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.
Next page: Best practices for brokers
Look to the Regulators
The gripe most agents have with this general rule is that it potentially imposes liability on them for the failures of state regulators. State departments of insurance 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 that the broker's duty to act with reasonable care includes:
- Evaluating the financial stability of an insurance company with which the broker intends to place insurance
- Informing the insured if the investigation reveals evidence of financial infirmity
- Informing the insured that the broker nonetheless intends to place the policy.
Best Practices for Brokers
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 errors and omissions (E&O) claims.
- Try to use an admitted carrier to place a risk, and document your efforts to do so. This is typically mandated by state insurance regulations, but it bears repeating
- Maintain current ratings for all the admitted carriers you commonly use. If you can't place the risk on an admitted basis, notify the insured, explain the difference 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
- 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.
By following these guidelines you'll be able to serve the insured when seeking coverage for the risk while keeping the insured informed. It will instill confidence that you are being diligent in your efforts.
Matthew S. Marrone is a partner with Goldberg Segalla LLP. Contact him at [email protected].
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