Plug the Agents’ E&O Gap: Protection from Carrier Insolvency

Any producer, agent or broker can be exposed to the insolvency of one of their markets. Carriers providing insurance agents’ errors and omissions insurance (E&O) have developed a variety of responses to the exposure created by insolvency. A review of policies filed with states revealed:

An absolute exclusion of all claims arising out of insolvency.

An exclusion of claims arising out of insolvency unless the carrier is covered by a state guaranty fund or association.

An exclusion of claims arising from insolvency unless the company met pre-determined but arbitrary rating criteria at the time the business was placed.

With producers able to purchase insurance from a variety of E&O markets, each utilizing its own insolvency exclusion, a designated insurance company could not obtain a single solution to assuage the concerns of its agents. So Demotech, Inc. and Century Surety Co. have leveled the playing field for every financially stable insurance company operating in the U.S.

The Limited Insurance Agent’s Errors and Omissions Insurer Insolvency Gap Insurance Policy will pay those sums that the insured becomes legally obligated to pay for damages and defense costs for claims or suits arising out of the insolvency of the designated insurer.

Agents and producers need not be concerned — if their E&O policy excludes insolvency, they are covered. Claim payments and loss adjustment expense payments are due and payable on behalf of the insured. Equally important, there are no offsets for state guaranty funds.

The insurer can purchase a limit of liability equal to its loss and loss adjustment expense reserves. In effect, this coverage permits the insurer to purchase its own guaranty fund.

Agents benefit because it closes the insolvency gap in their E&O policy. Consumers benefit because they are the recipients of the indemnity payments. Reinsurers benefit because the liabilities assumed from their cedants will be discharged on behalf of their client and need not be coordinated through a state guaranty fund or a liquidation outside of a guaranty fund. The carriers that purchase the coverage benefit because the playing field is level. More importantly, financially stable carriers not covered by a state guaranty fund, such as captives and risk retention groups, can purchase coverage so that an insurer is legally obligated to pay for damages and defense costs arising out of insolvency.

This product creates opportunities for producers, consumers and insurers alike. Exposure to insolvency is no longer a producer’s problem. Now it is a covered peril.

In my discussions with carriers, I have learned that although the expense associated with securing and maintaining a fronting carrier can be 6 to 10 percent of premium, it is the cost and effort associated with posting collateral as well as the lost opportunity to brand a company that can neither be quantified nor regained. Although 10 percent of premium is significant, the true cost of renting another carrier’s rating far exceeds the out-of-pocket cost.