E&O Insights: E&S Market Requires Attention to Detail

The excess and surplus lines (E&S) marketplace fulfills a huge role in our industry. The exposures it can entertain are virtually limitless. Without this segment of our industry, many risks might very well have gone uninsured. Few agencies can properly serve their clientele without the benefits and product offerings of the E&S industry. Despite these well-deserved accolades, the E&S marketplace has evolved into a significant errors and omissions (E&O) hotspot which can, without tremendous attention to detail, become an incurable E&O headache.

There are a host of significant issues somewhat unique to E&S compared to the admitted marketplace. Insurance agencies need to have a strong awareness of the issues, and then implement procedures necessary to effectively manage them.

Relationships and Submissions

Do you have a relationship with each of your wholesalers? Unlike the standard market, agents don’t typically have a direct relationship with E&S companies. To access them, agents use E&S brokers, also called wholesalers. While each wholesaler has access to markets, oftentimes various wholesalers have many of the same markets. The key is to identify a couple of wholesalers with which you can develop a relationship. You will need more than one as no single wholesaler can handle every class of business.

Based on the timing in the marketplace, these wholesalers will either be fairly busy or completely swamped. In the hard market, they will have more business than they can handle. In these instances, retail agents need to provide the wholesalers with a sufficient volume of business to have some credibility if you want to get a response to your application within a reasonable time period.

Make sure your applications are of high quality. To begin, make sure the applications are complete. No wholesaler, or carrier for that matter, wants to work on applications where information is lacking or sketchy. Everyone in the industry is trying to achieve greater efficiency and make their efforts beneficial and rewarding. If your apps are incomplete, don’t be surprised if the wholesaler does not even work on them. They simply do not have the time. This has the potential to put your agency in a bind as you try to place the account.

Binding, Renewals and Endorsements

Don’t bind the risk without consulting the wholesaler. Unlike the standard marketplace, you don’t have any authority to bind an account in the E&S market. Lead time is a big issue, so do your best to provide the wholesaler with sufficient time to enable them to do their job. While this is definitely an issue on new business, binding renewals in the E&S market requires some organization and planning.

E&S renewals are not automatic; essentially you must go through the same process as with a new account. Pull your renewal X-date list at least 90 days in advance and find out from your wholesaler if a renewal application will be necessary. This will probably heavily depend on the type of the risk. Upon receiving the renewal proposal, perform your necessary due diligence well in advance of the renewal date so renewal instructions can be provided.

It is critical to stay on top of renewals so a renewal order to the wholesaler can occur before the X-date. If you try to bind the account after the X-date, there is no guarantee the binding request will be honored. In addition, there is traditionally no back dating in the E&S market, so binding after the X-date could expose your client — and your agency — to an uninsured loss, if one were to occur.

Review the renewal proposal for changes. In the E&S market, typically there is no requirement that advance notice be given regarding changes in pricing or coverage issues. As a result, you may find yourself with the renewal proposal from the wholesaler days before the X-date with a policy that looks significantly different from the expiring one. The issue may also involve limits. Imagine the anxiety you would feel finding out the limit on one of your renewals has dropped from $3 million to $1 million due to loss experience or maybe loss of reinsurance. In addition, the proposal may contain various unique endorsements that could severely limit the coverage actually provided.

This requires your agency to extensively review these proposals for any changes. While it would be nice for the wholesaler to tell you, don’t count on it. There is a chance the renewal proposal limits coverage to the extent the customer no longer wants it, so advise your client of these various limiting endorsements/exclusions at the proposal time to secure their permission to proceed.

Is money needed to bind? The last thing you need is to request binding only to find out the premium payment is necessary before coverage is considered bound. Know the rules of engagement of each of your wholesalers. One of the advantages of having sufficient volume with a wholesaler is that they will put your agency on an account current. This will take away some of the potential headaches.

Do your E&S policies contain a Classification Limitation endorsement? You must know this as there is a good chance the general liability policies contain this endorsement, which essentially restricts coverage under that policy to only those classifications noted on the policy.

For example, if you insure a painter who only performs inside painting, the coverage would state only claims arising from inside painting would be covered. If the painter gets the opportunity to paint the outside of a house, there would be no coverage unless the policy was modified accordingly. When placing coverage for your clients through the E&S market, advise them in writing of this limitation — and explain that if they perform any work outside the stated classifications, they need to contact the agency.

Market Availability

Use E&S in both hard and soft markets. Many agencies only use the E&S industry in a hard market. If your agency is one of those, you are probably missing opportunities to write business. Moreover, by providing your wholesaler with a good continuous flow of business, they will probably provide you with better service and might be able to handle a problem with minimal disruption if one occurs. This is a unique aspect of our industry where a solid focus on attention to detail may just be that ounce of prevention that is worth a pound of cure.