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.