Agents and brokers who place relatively straightforward risks with admitted carriers traditionally have not had to concern themselves with the problem of carrier insolvency. If admitted carriers become insolvent, guaranty funds typically cover losses. But hard-to-place risks, which require the broker to access the surplus lines market, can present a virtual minefield. Although some states regulate surplus lines insurers more closely than others, insurance commissioners aren't going to hold them to the same reporting and deposit standards as admitted carriers. Thus, although rating agencies like A.M. Best will provide brokers with the 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. 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. It raises the question: Can an agent or broker be liable for placing coverage with a carrier who ultimately becomes insolvent and cannot indemnify an insured for losses?

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. While recognizing that an insurance agent is not a guarantor of the financial condition or solvency of an insurance company, these jurisdictions have 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 that an insurance broker is required to perform varying levels of investigation before placing coverage with a carrier, and failure to do so may render the broker liable to the insured for resulting losses due to the insolvency.