It's no secret that the pricing cycle for property-casualty insurance has been unfavorable for several years. And the entire country knows what's happening with the economy and, in particular, the equity and credit markets. Taken together, these circumstances are hitting insurers very hard. Standard & Poor's recently offered its outlook for the property-casualty sector over the next 12 to 18 months, and with downgrades expected to exceed upgrades, it isn't promising. Brokers are nervous, too, wondering what will happen to them if a carrier with whom they've placed coverage goes under. What responsibility, if any, does the insurance broker bear to the insured if a carrier becomes insolvent? Some courts that have considered the issue have held that an insurance broker has an obligation to investigate the financial soundness of the insurance carrier, and to refrain from placing insurance with a carrier the broker knows or should know is insolvent. See Williams-Berryman Ins. Co. v. Morphis, 461 S.W.2d 577 (Ark. 1971); Nidiffer v. Clinchfield R.R., 600 S.W.2d 242 (Tenn.Ct.App. 1980); Sternoff Metals Corp. v. Vertecs Corp., 693 P.2d 175 (Wash.App. 1984). While recognizing that an insurance agent is not a guarantor of the financial condition or solvency of an insurance company, these jurisdictions applied the general rule that brokers are required to use reasonable care, skill and judgment with a view to the security or indemnity for which the insurance is sought. These courts generally believe an insurance broker is required to perform varying levels of investigation before placing coverage with a carrier, and failure in such respect may render the broker liable. The gripe most agents have with this general rule is that it potentially imposes liability upon them for the failures of state regulators. State insurance departments regulate the amounts of unimpaired capital and surplus that insurance carriers must maintain, and force them to deposit securities with insurance commissioners. If the insurance commissioners aren't doing their jobs to ensure that carriers are solvent, why should the brokers take the blame? It's a fair question, and some jurisdictions have in fact held that the broker has no duty to investigate the financial condition of an insurer authorized to do business in a state because that duty is already imposed on the insurance commissioner. Others have essentially split the difference, holding the broker's duty to act with reasonable care includes:
o Evaluating the financial stability of an insurance company with which the broker intends to place insurance,
o Informing the insured if the investigation reveals evidence of financial infirmity, and
o Informing the insured the broker nonetheless intends to place the policy (Carter Lincoln-Mercury Inc., Leasing Division v. EMAR Group Inc., 638 A.2d 1288 [N.J. 1994]). For practical purposes, brokers who place relatively straightforward risks with admitted carriers traditionally have not had to concern themselves with this problem. If admitted carriers become insolvent, guaranty funds typically cover losses, and these days it's even possible the government will step in to assist. This problem with hard-to-place risks may require the broker to access the surplus lines market. Although some states regulate surplus lines insurers more closely than others, insurance commissioners typically won't hold them to the same reporting/deposit standards as admitted carriers. Thus, while rating agencies like A.M. Best provide brokers with financial ratings of surplus lines carriers, those ratings won't provide the same level of security as insurance commissioner mandates. Rating agencies sometimes fail to downgrade insurers' ratings as quickly as they should. While all brokers are rightfully nervous about these claims, those who frequently place risks in the surplus lines market are most likely to be at risk over the coming months for claims of placing insurance with insolvent carriers. Surplus lines brokers should not panic, as it's impossible to determine how great a risk that will be. Some states have surplus lines guaranty funds, which may provide some level of protection in the event these carriers go under. In the interim, however, all brokers–particularly those using non-admitted carriers–are well-advised to follow a few best practices to help prevent or defend these types of E&O claims. Try to use an admitted carrier to place a risk, and document your efforts to do so. Maintain ratings for all admitted carriers you commonly use. If you can't place the risk on an admitted basis, notify the insured, explain the differences between admitted and surplus lines carriers, and confirm that the insured would like you to try to place the coverage on a non-admitted basis. By following these guidelines you'll be able to serve the insured by seeking coverage for the risk while keeping the insured informed. If provided with relevant knowledge and consulted at each step of the decision-making process, the insured will be less likely to hold you responsible if a carrier ultimately goes belly-up. Matthew S. Marrone is a partner with Lucas and Cavalier LLC, a regional litigation firm with headquarters in Philadelphia. Contact Marrone at 215-751-9192 or [email protected].