In today's litigious environment, if you're an agent and the insurer you represent becomes insolvent, you could be subject to lawsuits from policyholders — your clients — claiming you placed their coverage with a carrier that became insolvent. If that happens, don't be surprised if your Errors & Omissions policy will not defend you against this potentially serious exposure. You could be saddled with the cost of paying for your own legal defense or hit with a big-dollar settlement. In any case, your reputation would suffer, something no agent can afford.

In many cases, your customers would not even have access to a guaranty fund to pay their claims. State guaranty funds only cover admitted carriers. Excess and Surplus Lines insurers, Risk Retention Groups, Captives, and other Alternative Risk Transfer mechanisms do not have access to these funds. Even if the insolvent company is an admitted carrier, neither you nor your clients want to go through the hassle of trying to recover from a guaranty fund bureaucracy.

Most E&O markets exclude insurance company insolvency exposure if the damages or claims expense arise directly or indirectly out of the insolvency, bankruptcy, receivership, rehabilitation, or liquidation of risk-bearing entities that are non-rated or low-rated (under B+, A-, or better) by the A.M. Best Company, or below a particular financial size category. According to attorneys Janice DiGennaro and Lawrence Levy of Long Island, NY, experts on liability issues, courts generally have upheld the liability exclusion. Clearly, the exclusion can create confusion and tension between an insurance company and its agency force. It also influences perceptions of the carrier's image.