As the market softens, Russell said, carriers' appetites change. Certain types of risks that previously were destined for the E&S marketplace now can be placed with standard or admitted insurers. For example, standard carriers that once spurned “lease risk only” buildings–retail centers, office buildings and the like–have once again acquired a taste for them. Russell also sees non-habitational general contractors moving back to admitted markets, although he said: “It's still pretty much an E&S market for habitational risks like apartment buildings. A handful of markets still write condominiums and town homes–fewer than did three years ago.” He added that, in recent years, even the trades–especially those with water-related exposures, including plumbing and roofing–have gravitated toward the E&S marketplace.

Russell said some standard companies are beginning to restrict their liability limits for certain professionals–particularly architects, engineers and lawyers–and for those with past claims activity. As a result, he sometimes must tap the E&S markets to satisfy customers' limit needs. “The legal climate varies from state to state,” he said, “and Texas is one of the more litigious states. Very few companies want to write law firms that handle class-action suits, especially those involving personal injury.” Obtaining adequate coverage for structural engineers and for lawyers practicing in Texas typically requires the expertise of a wholesaler or program administrator experienced in–and comfortable with–such classes of business, he said.

Russell noted that agents working with E&S markets need to understand how they differ from admitted carriers. For instance, some E&S markets have their own supplemental applications that agents must complete in addition to an ACORD form, and agents must take care to use the current edition of the correct app. (Russell said that many E&S carriers make their applications and forms available online, which helps agents tremendously.) Also, a quote from an E&S market might list several endorsements without furnishing a copy of each one–and they might be company-specific rather than ISO endorsements with which the agent is familiar. In that case, the agent should request copies of the endorsements. Also, Russell said, wholesalers often process quotes based on insureds' expiration dates, regardless of when they receive applications. Since agents may get quotes only a day or two before the clients' or prospects' current policies expire, they may not have much time to present them, and therefore should plan accordingly. Finally, because claims submitted to E&S markets may pass through the hands of several people (brokers, inside adjusters, outside adjusters, etc.), the claim-handling process may be slower and more cumbersome than agents are accustomed to.

Still, said Russell, E&S markets are important to his agency. “They provide much-needed coverage that we otherwise would have a hard time finding, and their specialized knowledge makes them good resources for us.”

Don Way
Thoits Insurance Service Inc.
Mountain View, Calif.

For Thoits Insurance, accessing the E&S markets can be a do-it-yourself proposition. The large retail broker has its own surplus-lines license and uses it to place about 20% of its E&S business, according to Don Way, president.

So what's involved in getting such a license?

“If you're in good standing with the (insurance) commissioner out here and you have a broker's license, not much,” Way said. “You have to pay an additional fee … you have to post a bigger bond and agree to certain conditions.” You'd also better have your books in order, he added. “When you become a (surplus-lines) licensee, you get ratcheted up on the next-to-be-audited list,” he said.

Way said the main benefits of going to the E&S markets direct are quicker response and less risk of misunderstanding. Among the risks it places direct are some of its directors and officers liability insurance and difference in conditions (DIC) coverage. “It's our code word for earthquake,” he said.

Thoits also funnels plenty of business through E&S intermediaries. “There's some miscellaneous professional liability placed that way because some of the wholesalers have binding agreement with carriers … and sometimes they can get better terms than we can going direct,” Way said.

Besides going to the E&S marketplace for certain coverages, Thoits also taps it when layering high limits. For example, Way said, Thoits recently arranged more than $300 million in stock throughput coverage for an export-importer that handles a high volume of computer chips. It did so by layering coverage with several E&S insurers.

When layering coverage in certain lines, Thoits often lets an E&S wholesaler handle the entire transaction, rather than use its surplus-lines license to secure the primary or other layers, Way said. “There's a challenge when you're layering,” he said, “particularly in D&O, where the terms and conditions are so critically important. If you're placing four, five or six layers to get the limits that you need, generally you want them to all go through the same place.”

Way said one of the things he likes about dealing with the E&S marketplace is that its underwriters tend to be more sophisticated than those he finds working for admitted carriers. There's also the opportunity to customize coverage. For example, D&O policies written for companies making initial public offerings of stock usually exclude coverage for lawsuits filed by shareholders who own more than 5% (or some other figure) of a company's shares. When working with nonadmitted markets, it may be possible to remove such exclusions, Way said. “It's very hard to do with a standard carrier, because it has to go through legal,” he said. “In the E&S market, very often the line underwriter or the desk underwriter will be more sophisticated and have the ability to do that.”

The main drawback to using E&S markets, Way said, is the lack of binding authority. “If I'm dealing with Travelers or Hartford, I can make a phone call and know my coverage is bound,” he said. “If I'm dealing with an intermediary, who may be functioning as a broker himself, and with a nonadmitted market, I don't have coverage until I get a document in my hand with a proper signature on it that says I have coverage.”

Thoits places its E&S business through a limited number of wholesalers. “You really have to vet these surplus-lines brokers very carefully,” Way added. “Some of them are minimally capitalized and minimally staffed, so we do a lot of due diligence.”

Among the things Thoits checks is a surplus-lines broker's E&O coverage. “Some of them carry just minimum limits, $1 million, with companies that are unrated,” Way said. “We do care about the E&O insurance. We care about that a lot.”

Capitalization also is crucial, Way said, because Thoits sometimes must rely on surplus-lines brokers to forward large premium trust fund checks to insurers. “You don't send someone with $20,000 in the bank a $300,000 check and ask them to send it someone else,” he said. “I mean, that is just not being responsible.”

Ty Harris
Harris Insurance Inc.
Birmingham, Ala.

Among the risks that Harris Insurance places with E&S companies are homebuilders, wholesale garage dealers, trucking accounts, beach property and accounts with bad claims histories, according to Ty Harris, commercial lines vice president. Specific lines include liquor liability and excess liability, he added. “We are finding that our standard markets are limiting our umbrellas limits because of reinsurance issues,” Harris said. “We are sometimes forced to use the E&S markets for limits in excess of as low as $2 million (primary).”

Like many agents, Harris said he is finding coverage for coastal property difficult to obtain even in the E&S marketplace. “Because of the hurricane activity, we are having a very hard time placing wind and flood coverage for condos and beach houses,” Harris said–and with the oceanfront just four hours away, many of the agency's clients need such insurance for vacation property.

Harris Insurance accesses the E&S market via four MGAs/brokers. “We have a couple that give excellent service but are limited in what they can write,” Harris said, “and we have a couple that offer a broader array of products, and this sets them apart.”

E&S intermediaries usually require retail agents to enter into contracts with them, although Harris said he is not always thrilled by such arrangements. “We have found some contract wording to be very one-sided,” he said. “We recently declined to appoint a new MGA because of contract wording. We have found other contracts to be more fair and reasonable. We would prefer no contract at all.”

Before placing a risk with an E&S carrier, retail agents generally must provide evidence that they have made a “diligent search” for coverage in the admitted market. “When we get declinations (from standard carriers),” Harris said, “we simply scan them into our system, providing permanent documentation.”

Harris said working with E&S markets differs from dealing with standard carriers in a number of ways. “They usually want signed renewal applications and want related forms to be signed,” he said. “They have a 25% minimum earned (premium) requirement. The binding authority with the MGAs is limited to nonexistent.” Unless clients pay premiums upfront, the agency has little choice but to arrange for outside premium financing, Harris said. The interest premium finance companies charge is usually considerably higher than the fees charged by standard insurers offering installment options, he added.

Away from coastal areas, the market is softening for some kinds of risks, Harris said, giving the agency an opportunity to move some E&S clients to admitted carriers–within limitations. “Our experience has been that the standard markets still heavily underwrite the class of business and are still not that interested in writing accounts that they have not traditionally written,” he said. Those the agency has been able to move include new businesses in acceptable classes that have built up at least a three-year loss-free history with an E&S insurance company, he said.

Overall, Harris said he considers the E&S marketplace an important competitive advantage for independent agents. The options it enables independent agents and brokers to offer their clients “can set us apart from direct writers,” he said.

John Tallarida
The Heffernan Group
Palo Alto, Calif.

The Heffernan Group, an agency with more than $60 million in annual revenue, uses the E&S markets in conjunction with a number of the agency's specialties, according to John Tallarida, senior vice president. In its construction unit, for instance, it often turns to those markets for umbrella placements and for excess insurance written for owner-controlled insurance programs. Nonadmitted markets also are the only sources of excess general liability coverage for such unusual Heffernan accounts as event planners that arrange entertainment in National Football League stadiums.

Heffernan has an admitted program for California nonprofit organizations, but Tallarida said E&S markets are one of its sources for excess sexual abuse and molestation coverage. Another use is for excess placements on a number of D&O accounts, he said, as well as primary coverage for some D&O risks.

As standard markets have softened, Tallarida said Heffernan has moved some accounts from nonadmitted carriers to admitted insurers. As an example, he cited apartment and condominium buildings in California. On the flip side, he said, Heffernan has had to move accounts with catastrophe windstorm exposures to the E&S markets from standard carriers. He said Heffernan writes quite a few ocean-side resorts and hotels as part of the coverage it provides to several hospitality chains. In the past, if 20% of a chain's exposures were located in hurricane-prone coastal areas, the chain's standard insurer would accommodate them, he said, but that's no longer the case.

Tallarida said sometimes an account's coverage and price don't change much when it's moved to a standard from an E&S carrier. He said he sees the biggest difference in retentions. An E&S carrier might require certain accounts to carry $25,000 or $50,000 general liability deductibles, he said, while some standard insurers might not require deductibles at all.

Tallarida said Heffernan Group works with perhaps 25 different MGAs and surplus-lines brokers–just out of its Palo Alto office, where Tallarida is branch manager. Producers tend to approach brokers for specific purposes, he said. For instance, a couple might be really good for difficult property risks, while others excel at arranging coverage for earthquakes or medical malpractice. Heffernan Group also does a lot of business directly with Lloyd's of London, he said. It maintains London line slips for lawyers professional liability, real estate E&O and for a Heffernan division that insures churches.

When working with retail agents and brokers, surplus-lines brokers usually collect and remit surplus-lines taxes and tend to other regulatory matters–but that's not always the case, Tallarida said. “Some actually push that onto the retail broker,” he said. “I'd say it's only about 20% of the time, but you have to be very aware of that and know what you're getting into.”

For example, he said, after “going pretty far down the road” with a surplus-lines broker on an account, a retailer may discover than the broker is not licensed in a state in which taxes must be remitted. Consequently, the retailer might have to bring in another surplus-lines broker just to take care of that issue or otherwise deal with it. On the other hand, he said, a surplus-lines broker sometimes may relieve the retailer of the responsibility for searching for coverage in the admitted market, and documenting that search, before placing an account with an E&S carrier.

Tallarida said that what he likes about working with E&S markets are their flexibility and creativity. “The standard markets have a rather tighter box on what they can do,” he said. Right now, however, no amount of creativity is of much help in arranging hurricane coverage in coastal areas, he said, where even the E&S markets have “very limited capacity.”

Mark Bates
Fleming, Bates & Barber
Crown Point, Ind.

Fleming, Bates & Barber uses the E&S markets for a variety of exposures, according to the agency's president, Mark Bates, who also is a former president of the Big “I” of Indiana. He said he turns to them to obtain liquor liability insurance, special events insurance, property insurance for vacant commercial and residential structures, and general liability insurance for start-up contractors. In some cases, he also places certain types of professional liability coverage, including employment practices, directors and officers, and fiduciary, with E&S carriers.

As the admitted marketplace has softened in the past year, Bates said he has moved some accounts out of E&S markets. One example was a concrete contractor. Bates had placed the account with an E&S carrier when it was a startup, because “no one in the standard market wanted him.” Now the account has a track record, and admitted markets are more interested. “I just moved him into the standard market a month ago and saved him a ton of money,” Bates said. Coverage forms also tend to be broader in the admitted market, another reason why agents have a duty to move clients into it when circumstances warrant, Bates said.

Accounts that start out with a cavalier attitude toward loss control often end up in the E&S marketplace, Bates said, but eventually can move out of it if their loss record and procedures demonstrate that they've become serious about risk management. Some accounts, however, tend to go to the E&S marketplace and stay there, he said. They include contractors who exclusively install exterior insulation and finish systems (EIFS), certain product liability risks and the aforementioned vacant properties.

Bates said he approaches the E&S marketplace through several MGAs and surplus-lines brokers, primarily Arlington-Roe and Burns & Wilcox. Compared with standard insurers, E&S carriers tend to require more supplemental applications but otherwise are similar, he said.

Bates said he has encountered few risks for which he couldn't find coverage in the E&S marketplace, although it might be expensive. He said he recently discussed the marketplace's importance with an intern from Indiana State University's Insurance and Risk Management Program, who is working in his office for the summer. Regardless of what a client brings you, “as an independent agent, you have a market for it,” he told the intern over lunch. “At what price? Now that's a different matter.”

Brian Boro
Pritchard & Jerden Inc.
Atlanta, Ga.

For Pritchard & Jerden, a $9 million-revenue agency that does business primarily in Georgia, Florida, Alabama and South Carolina, it hasn't been easy to arrange coverage for some risks–even in the E&S marketplace.

“Anything having to do with Florida property is strictly E&S now,” said Brian Boro, who is the agency's property and casualty marketing manager.

Those risks that can get coverage are seeing rates double or triple from what they were a few years ago, he said, and capacity also is problem. At the time he was contacted, Boro was attempting to arrange coverage for a $25 million building located between Orlando and Jacksonville. The most he could secure in wind-damage coverage was $15 million, he said, so the owner had to retain the rest of the risk. The program also will be layered. “Three or four years ago, we could get one carrier to put up the whole limit,” he said.

Besides using E&S markets to provide whatever hurricane coverage he can, Boro said he turns to them to obtain builder's risk coverage for any structure with wood-frame construction. On the casualty side, he uses them for “most anything related to residential construction” as well as for medical malpractice and D&O, particularly for risks that have experienced claims or financial difficulties.

Lately, Pritchard & Jerden has been consolidating the number of E&S intermediaries it works with. With some insurers withdrawing from the Southeast, Boro said, it's essential to place business through MGAs and surplus-lines brokers that have strong relationships with the remaining markets. “The E&S carriers are probably seeing hundreds and hundreds of submissions … each month,” he said, “so if we just focus on using one or two brokers, we feel we get a little more leverage and responsiveness.”

Boro said he likes the flexibility of E&S markets. “It's easier to negotiate the coverage and the rate,” he said. “Whereas the standard insurers need to put (a risk) through the rating system and see what spits out, the E&S carrier can ask you what rate you're targeting, and they're a bit more flexible and nimble in getting a quote back to you.”

He said a drawback, however, is that an agent needs to fill out a supplemental application for each E&S carrier an intermediary approaches, “whereas the standard markets really don't have a problem quoting off each other's applications.” Boro said he also feels that surplus-lines brokers often don't look out for the interests of agents and their clients as much as they should. “I feel like some of them work for the carrier instead of us,” he said.

Boro said he also sometimes feels E&S intermediaries don't earn their pay, although he said that's less the case in today's market. In particular, he said intermediaries should take more care to qualify submissions. “When I send a submission to a broker, and all they do is forward it–basically take my e-mail and forward it–wait for it to get logged in, wait for the underwriter to take a look at it, and then come back with questions, you might lose two weeks,” he said. A good E&S wholesaler, on the other hand, “should have enough experience and know-how” to know when a market is going to need additional information and to get it from the retailer before forwarding the submission, he said.

Boro expressed satisfaction with the wholesalers he's mainly using, but, like many agents in the Southeast, wishes they had more markets to bring to the table. “I just hope more E&S carriers will step up to the plate and take on some of the wind issues and provide a little capacity,” he said, “because the way we're heading, we're going to be down to two or three carriers before we know it.”