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E&O: Are Insurance Agents at Risk for Insurer Insolvency?


E&O: Are Insurance Agents at Risk for Insurer Insolvency? A recent article in PropertyCasualty 360 discussed whether insurance agents and brokers could be held responsible if a carrier were to go belly up and not able to fulfill their obligations, particularly with surplus lines insurers where a lot of hard-to-place risks are placed.  Would the agent or broker face an E&O exposure if a carrier went bankrupt and could not pay its claims?

As the PC360 article stated, admitted insurers have guaranty funds to cover claims. The concern lies in the non-admitted market whose regulation varies from state to state. Insurance agents look to carrier ratings from agencies such as A.M. Best for insurer financial stability but these ratings don’t reflect the scrutiny an insurance commissioner requires. “Rating agencies sometimes fail to downgrade insurers’ ratings as quickly as they should. There have been instances of non-admitted carriers receiving an A+ rating one year, going into receivership the following year, and being liquidated the year after that,” as stated in the PC360 article.

The general rule is that an insurance agent or broker is not a guarantor of the solvency of a carrier from which he or she obtains insurance. However, in the vast majority of states, an agent has a duty to use reasonable skill, care, and diligence in the placement of insurance. Consequently, an agent may be liable to an insured for a loss resulting from insurer insolvency if the agent knew or should have known that the insurer was insolvent at the time the risk was placed.

In fact, according to the Council of Insurance Agents & Brokers (CIAB), although in the past, it was generally and widely accepted that no liability attaches if an insurer becomes insolvent after issuance of the policy, case law in Louisiana, New York and Texas has extended agent liability to situations in which knowledge regarding the insolvency of a carriers was or should have been acquired by the agent subsequent to placement of the risk. Many states have enacted statutes requiring agents and brokers to inform insureds of insurer insolvency upon receiving their own notice of such insolvencies.

What steps can agents and brokers take to mitigate any exposure for liability in the event of insurer insolvency in the surplus lines space? The CIAB recommends the following:

  • Use diligence to ensure that the risk cannot be placed with an authorized carrier. Check the rating if you find a surplus lines carrier willing to accept the risk, and convey it to the insured before you bind the coverage.
  • Ensure that the risk may lawfully be placed on a surplus-lines basis.
  • Follow the steps suggested with regard to authorized insurers both as to solvency at the time of placement and subsequent financial condition of the surplus-lines carrier. They include ascertaining the financial condition of the unauthorized insurer before placing the insurance; not knowingly placing surplus lines insurance with carriers that are financially unsound; and not placing insurance with an insurer with capital stock and surplus amounts below a set minimum level.
  • Use a wholesale surplus lines broker and charge that broker with the responsibility of complying with all statutory requirements.

Of course, there are many risks written on a surplus lines basis with financially sound carriers. It is good best practices to keep your insureds informed of the carriers with which you are placing business and of any changes or developments to mitigate any potential E&O risks down the line.

Axis Insurance Services specializes in Errors & Omissions (E&O) insurance and can secure a policy for your insurance agency that serves your needs, including for MGAs and MGUs. Just give us a call at (877) 787-5258.

Source: E&O Best Practices Help Mitigate Exposure

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Blogged on: March 19, 2015 by Mike Smith
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