It's no secret that the pricing cycle for property-casualtyinsurance has been unfavorable for several years. And the entirecountry knows what's happening with the economy and, in particular,the equity and credit markets. Taken together, these circumstancesare hitting insurers very hard. Standard & Poor's recentlyoffered its outlook for the property-casualty sector over the next12 to 18 months, and with downgrades expected to exceed upgrades,it isn't promising. Brokers are nervous, too, wondering what willhappen to them if a carrier with whom they've placed coverage goesunder. What responsibility, if any, does the insurance broker bearto the insured if a carrier becomes insolvent? Some courts thathave considered the issue have held that an insurance broker has anobligation to investigate the financial soundness of the insurancecarrier, and to refrain from placing insurance with a carrier thebroker knows or should know is insolvent. See Williams-BerrymanIns. Co. v. Morphis, 461 S.W.2d 577 (Ark. 1971); Nidifferv. 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 nota guarantor of the financial condition or solvency of an insurancecompany, these jurisdictions applied the general rule that brokersare required to use reasonable care, skill and judgment with a viewto the security or indemnity for which the insurance is sought.These courts generally believe an insurance broker is required toperform varying levels of investigation before placing coveragewith a carrier, and failure in such respect may render the brokerliable. The gripe most agents have with this general rule is thatit potentially imposes liability upon them for the failures ofstate regulators. State insurance departments regulate the amountsof unimpaired capital and surplus that insurance carriers mustmaintain, and force them to deposit securities with insurancecommissioners. If the insurance commissioners aren't doing theirjobs to ensure that carriers are solvent, why should the brokerstake the blame? It's a fair question, and some jurisdictions havein fact held that the broker has no duty to investigate thefinancial condition of an insurer authorized to do business in astate because that duty is already imposed on the insurancecommissioner. Others have essentially split the difference, holdingthe broker's duty to act with reasonable care includes:
o Evaluating the financial stability of an insurance company withwhich the broker intends to place insurance,
o Informing the insured if the investigation reveals evidence offinancial infirmity, and
o Informing the insured the broker nonetheless intends to place thepolicy (Carter Lincoln-Mercury Inc., Leasing Division v. EMAR GroupInc., 638 A.2d 1288 [N.J. 1994]). For practical purposes, brokerswho place relatively straightforward risks with admitted carrierstraditionally have not had to concern themselves with this problem.If admitted carriers become insolvent, guaranty funds typicallycover losses, and these days it's even possible the government willstep in to assist. This problem with hard-to-place risks mayrequire the broker to access the surplus lines market. Althoughsome states regulate surplus lines insurers more closely thanothers, insurance commissioners typically won't hold them to thesame reporting/deposit standards as admitted carriers. Thus, whilerating agencies like A.M. Best provide brokers with financialratings of surplus lines carriers, those ratings won't provide thesame level of security as insurance commissioner mandates. Ratingagencies sometimes fail to downgrade insurers' ratings as quicklyas they should. While all brokers are rightfully nervous aboutthese claims, those who frequently place risks in the surplus linesmarket are most likely to be at risk over the coming months forclaims of placing insurance with insolvent carriers. Surplus linesbrokers should not panic, as it's impossible to determine how greata risk that will be. Some states have surplus lines guaranty funds,which may provide some level of protection in the event thesecarriers go under. In the interim, however, allbrokers–particularly those using non-admitted carriers–arewell-advised to follow a few best practices to help prevent ordefend these types of E&O claims. Try to use an admittedcarrier to place a risk, and document your efforts to do so.Maintain ratings for all admitted carriers you commonly use. If youcan't place the risk on an admitted basis, notify the insured,explain the differences between admitted and surplus linescarriers, and confirm that the insured would like you to try toplace the coverage on a non-admitted basis. By following theseguidelines you'll be able to serve the insured by seeking coveragefor the risk while keeping the insured informed. If provided withrelevant knowledge and consulted at each step of thedecision-making process, the insured will be less likely to holdyou responsible if a carrier ultimately goes belly-up. MatthewS. Marrone is a partner with Lucas and Cavalier LLC, a regionallitigation firm with headquarters in Philadelphia. Contact Marroneat 215-751-9192 or [email protected].