A myth is sneaking into the industry that insurer insolvency is not as important today. Belief in this myth is important to many entities. To put it more simply, a number of companies, agencies, and other firms benefit if less attention is paid to insolvency issues.
Insurer insolvency is important and barring complete statutory and case law reversals, will always remain a paramount issue, particularly from an E&O perspective. Because insurance is primarily state regulated (though less so than many agents think), agencies need to know their state specific law. What follows is partially generic and each agency would be well served to study this issue relative to every state in which they do business rather than the state in which they reside. Insolvency issues generally follow the client, not the agent.
One issue with which many agents are mistaken is how their E&O policy treats insolvencies. For reasons I cannot fathom given this is the business agency owners are in, many agency owners, producers, and CSRs think that all E&O policies have the same insolvency clause. The insolvency clauses vary significantly from one carrier to another. Every agency owner needs to read and completely understand their policy’s insolvency clause.
In particular, understand insurance company rating requirements. The rating requirements are often specific to who the rating company must be and the specific rating scale used. Furthermore, the rating is usually specific down to the plus or minus. I see too many producers and CSRs and even agency owners that think any “A” or any “B” qualifies and this is rarely accurate. In some cases, writing with a company rated an A- might not qualify and rarely does writing with a “B” versus a “B+” qualify using the A.M. Best rating scale.
Size requirements are common too. So not only might a carrier have to have a B+ rating. They may also have to be a size XIII (for example only) too. Organizational requirements may be a requirement. For example, some governmental entities without ratings may qualify under some policies.
Also understand whether coverage truly exists for any insolvencies. Most of the time it does but I personally would not take this coverage for granted with all policies.
A second very significant issue is that whether or not coverage exists, agencies still have strict responsibilities to notify insureds regarding financial stability, admitted status, how client size affects qualification for the guaranty fund, and lack of carrier ratings. Again, for reasons I fail to understand, agents are assuming that if they think they have coverage under their E&O policy, they do not have to notify clients of these issues. The two really have no connection. The courts are clear on this.
For example, in the landmark case Texas case of Higginbotham from 1987 (Higginbotham & Associates, Inc. v. Greer, Tex. App. 1987), many agents read what they want to read in the judgment. They read only that agents are not liable for discerning the financial stability of the carrier if the carrier is solvent at the time the policy is procured. However, the case also stated that if the agent knew or should have known the insurer was not financially stable, they have a responsibility to advise the client appropriately.
- The attorney for the IIABA of Wisconsin, Tim Fenner, wrote the following, “Under Wisconsin law, an insurance agent or broker has a duty to the prospective policyholder to exercise reasonable skill and ordinary diligence in selecting the carrier in question and in ascertaining that the carrier is of good credit and standing.”
- The Michigan Association of Insurance Agencies wrote the following in 2003, “When an agency learns that a company’s rating has dropped or it is involved in some regulatory action because of a financial problem, the clients placed with the company should be advised.”
- “Brokers court trouble by placing coverage with insurance companies that A.M. Best or Standard & Poor’s considers vulnerable and, on the other side of the coin, somewhat insulate themselves against liability by placing coverage with insurers that such rating companies deem to be secure.” Wyrick v. Hartfield, 654 N.E.2d 913, 915-16 (Ind. Ct. App. 1995).
- “A few courts hold that brokers have a duty to investigate insurers’ financial condition before placing coverage with them. Even these courts, however, recognize that a broker’s duty is only to refrain from placing coverage with an insurer that she knows or reasonably should know to be financially unsound. In jurisdictions that impose a duty to investigate, or that occasionally view the existence of such a duty as a fact issue, a broker’s duty apparently requires him only to check an insurer’s A.M. Best or Standard & Poor’s rating or to check the insurer’s status with state regulatory bodies.” From Tort Trial & Insurance Practice Law Journal, Fall 2004 (40:1) Insurance Agent & Broker Liability.
Notice these cases cite not only A.M. Best but Standard & Poor’s too. This is important because more than one insurance company is rated at less than investment quality by Standard & Poor’s but almost no insurance agency ever checks the S&P ratings.
Agents are being told by some highly positioned people that if the carrier is admitted, they need not worry about the carrier’s poor rating or lack of a rating. This is poppycock. The case law is clear. Notice that none of these rulings create this exception?
Another important point to note is the guaranty fund is still not a cure all. State guaranty funds typically have limitations by client size. For example, if a client has more than $X in assets, they do not qualify for the guaranty fund. Some of these limits are low. Agents need to know these limitations.
Additionally, even if the guaranty fund does provide coverage, my experience is these funds do not always pay claims immediately and unless you are 100% sure the state’s guaranty fund can pay all the claims resulting from a large catastrophe, can you really promise clients they do not need to be concerned about the guaranty fund paying them fully and quickly?
A final point is that some carriers are talking agents into thinking the lack of a rating is not important. In some states, some of the largest health carriers have no ratings. Whether the lack of a rating indicates financial instability or not is beside the point relative to agency exposures. Without a rating the agent has no third party verification of the financial stability and therefore owes its clients notice.
I am not going to argue with those who state ratings are too difficult to get or that ratings are too expensive to acquire or that ratings are not that important or do not prove anything. All those points may or may not be correct. The case law though is strong that agents must notify insureds if the carrier’s financial stability, judged by their ratings or lack thereof, is a question and notification is required regardless of the guaranty fund or admitted status.
My recommendation is to not buy into these myths promulgated by self-interests. Protect yourself, your agency, your employees, and your insureds.