When I worked at an insurance agency as a young man, I found an envelope slid under the office door one morning. Inside was a check intended as a premium payment.
I soon learned an important lesson about accepting payments in the insurance industry that is even more important as more customers start paying online due to the coronavirus pandemic.
The check was clearly meant for us. It was made out to our agency. But nobody in the agency recognized the name, and we couldn’t find any policies on it.
This created the potential for an E&O claim – the industry term for insurance problems involving errors and omissions with payment. If we cashed that check, we could be in a for a mess of trouble. My bosses warned me not to do anything with it until we learned what it was for.
These days, insurance agencies are almost universally accepting payments online. And with millions of Americans staying at home to stop the spread of Covid-19, even those who were reluctant to pay their bills online are going to make the shift.
That means there are a whole lot of people who could be sliding envelopes under that virtual door, and if your agency is automatically accepting online payments, you’re headed for a lot of E&O claims down the road.
But when software creates a problem, it can also usually solve it. With the right changes to your online payment processing, you can avoid these kinds of E&O claims with something called conditional payments.
Here’s how it works.
E&O claims happen when an insurance company incorrectly accepts payment, even when it’s for the wrong amount or from someone who is not a customer. By cashing that check, the insurance company has essentially given the customer the ability to argue in court that they were insured.
As it turned out, the check slid under our door so long ago was from one of our customers, and the payment was past due. In fact, as a result of non-payment, the policy was slated to be canceled. To make matters worse, the check was not for the full amount of money owed.
If we accepted the check by depositing it, that would reset the cancellation date. A reinstatement notice would have to be sent by the insurance carrier.
But if the check then bounced, the insurance carrier would need to issue a new notice of cancellation with a date even further in the future, effectively giving the insured more coverage even after they hadn’t paid. That would hurt our bottom line, reducing our agency commission and forcing us to write off the cost of the premium.
In the old days, it was rare that an envelope would show up under an office door in these circumstances. But the increase in online payments means it is far easier for customers to make these kinds of mistakes, especially as the less tech-savvy customers who had held off are forced into it by concerns over the coronavirus.
Married couples using different credit cards, a customer forgetting their password, or an older customer getting confused while searching online – these are all potential E&O claims in the making.
There are two main problems. In the first, the agency accepts a premium from a non-customer. In doing so, it creates a legally enforceable insurance contract, even if no policy exists. This is true even if you immediately return the payment. In the second, the agency’s acceptance of a customer’s partial payment forces it to postpone cancellation, even though they are past due.
All of this is compounded online, where payments are processed automatically. Fortunately, there is a solution: Conditional payments.
Under a conditional payment, online customers can request that you accept payment, but your website will not automatically put a hold on the funds. This means you have not legally accepted the payment.
Instead, the customer is given a notice that their payment will not go through until it is reviewed by a human being.
At the agency, you will receive email notifications advising you that someone has requested you accept a specific payment for a specific policy. This allows you to confirm the existence of the customer and the adequacy of the payment.
You respond to the system by clicking accept or decline.
If you accept the payment a receipt is sent to your insured showing the time/date of the transaction as the time/date stamp the system put on their request for payment.
Essentially, we treat the time/date stamp of the request for payment the same way the insurance industry has traditionally treated the postmark date on a check received in the mail. The postmark date is accepted as the payment date for cancellation reinstatement purposes.
If you decline, the system sends an email to the insured stating the payment is declined with any text explanation you include. This might include instruction on how to contact you to resolve any issues.
This is the same method the IRS uses when accepting income tax payments online.
Few, if any, agency financial management systems keep real-time information on payments for your customers. This means even integrating your online payment system with your agency management systems would not adequately protect you from these risks.
If your insured is paying for an agency billed policy, integration with your agency management should provide correct information and can be useful in protecting you against these risks.
When you are setting up your online payment system, make sure to ask your provider if they allow conditional payments and how well they are integrated with financial management systems. At Simply Easier payments, we do both, to protect agencies from the risks I learned about thanks to an envelope slid under a door so many years ago.
At a time when many Americans are nervous about their futures, making sure that you can properly handle their insurance payments is just good business.
By Duke Williams, Founder of Simply Easier Payments