Agents & Brokers: Unsafe In Any Market

The conventional wisdom that hard markets produce more agent E&O claims doesnt stand up to any hard evidence, but the fear of such claims is greater now even though there are some strong arguments contesting the intuitive conclusion.

“I am in the camp that believes hard markets create greater exposure for agents and brokers,” said Peter Biging, a partner with the law firm of Nicoletti Hornig Campise Sweeney & Paige in New York.

Mr. Biging, who also moderated a panel discussion on the topic at the Professional Liability Underwriting Society International Conference in November, summed up his view for National Underwriter: “Its not atypical for an insured to tell an agent or broker, Just renew my coverage at the same limits and the same rates. [But] if its a hard market, its harder to do.”

When the agent or broker comes back and says, “Rates are up 30, 40, 50 percent. I cant do that,” there will be “expressed or internalized pressure for the agent to come up with creative ways” to keep coverages and rates close to what they were.

He said creative advice can take several forms: “Maybe you dont need employment practices liability. [Or] do you really need these limits?” The other thing the agent might do is suggest switching coverage to a lower-rated carrier, he said, noting that when the producer starts getting creative, he or she creates a potential E&O situation. If the client gets placed with a lower-rated carrier that becomes insolvent, the agent or broker will be blamed, he said.

Raymond Wahl, senior vice president for West Hartford, Conn.-based Lee & Mason Financial Services, offers a dissenting view. “I would argue that the hard market actually helps the agent or broker from the E&O perspectivebecause if theres only one place to get coverage, you couldnt have done anything wrong by putting it there.”

“Conversely, in a soft market, where there are so many companies available, theres a much higher possibility for agents to get in trouble,” he argued. “If theres only one carrier, one form, one limit, then how could you make a mistake? [But] if there are 20 different places to go, [and carriers] are willing to give all sorts of coverage extensions, then a case can be made that the agent could have done better.”

Ken Schneider, vice president and director of product development for Farmington Hills, Mich.-based Burns & Wilcox, gave the surplus lines perspective. “The E&S market has more than doubled in size in the last two years. That means we have a lot more submissions, a lot more paper flowing back and forth,” he noted.

“Its just human naturethe more transactions you make, the easier it is to make a mistake,” he said, also highlighting the increased risk of insolvency of carriers.

Eugene Mason, senior vice president for Willis Re in Farmington, Conn., said his review of claims data on the reinsurance side shows theres been an increase in the frequency of claims for agents and brokers in the last few yearsand “a noticeable uptick in claims for failure to secure adequate coverage on renewal.”

A great percentage of agents and brokers really never experienced placing business in a hard market, he added, noting that in a hard market, they have to put considerably more effort into renewing policies and into extensive documentation and communication with the insured.

Mr. Wahl doesnt believe the hard market is responsible for the frequency trend. For agents, and for every other class of E&O, theres been a long-term uptick that goes back to the late 1970s, he said.

As for actual claims related to recent insurer failures, experts agree its too soon to draw conclusions from empirical data.

“There hasnt really been an uptick. Maybe six months from now we may see the claims from last year,” Mr. Mason said.

“I certainly dont mean to downplay this,” Mr. Wahl said, noting that there have been serious situations for agents with respect to Reliance, Legion and Kemper. But “once those companies got downgraded, there was an immediate outflow of business.” Agents knew what they needed to do, he said, pointing out that the exposure is controllable, even in situations where agents E&O policies contain insolvency exclusions.

Noting that hes written E&O on forms that have everything from no insolvency exclusion to a full one, he said his current (Liberty Mutual) form provides that if a carrier is rated “A-minus” or higher when the E&O policy is written, then the agent is covered for claims related to an insolvency. But even in situations where an agent must place a client with a “B” carrier, agents can control their risksby explaining to insureds that this is all thats available, by spelling out the risks and documenting files. “Even if you get sued, its very defensible at that point,” he said.

At the PLUS conference, Mr. Mason pointed out that insurer insolvency historically represents a nominal percentage of claimsless than 5 percent. He noted, however, that while underwriters have been historically successful in eliminating insolvency exposures through exclusionary language, during the soft market they removed the language entirely.

During an interview, Mr. Mason said that the increased number of downgrades has really put the insolvency issue on the radar screens of E&O insurers. “In the soft market, youd have underwriters who werent even having insureds complete full applications at renewal. Now that the market has turned harder, insurers are requiring each insured to fill out a full application,” complete with questions about carriers and their current ratings.

Apart from potential claims related to insolvencies, Mr. Biging sees another worrisome claims trend developing.

“Anecdotally, there have been more and more cases alleging a fiduciary relationship,” he said. Noting that such cases have been turning up more frequently since 2002, he chalked it up to two factorscreative plaintiffs lawyers and the fact that brokers have been promising more services, such as risk management and consulting.

“When youre acting as a risk manager, youre doing more than just procuring the coverage that clients tell you to get. Youre saying, Im going to assist you in determining what you need to get.”

The problem with that is that it allows plaintiffs to “get past the sweet, decisive knock-out defense” that agents and their lawyers could once rely on to shut the door on E&O cases quickly. That defense, he said, is summed up in one simple question: “Did you read the policy?”

Mr. Biging explained that the “basic duty” of an agent or broker is simply “to procure requested coverage within a reasonable period” or to advise the client that he or she wasnt able to. So if the client later filed suit alleging that he or she didnt have appropriate coverage or limits, “the broker said, All I had to do was procure coverage. You had a duty to read it.”

Once the broker holds himself out as a risk manager, that allows plaintiffs to say that a “special relationship” exists, creating a “greater, fiduciary duty of care” on the part of the brokerone that cant be easily dismissed in the same manner.

A lot of brokers are heading in that direction “and making no bones about it,” Mr. Biging said. “Some of my clients are advertising the fact that theyre taking on the role of risk manager, to my chagrin, but they say they have to for business purposes,” he noted, reading off some phrases from broker Web sites that promise to do everything from performing “strategic decision risk analysis” to identifying “new and emerging exposures.”

“Others cross the line, without expressly saying that theyre doing thatjust in getting more creative” to respond to the challenges of meeting clients needs during a hard market, he added.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 30, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Agents & Brokers: Unsafe In Any Market

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