THE E&S marketplace is a valuable tool for most independentagents and brokers. Indeed, American Agent & Broker's annualreader survey consistently shows that nearly 90% of the magazine'srecipients regularly work with E&S carriers, primarily throughsurplus-lines brokers and MGAs.

To learn more about how agents and brokers use the E&Smarketplace, we recently contacted a number of them, ranging fromrelatively small agencies to those in Business Insurance's list ofthe country's 100 largest brokers. Among other things, they told uswhat sorts of risks they're placing with nonadmitted carriers thesedays, how the hardening market for catastrophe-prone risks and thesoftening market for many others kinds of business are affectingtheir use of E&S markets, and what they see as the advantagesand drawbacks of working with MGAs, surplus-lines brokers andE&S insurers. Their comments follow.

Bill Russell
Bill Russell Insurance Agency
Austin, Texas

Bill Russell, president of Bill Russell Insurance Agency, whichis a member of a 35-member agency cluster, said he typically turnsto E&S insurers for special products like employment practicesliability and professional liability for certain risks. He alsomight seek them out for coverage on particular properties thatstandard markets don't care to write because a building is vacant,or because of its age or occupant. He also places general liabilityinsurance for certain risks with nonadmitted insurers.

As the market softens, Russell said, carriers' appetites change.Certain types of risks that previously were destined for theE&S marketplace now can be placed with standard or admittedinsurers. For example, standard carriers that once spurned “leaserisk only” buildings–retail centers, office buildings and thelike–have once again acquired a taste for them. Russell also seesnon-habitational general contractors moving back to admittedmarkets, although he said: “It's still pretty much an E&Smarket for habitational risks like apartment buildings. A handfulof markets still write condominiums and town homes–fewer than didthree years ago.” He added that, in recent years, even thetrades–especially those with water-related exposures, includingplumbing and roofing–have gravitated toward the E&Smarketplace.

Russell said some standard companies are beginning to restricttheir liability limits for certain professionals–particularlyarchitects, engineers and lawyers–and for those with past claimsactivity. As a result, he sometimes must tap the E&S markets tosatisfy customers' limit needs. “The legal climate varies fromstate to state,” he said, “and Texas is one of the more litigiousstates. Very few companies want to write law firms that handleclass-action suits, especially those involving personal injury.”Obtaining adequate coverage for structural engineers and forlawyers practicing in Texas typically requires the expertise of awholesaler or program administrator experienced in–and comfortablewith–such classes of business, he said.

Russell noted that agents working with E&S markets need tounderstand how they differ from admitted carriers. For instance,some E&S markets have their own supplemental applications thatagents must complete in addition to an ACORD form, and agents musttake care to use the current edition of the correct app. (Russellsaid that many E&S carriers make their applications and formsavailable online, which helps agents tremendously.) Also, a quotefrom an E&S market might list several endorsements withoutfurnishing a copy of each one–and they might be company-specificrather than ISO endorsements with which the agent is familiar. Inthat case, the agent should request copies of the endorsements.Also, Russell said, wholesalers often process quotes based oninsureds' expiration dates, regardless of when they receiveapplications. Since agents may get quotes only a day or two beforethe clients' or prospects' current policies expire, they may nothave much time to present them, and therefore should planaccordingly. Finally, because claims submitted to E&S marketsmay pass through the hands of several people (brokers, insideadjusters, outside adjusters, etc.), the claim-handling process maybe slower and more cumbersome than agents are accustomed to.

Still, said Russell, E&S markets are important to hisagency. “They provide much-needed coverage that we otherwise wouldhave a hard time finding, and their specialized knowledge makesthem good resources for us.”

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

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

So what's involved in getting such a license?

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

Way said the main benefits of going to the E&S marketsdirect are quicker response and less risk of misunderstanding.Among the risks it places direct are some of its directors andofficers 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&Sintermediaries. “There's some miscellaneous professional liabilityplaced that way because some of the wholesalers have bindingagreement with carriers … and sometimes they can get better termsthan 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, Waysaid, Thoits recently arranged more than $300 million in stockthroughput coverage for an export-importer that handles a highvolume of computer chips. It did so by layering coverage withseveral E&S insurers.

When layering coverage in certain lines, Thoits often lets anE&S wholesaler handle the entire transaction, rather than useits 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 socritically important. If you're placing four, five or six layers toget the limits that you need, generally you want them to all gothrough the same place.”

Way said one of the things he likes about dealing with theE&S marketplace is that its underwriters tend to be moresophisticated 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 publicofferings of stock usually exclude coverage for lawsuits filed byshareholders who own more than 5% (or some other figure) of acompany's shares. When working with nonadmitted markets, it may bepossible to remove such exclusions, Way said. “It's very hard to dowith a standard carrier, because it has to go through legal,” hesaid. “In the E&S market, very often the line underwriter orthe desk underwriter will be more sophisticated and have theability to do that.”

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

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

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

Capitalization also is crucial, Way said, because Thoitssometimes must rely on surplus-lines brokers to forward largepremium 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 itsomeone else,” he said. “I mean, that is just not beingresponsible.”

Ty Harris
Harris Insurance Inc.
Birmingham, Ala.

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

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

Harris Insurance accesses the E&S market via fourMGAs/brokers. “We have a couple that give excellent service but arelimited in what they can write,” Harris said, “and we have a couplethat offer a broader array of products, and this sets themapart.”

E&S intermediaries usually require retail agents to enterinto contracts with them, although Harris said he is not alwaysthrilled by such arrangements. “We have found some contract wordingto be very one-sided,” he said. “We recently declined to appoint anew MGA because of contract wording. We have found other contractsto be more fair and reasonable. We would prefer no contract atall.”

Before placing a risk with an E&S carrier, retail agentsgenerally must provide evidence that they have made a “diligentsearch” for coverage in the admitted market. “When we getdeclinations (from standard carriers),” Harris said, “we simplyscan them into our system, providing permanent documentation.”

Harris said working with E&S markets differs from dealingwith standard carriers in a number of ways. “They usually wantsigned renewal applications and want related forms to be signed,”he said. “They have a 25% minimum earned (premium) requirement. Thebinding authority with the MGAs is limited to nonexistent.” Unlessclients pay premiums upfront, the agency has little choice but toarrange for outside premium financing, Harris said. The interestpremium finance companies charge is usually considerably higherthan the fees charged by standard insurers offering installmentoptions, he added.

Away from coastal areas, the market is softening for some kindsof risks, Harris said, giving the agency an opportunity to movesome E&S clients to admitted carriers–within limitations. “Ourexperience has been that the standard markets still heavilyunderwrite the class of business and are still not that interestedin writing accounts that they have not traditionally written,” hesaid. Those the agency has been able to move include new businessesin acceptable classes that have built up at least a three-yearloss-free history with an E&S insurance company, he said.

Overall, Harris said he considers the E&S marketplace animportant competitive advantage for independent agents. The optionsit 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 inannual revenue, uses the E&S markets in conjunction with anumber of the agency's specialties, according to John Tallarida,senior vice president. In its construction unit, for instance, itoften turns to those markets for umbrella placements and for excessinsurance written for owner-controlled insurance programs.Nonadmitted markets also are the only sources of excess generalliability coverage for such unusual Heffernan accounts as eventplanners that arrange entertainment in National Football Leaguestadiums.

Heffernan has an admitted program for California nonprofitorganizations, but Tallarida said E&S markets are one of itssources for excess sexual abuse and molestation coverage. Anotheruse is for excess placements on a number of D&O accounts, hesaid, as well as primary coverage for some D&O risks.

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

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

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

When working with retail agents and brokers, surplus-linesbrokers usually collect and remit surplus-lines taxes and tend toother regulatory matters–but that's not always the case, Tallaridasaid. “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 veryaware 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 discoverthan the broker is not licensed in a state in which taxes must beremitted. Consequently, the retailer might have to bring in anothersurplus-lines broker just to take care of that issue or otherwisedeal with it. On the other hand, he said, a surplus-lines brokersometimes may relieve the retailer of the responsibility forsearching for coverage in the admitted market, and documenting thatsearch, before placing an account with an E&S carrier.

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

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

Fleming, Bates & Barber uses the E&S markets for avariety of exposures, according to the agency's president, MarkBates, who also is a former president of the Big “I” of Indiana. Hesaid he turns to them to obtain liquor liability insurance, specialevents insurance, property insurance for vacant commercial andresidential structures, and general liability insurance forstart-up contractors. In some cases, he also places certain typesof 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, Batessaid he has moved some accounts out of E&S markets. One examplewas a concrete contractor. Bates had placed the account with anE&S carrier when it was a startup, because “no one in thestandard market wanted him.” Now the account has a track record,and admitted markets are more interested. “I just moved him intothe standard market a month ago and saved him a ton of money,”Bates said. Coverage forms also tend to be broader in the admittedmarket, another reason why agents have a duty to move clients intoit when circumstances warrant, Bates said.

Accounts that start out with a cavalier attitude toward losscontrol often end up in the E&S marketplace, Bates said, buteventually can move out of it if their loss record and proceduresdemonstrate that they've become serious about risk management. Someaccounts, however, tend to go to the E&S marketplace and staythere, he said. They include contractors who exclusively installexterior insulation and finish systems (EIFS), certain productliability risks and the aforementioned vacant properties.

Bates said he approaches the E&S marketplace through severalMGAs and surplus-lines brokers, primarily Arlington-Roe and Burns& Wilcox. Compared with standard insurers, E&S carrierstend to require more supplemental applications but otherwise aresimilar, he said.

Bates said he has encountered few risks for which he couldn'tfind coverage in the E&S marketplace, although it might beexpensive. He said he recently discussed the marketplace'simportance with an intern from Indiana State University's Insuranceand Risk Management Program, who is working in his office for thesummer. Regardless of what a client brings you, “as an independentagent, 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 thatdoes business primarily in Georgia, Florida, Alabama and SouthCarolina, it hasn't been easy to arrange coverage for somerisks–even in the E&S marketplace.

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

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

Besides using E&S markets to provide whatever hurricanecoverage he can, Boro said he turns to them to obtain builder'srisk coverage for any structure with wood-frame construction. Onthe casualty side, he uses them for “most anything related toresidential construction” as well as for medical malpractice andD&O, particularly for risks that have experienced claims orfinancial difficulties.

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

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

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

Boro said he also sometimes feels E&S intermediaries don'tearn their pay, although he said that's less the case in today'smarket. In particular, he said intermediaries should take more careto qualify submissions. “When I send a submission to a broker, andall they do is forward it–basically take my e-mail and forwardit–wait for it to get logged in, wait for the underwriter to take alook at it, and then come back with questions, you might lose twoweeks,” he said. A good E&S wholesaler, on the other hand,“should have enough experience and know-how” to know when a marketis going to need additional information and to get it from theretailer before forwarding the submission, he said.

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