Mistakes made when purchasing insurance and bonds are often realized when it is too late to do much about it. It is therefore prudent to do the required research and ask the right questions before a purchase is made to make sure an agency’s main concerns are being addressed. These concerns seem to have increased in recent years due to volatility in the collection market according to Ben Johnson, director of risk management – insurance at Cornerstone Support. Johnson recommended a few key considerations when preparing to shop around for the appropriate insurance policy.

johnson ben“I think it’s also important to look for what your tolerance is for a deductible; A.M. Best’s financial rating, and stability of the insurance carrier is also important to consider,” said Johnson. “Every insurance policy is different so it’s important to read the fine print, read the exclusions and so forth.”

In addition, the cost of an insurance policy can seem cloudy. The cost needs to be considered at face value and at what it could be in the future.

st.martin janis“There is a distinction between insurance costs and price,” said Janis St. Martin, CIC, vice president of Collectors Insurance Agency. “Insureds find themselves uninsured or underinsured; defense costs rise sharply due to a lack of defense expertise; and the biggest culprit, unchecked claims. If your claims aren’t reviewed by your provider on an annual basis for potential corrective measures, they will continue into the following year. In addition to the inevitable premium increase, each covered claim incurs a deductible and they add up fast. When we review loss runs for new insureds it’s evident their premium savings cost too much.”

An eye for detail is certainly required as a collection professional must be aware of what exactly a policy can and cannot do. Regulation-specific exclusions must be noted in particular.

“One of the first things you would look for in a policy form is any type of exclusion or limitation on the FDCPA, the FCRA, or TCPA,” said Johnson. “Secondly, I would encourage an insured to look at the class action limitations as well. See if there are any sort of caps or amended deductibles on class action claims because that’s becoming increasingly common as well.”

While a situation where an agency is unhappy with a policy is common, insurance companies can also opt out of the renewal of a policy. However, a notice must be issued in advance.

“The E & O (errors and omissions) policy is usually a 12-month term and if the insurance company is going to choose not to offer renewal terms they’re required to notify you in advance so you have time to prepare and shop for other options,” said Johnson.

While claims are the main reason for an insurance provider to opt out of renewal, there is no exact magic number of claims or claim amounts that will cause the refusal of renewal.

“The insurance companies that have a better appetite for the collection industry tend to understand that there are going to be frequent claims in this class of business because of the way the FDCPA is written and the number of attorneys out there who specialize in suing debt collectors,” said Johnson. “There is a high frequency of claims. It’s typically going to be the severity of the claims and the dollar amount that could result in premium increases or potentially a non-renewal notice at the end of the policy term.”

Bonding is another precaution that can make sure an unpleasant occurrence does not become a decisive moment in an agency’s history. Open communication can ensure success and possibly a better deal in this arena.

blackburn joel“I recommend being open to providing both corporate and personal financial information that the surety requests during the underwriting process,” said Joel Blackburn, senior bond analyst at Cornerstone Support. “The sureties reserve the right to request a range of information including corporate financials, personal financials, and even bank statements and investment summaries. Many times this is not required, and simply signing the indemnity agreement is sufficient. But if requested, providing additional information can make the surety more comfortable with your account and help secure a better rate for your bonds.”

Keeping the growth and expansion of an agency in mind when bonding is essential. Measures taken to secure bonds one year may need to be enhanced the next in accordance with the agency’s activities.

“Most insurance agencies will have authority to place bonds without financial statements up to a certain bond aggregate,” said St. Martin. “As agencies expand their collection activity into new jurisdictions, they will need additional bonds. They will surpass this aggregate and trigger the financial statement requirement. If the agency is struggling, additional bonding becomes a challenge. Collection agencies should proactively consider their bonds when making business decisions that may impact their financial position.”

There are alternatives to bonds but they should be closely examined and carefully considered as they may not function the same way and leave an agency vulnerable at an inopportune time.

“Placing an Irrevocable Letter of Credit (ILOC) in lieu of a bond should be considered an absolute last ditch option,” said Blackburn. “There are many surety companies out there, standard market and non-standard market, that are able to write bonds, even if your company is going through a hard time financially. Paying a higher premium rate for bonds is still much better than having your company’s capital tied up in an ILOC. The liability tied up in a bond does not necessarily end with the cancellation of a bond, which means that if you have an ILOC, your capital could still be held for years by the surety company after the bond has been cancelled.”

Adequate preparation to be insured and bonded can make the process easier and less costly. However, ensuring compliance on the front end will not only decrease the amount of trouble in the whole process but help an agency eliminate the concern of a dreaded notice of non-renewal.