E&O Insights: Differences Between Standard, Excess & Surplus Markets

By | January 28, 2013

For as long as the insurance industry has been around, the excess and surplus (E&S) lines marketplace has served a vital role in writing difficult-to-place, specialty business for which admitted markets don’t have the appetite. There is no doubt that the flow of applications to the E&S market will increase as the market hardens.

Agency personnel must understand and account for the key differences between the standard markets they deal with regularly and the E&S market where they may have less frequent interaction. Problems can surface quickly and often without proper accounting for these differences, especially if you are not giving the ES business heightened priority.

Lead Time and Application

Quality wholesalers are always busy, even in a soft market. In a hard market, “absolutely crazy” probably better defines the pace and workload. Give your wholesaler plenty of time with the submission. If the wholesaler has questions, respond quickly and accurately. Allow for a lead time upward of 60 days. While wholesalers will typically accept ACORD applications for most of their business, there will be some classes of business where the carrier will want its own application completed. To save time down the road, contact your wholesaler in advance and ask whether a specific application is needed.

Agency personnel must understand and account for the key differences between standard markets and the E&S market.

Lack of Binding Authority/No Back-Dating Coverage

Retail agents, absent an E&S license, do not have binding authority as they would with a standard market where an agency agreement is in place. Technically, the retail agent is not the “official agent.” The wholesaler used to access that market is technically the agent of record.

What does this mean and what should an agency do? Whether the ES account is new or a renewal, to bind a risk the retail agent must advise the wholesaler. Realize, however, that the wholesaler might not even have the authority and may need to contact the carrier. Due to this situation, the client should not be advised that coverage is bound until the wholesaler confirms it.

The producer or CSR at the retail agency level should make sure the client is contacted far in advance of the expiration date. This will enable the client to review the proposal and make a decision on whether to proceed.

Binding Coverage

The proposal from the retail agent should include language that clarifies when the agency must be notified, to ensure that coverage is bound with no lapse in coverage. The important date should be a couple of days in advance of the expiration date to allow the retail agent sufficient time to contact the wholesaler to bind coverage.

The retail agency must act promptly when advised that the binding of coverage is desired. If, due to workloads, the customer service representative does not bind the coverage promptly, a gap in coverage is possible.

For example, say the client advises the retail agency to put specific property coverage into effect. The current coverage is due to expire on Saturday. The CSR inadvertently does not make the call to the wholesaler until the following Monday. In virtually all situations, the new effective date now will be Monday. There would be no coverage if a loss occurred over the weekend.

This situation happens all too often, resulting in an errors and omissions (EO) claim against the agency. Be sure that ES business gets the priority it deserves.

No Advance Notice of Coverage Changes

In the standard market, when a carrier looks to make a modification, typically a reduction, the carrier is required to send a conditional renewal notice detailing the changes. In the ES market, if a carrier wants to restrict the coverage on the renewal, there is no requirement to provide this advance notification. As a result, tremendous responsibility is put on the retail agent to identify changes between the expiring coverage and the proposed renewal coverage.

It is best to assume that the renewal does not look like the expiring coverage, so simply be pleasantly surprised if there have not been changes. The retail agent should ask the wholesaler ahead of time if any changes on the renewal policy are expected. Document what the wholesaler advises you. When the renewal proposal is received, ask again if there are any changes. Document these discussions as well.

It is always best for retail agents to check the renewal terms themselves, regardless of what the wholesaler advises.

When interacting with the customer, make it part of your process to review the renewal proposal with the customer to get approval on whether they want coverage bound.

Unique Carrier Forms

Many ES carriers have unique carrier forms. As the retail agent, you may be looking to provide your customer with alternative proposals to consider. Compare each of these proposals and bring the differences to the customer’s attention. This will allow the customer to make an educated decision — and that is critical. At the end of the day, it is your customer who needs to decide what coverage and policy or policies they want, if any. Don’t assume that each of the general liability proposals contains the same coverage/restrictions.

A Professional Relationship

In most agencies, the ES marketplace is critical to place various lines/classes of business. Establishing a solid relationship with these industry professionals should ensure your applications get the attention you desire and that you understand the issues the ES marketplace presents. Having a professional relationship could also save you some “sleepless nights,” as you’re less likely to have EO issues arise.

About Curtis M. Pearsall

Pearsall is president of Pearsall Associates Inc., a risk management consulting firm. He is also a special consultant to the Utica National Agents E&O program. Phone: 315-768- 1534. Email: curtis@pearsallassociates.com. More from Curtis M. Pearsall

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Insurance Journal West January 28, 2013
January 28, 2013
Insurance Journal West Magazine

Excess, Surplus & Specialty Markets Directory, Volume I