Side Deals

The CIP Society Ethics Series

In a mid-sized town, the majority owner of a well-established insurance brokerage had developed many business connections resulting from years of cultivating solid relationships. The connections included both personal and commercial clients, plus service industry suppliers and other insurance-related contacts.

After many years of contemplation, the broker decided it was time to commence a major home renovation project. He discussed this notion with someone who happened to be a long-standing client for both his commercial and personal interests. The client happened to be a general contractor that specialized in home renovations. The client/contractor advised the broker to look no further and that he would provide the best value and quality. The broker knew of the contractor’s excellent reputation for both quality and price.

A close friend to the broker wished him well on the forthcoming renovations and asked if he thought about all of the ethical considerations of hiring an existing client. Puzzled by this comment, the broker asked him to clarify. “Well,” said the friend, “here are a few to get you started.”

1) The transparency of the deal, that is, what might other long-standing clients/contractors think if they were not given an opportunity to bid?

2) Will other shareholders in your brokerage feel that they are subsidizing the renovations through reciprocal arrangements made on the client’s insurance file?

3) Will you be beholden to the contractor if the deal is better than typical?

4) If the renovations do not meet your expectations, yet the contractor feels that they meet the requirements of your agreement, how will you manage the dispute without jeopardizing your existing relationship?

Not wanting to discourage the broker, his friend indicated that there are many other considerations that may be unique to this situation. What might some of these be? Should the broker dispense with this arrangement with the client, or how might he address the foregoing items and also prevent other complications?

Maurice AudetSenior Vice President, Regional Resource Leader Risk Research & SolutionsAon Reed Stenhouse Inc.

With respect to the scenario presented, the words of caution provided by the broker’s friend are definitely justified.

However, we do business with people who can get the job done. Doing business with friends and clients is not something that should be shunned, but it should be approached with caution.

In reviewing the Registered Insurance Brokers of Ontario’s (RIBO) Code of Conduct, there is nothing prohibiting brokers from doing business with clients or friends. What is important is that the transaction be transparent, in that it be treated as a proper contract and not as a handshake deal. The payment for the work cannot be a waiver of insurance premiums in return for the work.

Based on the information provided, the contractor does excellent work at a good price. This is the type of person we want to deal with, both professionally and personally. So that there are no misunderstandings as to the scope of the work or the quality of the work, the expectations must be spelled out in a proper industry-accepted contract showing the scope of the work, the price, the term of performance and the procedures for dealing with disputes.

Randy BusheyBroker Consultant

Whether a broker chooses to buy goods and services from a client, or makes a corporate policy decision prohibiting such transactions, the terrain is littered with potential ethical and business-practice landmines.

That is because different people can have very different standards of what ought to take precedence in guiding the right business decision.

The practice of ethics involves “the standards and principles of right conduct,” that is, how one determines the principles – or behavioural “ought-ness” – to apply in a given situation. The principle is easy to understand. The application is usually much more difficult!

Sometimes, a written code – such as an employee manual – is a solution. However, if no such objective standards exist, the prevailing business culture may be determinative – and business culture ethics can be very different according to region and context.

In my corner of the world (northeastern Ontario), reciprocity is the expected standard and is rooted in the culture for generations. Clients paying a premium to a broker also expect that the broker buy from them when and if the opportunity arises.

So how does one avoid the landmines articulated by the broker’s friend in the example above?

A mentor of mine summarized all in his idiom, business is business. Among other things, this means the following:

• Think through the implications of selecting the contractor before you enter into the transaction, so you will be ready to provide an answer if another client asks why he or she was excluded.

• Always expect and provide good value for the dollar; never expect – or allow your client to expect – more by way of a special deal.

• When dissatisfied with the goods or services provided by a client, explain so clearly, honestly and respectfully – just as you would expect someone to express his or her disappointment with broker services that fall below expectations.

• Maintain transparency and apply the “mother sniff test.” (If my mother were to sniff around in my file, would she approve?)

Nadine AustinSenior Investigator,  Complaints and Investigation DepartmentRegistered Insurance Brokers of Ontario (RIBO)

In this scenario, the client and the broker have enjoyed a long-standing relationship based on ongoing trust. The client has received the benefit of the broker’s knowledge and service over the years and in return, the broker has made money.

Business protocol would encourage the broker to afford his client the same opportunity. The broker is aware of his client’s reputation for quality work and he has heard from others that his work is fairly priced. Why would he not consider him to do the work?

As with any contractual agreement, there has to be a clear understanding of what each party expects of the other. The contract should define the terms – such as the extent of the work to be done, price, materials, schedule of payments, ongoing progress review and timelines. The contract should also specify that in the event unforeseen issues arise as a result of the renovation, the value of the contract may be adjusted.

In addition, a letter should be attached to the contract that clearly indicates that this is a normal business agreement and that no special discounts have been applied. This document and the contract should be signed and dated by both parties. The broker should make it clear that this is a standard business deal. From a regulatory perspective, taking these extra steps removes the potential that favours are being done.

The Last Word

When a broker hires a client, it is important to recognize that the nature of the business relationship changes.

Because of the change, new sets of expectations should be defined in advance of any work being completed. It is also important to recognize that the broker’s other clients and co-workers may misinterpret the relationship as one where favours are being traded. In this situation, the broker’s actions can help ensure he maintains the trust of the people around him.

A standard contract can help outline the terms of the agreement between the broker and contractor and should include the scope of the work and timeline. If either party is unsatisfied with the outcome of the relationship further down the road, the original document can serve as a good reference for resolution.

Being aware that other clients and co-workers may question the nature of his business relationship, the broker can help dispel the uncertainty. He can ensure that all of his transactions are transparent and that he follows normal business practices. Part of being ethical is recognizing that there may be an appearance of unethical behaviour, even if untrue.

In the end, the broker should be prepared to answer questions about his new working relationship. He should take a proactive approach and mitigate future problems by entering into a contract with his client that defines expectations from both sides. He should make it clear that he understands what a conflict of interest is and be able to demonstrate, with evidence, that one does not exist. 

The CIP Society represents more than 17,000 graduates of the Insurance Institute of Canada’s Fellow Chartered Insurance Professional (FCIP) and Chartered Insurance Professional (CIP) Programs. The CIP Society, through articles such as this, is working to bring ethical issues to the forefront and provide learning opportunities that enhance the professional ethics of all insurance professionals.