Agent Risk Control – relative to Carrier Insolvency Exposures
Agent Risk Control – relative to Carrier Insolvency Exposures12.02.2018
I read this month about Merced Property & Casualty Company (Merced) being judicially found unable to meet its debts with about $23 million in assets and over $60 million in liabilities arising out of the Camp Fire wildfire in Paradise, California. While policyholders will be covered by the California Insurance Guaranty Association (CIGA), the coverage available from CIGA is capped. Given Merced’s liquidation, insureds will seek other avenues to satisfy claims in excess of the CIGA caps, and this includes E&O claims against insurance agents for the policy placement with a carrier that became insolvent.
I’ve written in the past about insurer insolvency E&O exposure with the leading Court case coming out of Texas thirty years ago, Higgenbotham v. Greer. The general rule is that an insurance agent is not a guarantor of the financial condition of an insurer, but can be held liable in situations where reasonable skill and judgment was not used in the selection of a carrier. I also discussed those limited jurisdictions that impose a higher standard of care. One such example is requiring a client know if the agent is aware of financial condition based upon which he or she should have reasonably been aware of an insurer’s insolvency. In view of Merced’s insolvency, and the extreme weather that has been predicted to continue, I thought it useful to revisit my discussion of E&O policy insolvency clauses and end with a list of risk management tools for the prudent insurance agent.
When available, insurance agents seek an E&O policy without an insolvency exclusion and, if an insolvency exclusion is included, seek one with a carve back or softer impact. The underwriting rationale to include such an exclusion typically with a specific rating threshold is to encourage agents to be aware of the financial ratings where business is placed. The undertaking of this activity, however, may create a duty of care and lead to liability not otherwise found at common law. The insurance agent may need to advise a client of an insurer’s financial condition or a change thereto to meet an enhanced obligation.
Even without an insolvency exclusion, my experience in defending insurance agents for over 20 years is that such a policy provides a mistaken false sense of security. I say this for two reasons even though a claim arising out of an insurer’s financial condition may be covered under an E&O policy subject to of course other policy terms and conditions. First, if a client(s) has a claim that cannot be satisfied by an insolvent insurer, and blames the agent for the same, the agent has lost that client and possibly with the spillover effect of losing other business. Second, the perceived benefit of not having an insolvency clause will be short lived as the resultant loss history will likely negatively impact the agent’s future E&O premiums and quite possibly insurability.
The liquidation order with respect to Merced does not change in my view that the insolvency clause issue should not be a controlling factor in purchasing and an E&O policy. Rather, I propose that an insurance agent consider other risk management tools including (i) determine that the insurer in question is presently solvent when placing the insurance, especially with new companies the agent is working with; (ii) determine that the insurer is licensed in the state or complies with state surplus lines statutes (this could include due diligence on the E&S broker; (iii) advise the client in writing as to why the non-admitted or unauthorized insurer is being selected with a reference that the state’s guaranty fund will not respond if the carrier becomes insolvent; (iv) exercise reasonable care, skill and diligence in jurisdictions where required to do so which could be beyond just checking the carrier’s A.M. Best rating; (v) even in states where no duty exists to monitor carrier financial condition, if an agent makes a business decision to do so, it needs to be done for all clients to avoid E&O exposure for not doing so for some clients; and, (vi) if the insurance agent reasonably becomes aware of a decline of an insurer’s financial condition, advise the client in writing and, if possible, offer other insurer options.