The excess and surplus lines market has been around a long time. It has served the insurance marketplace well, providing specialty coverage and writing tough-to-place risks. While activity in the E&S market is traditionally strong, as the market shows some signs of hardening there is no doubt this activity will increase, potentially reaching a “chaos” level. With this increase comes the potential for some significant errors and omissions (E&O) activity for those agents who believe this market is just like any other. There is tremendous uniqueness to the E&S marketplace and going in with your eyes open is a good way to start.
With the hardening of the market, admitted carriers will be shedding business that has had some claims activity or no longer meets their underwriting appetite. Agents will now need to reach out to the E&S market to place some of this business — and here is where some of the “fun” begins!
While wholesalers will typically accept ACORD applications for most business, there will be some classes of business where the carrier will want its own application completed. This could involve a specialty class or some type of professional liability. Contact the wholesaler in advance to determine if a specific app is needed. This extra step up front could save time and aggravation down the road.
Sufficient Lead Time
Wholesalers are busy, so give yours plenty of time with the submission. They may have some questions, so allow for that. Then provide the wholesaler with prompt and accurate responses. While some accounts may be able to be handled quickly, others may take some time. It is recommended to get the application to the wholesaler at least 60 days in advance of the expiration date.
There’s some work to do once you receive the proposal from the wholesaler providing the specific terms and conditions for that account. Review them carefully as in all likelihood there will be some differences between the expiring policy and the E&S proposal.
E&S carriers have tremendous flexibility to modify the coverage through exclusionary endorsements. As you review the proposal, note the differences between the previous admitted policy and the E&S proposal. Communicate these to your client, preferably in writing.
This review should be done before binding the coverage to ensure your client wants the coverage. Binding the risk with the wholesaler before getting the “OK” from the customer could cause some problems. If you were to bind the account only to find out the client does not want the coverage, you could face a “minimum earned premium” that is typically 25 percent but can be as much as 100 percent.
The Classification Limitation Endorsement is one endorsement you definitely want to be on the lookout for. Common on general liability policies, it essentially restricts coverage to only those classifications noted on the policy. For example, if you insure a carpenter, the coverage would state only claims arising from carpentry would be covered. If the carpenter does some plumbing, there would be no coverage for this exposure unless the policy was modified accordingly.
If the proposal contains this endorsement, bring it to your customer’s attention and advise that if they do anything outside of what is noted on the policy, they must contact your agency to try to get their “new” exposure covered. All of these conversations should be completely documented in the agency file as well as via correspondence back to the customer.
No Binding Authority
You’ve reviewed the proposal and brought the issues to the attention of the customer, and the customer has requested the coverage. Yet, as an agent, you must realize you do not have binding authority for E&S business. To bind a risk, the wholesaler must be contacted. Until you get authorization from the wholesaler, do not tell the customer that coverage is bound.
Another major issue with the E&S market is when accounts need to be bound. Coverage must be bound on or before the effective date for coverage to be put into effect. In the E&S market, there is no back-dating, so if you want the coverage bound for a risk that renews on Saturday, request binding from the wholesaler no later than Friday. If you wait until Monday, there is a good chance the risk will be bound effective Monday. This could be a major problem based on the type of the risk.
Don’t expect the renewal policy to look like the expiring one — it probably doesn’t
It is critical to carefully review renewal proposals from the wholesaler for accounts you have in the E&S market. E&S carriers are not required to issue conditional renewal notices advising your agency and the client of any changes. As a result, the coverage could be changed on renewal with no advance notification.
A good procedure is to ask your wholesaler ahead of time if they expect any changes on the renewal policy — and ask if there are any changes once you get the renewal terms. Document these discussions. It is also prudent to check the renewal terms. In some cases, the customer may not be agreeable to the changes, so make it part of your process to contact the client, review the renewal proposal with them and get their approval on whether coverage should be bound.
Ask Wholesaler for Evidence of E&O
Your wholesaler has probably asked your agency for a certificate of insurance showing evidence of E&O coverage. Ask your wholesaler for the same! This should be an annual process. If your E&S wholesaler does not have E&O, it might just affect whether you want to continue using them.
Establish a professional relationship with your wholesaler through hard and soft markets. Having a professional relationship with your wholesaler could make a big difference in your dealings with them — and whether your application even gets to the top of the pile.
The wholesaler is there to help you, but without their cooperation and support, your ability to effectively utilize the E&S market will be affected.