insurance agent advises against submission of a claim, think twice

You may think of your “independent insurance agent” as a good source for unbiased advice. In fact, the agent may well have an undisclosed financial incentive to discourage you from making a claim. This is something people should keep in mind when deciding whether to submit a claim, and when coverage has been denied for failure to turn in a timely claim.

By William Lazarus

One of the first decisions an insurance policyholder faces after an accident is whether to turn in a claim. Without a claim, of course, no coverage will be available. But the claim itself may well cause the insured’s premiums to rise. The benefits of making a claim have to be weighed against the costs of doing so.

When facing such a decision, a policyholder often turns to his or her agent for advice. This is particularly likely to occur if the agent bills himself as being independent from the insurer and, for that reason, in a good position to offer an unbiased recommendation. Insurance brokers or agents who represent several insurance companies typically call themselves independent because they are not tied to a single insurer. Even so, it’s a common practice in the industry that the “independent agent” has a financial incentive to help an insurer keep its payouts on claims low.

In an ongoing case, we’ve discovered that the supposedly “independent agent” who brokered an insurance policy for First Chicago Insurance Company stood to make bonus commissions. The agent would earn bonuses as long as First Chicago’s payouts on claims stood at 50 percent or less than the premium income generated by the agent’s book of business with the insurer. The lower this “loss ratio” below 50 percent, the higher the extra bonus for the agent.

First Chicago’s president called the arrangement “standard” in the industry. Industry insiders agreed, saying that “profit sharing” between independent agents and insurance companies is both commonplace and uncontroversial.

But such arrangements provide a monetary incentive to discourage claims. A claim that is not turned in will not lead to a payout, and a loss of profits, and, for the agent, a loss of bonus money.
Keep this in mind if your agent advises you to not submit a claim to your insurance company. You’ll still need to weigh the costs and benefits of doing so. But you’ll want to use your own judgment, rather than the advice of a person who likely has a direct interest in a matter.

If you previously decided against making a claim based on such advice – and the decision proved disastrous – consider undertaking an investigation. Was the agent who mis-advised you truly independent of the insurance company? If he wasn’t, your prior report to him may well be considered to be a report to the insurer itself. In that case, your report might be deemed a timely claim.

And, you may find upon investigation, that your “independent agent” was a double agent with dual, and conflicting, loyalties.