Agents and brokers who place relatively straightforward riskswith admitted carriers traditionally have not had to concernthemselves with the problem of carrier insolvency. If admittedcarriers become insolvent, guaranty funds typically cover losses.But hard-to-place risks, which require the broker to access thesurplus lines market, can present a virtual minefield. Althoughsome states regulate surplus lines insurers more closely thanothers, insurance commissioners aren't going to hold them to thesame reporting and deposit standards as admitted carriers. Thus,although rating agencies like A.M. Best will provide brokers withthe financial ratings of surplus lines carriers, those ratingswon't provide the same level of security as insurance commissionermandates.

Rating agencies sometimes fail to downgrade insurers' ratings asquickly as they should. There have been instances of non-admittedcarriers receiving an A+ rating one year, going into receivershipthe following year, and being liquidated the year after that. Itraises the question: Can an agent or broker be liable for placingcoverage with a carrier who ultimately becomes insolvent and cannotindemnify an insured for losses?

Some courts that have considered the issue haveheld that an insurance broker has an obligation to investigate the financialsoundness of the insurance carrier, and to refrain from placing insurance with a carrierthe broker knows or should know is insolvent. Whilerecognizing that an insurance agent is not a guarantor of thefinancial condition or solvency of an insurance company, thesejurisdictions have applied the general rule that brokers arerequired to use reasonable care, skill, and judgment with a view tothe security or indemnity for which the insurance is sought. Thesecourts generally believe that an insurance broker is required toperform varying levels of investigation before placing coveragewith a carrier, and failure to do so may render the broker liableto the insured for resulting losses due to the insolvency.

Next page: Best practices forbrokers

Look to the Regulators

The gripe most agents have with this general rule is that itpotentially imposes liability on them for the failures of stateregulators. State departments of insurance regulate the amounts ofunimpaired 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 ina state because that duty is already imposed on the insurancecommissioner. Others have essentially split the difference,holding that the broker's duty to act with reasonable careincludes:

• Evaluating the financial stability of an insurance company withwhich the broker intends to place insurance
• Informing the insured if the investigation reveals evidence offinancial infirmity
• Informing the insured that the broker nonetheless intends toplace the policy.

Best Practices for Brokers

All brokers—particularly those using non-admitted carriers—arewell-advised to follow a few best practices to help prevent ordefend these types of errors and omissions (E&O)claims. 

• Try to use an admitted carrier to place a risk, and documentyour efforts to do so. This is typically mandated by stateinsurance regulations, but it bears repeating   
• Maintain current ratings for all the admitted carriers youcommonly use. If you can't place the risk on an admitted basis,notify the insured, explain the difference between admitted andsurplus lines carriers, and confirm that the insured would like youto try to place the coverage on a non-admitted basis
• Check the rating if you find a surplus lines carrier willing toaccept the risk, and convey it to the insured before you bind thecoverage. 

By following these guidelines you'll be able to serve theinsured when seeking coverage for the risk while keeping theinsured informed. It will instill confidence that you are beingdiligent in your efforts. 

Matthew S. Marrone is a partner with Goldberg Segalla LLP.Contact him at [email protected].