E&O Insights: Why It’s Important to Review E&S Proposals

Hard market or soft, having an active relationship with at least a couple of excess and surplus lines (E&S) wholesalers is typically required for agencies to be successful. For as long as insurance has been part of our society, the E&S industry has played a vital and significant role. While the benefits of dealing in the E&S market are numerous, unfortunately so are the potential E&O issues. It is critical, for that reason, that agents understand some of the key issues that make this segment of our industry a potential E&O nightmare.

Let’s take the following actual scenario that recently occurred.

The insurance agency looked to place property coverage for one of its clients. Due to some issues with the risk, the agency needed to use the E&S market. As a result, a property application was submitted to an E&S broker who, in turn, submitted the application to the E&S carrier. The E&S carrier was receptive to the risk and issued a quote that contained a protective safeguards endorsement. Unfortunately, the agent did not note the protective safeguards endorsement on the proposal and thus did not bring it to the attention of his client.

The policy was ordered, received and delivered. The client suffered a fire loss that was denied by the carrier based on the client’s failure to maintain protective safeguards in compliance with the policy.

This scenario happens with a significant degree of frequency.

Lessons to Be Learned

To begin, it appears that the retail agent did not review the proposal in depth when it was received from the E&S wholesaler. The agent may have believed the proposal contained all of the coverages requested. After all, this was a basic request for property coverage, so what could possibly be the problem? One reason the E&S market has been able to handle risks that the standard market is not interested in is that the E&S market can modify coverage by adding specific endorsements (exclusions, limitations and requirements) that carve out or address specific exposures of concern. Therefore, the agent should have reviewed the E&S proposal in depth and noted the protective safeguards requirement.

There is the possibility that your application might ask for various coverages. Don’t assume the proposal provides the coverage you requested. Moreover, don’t count on the wholesaler to tell you what is not being provided. That’s up to your agency to figure out.

As an agent reviews the E&S proposal, if he or she does not completely understand what coverage is being provided (or excluded), it is highly recommended to ask the wholesaler to provide a full set of all applicable specimen policy forms. These forms should be reviewed in depth by the retail agent.

Another “best practice” involves including these specimen forms on the proposal the agency provides to the client. This will then enable the client to see the coverage being provided (or excluded) and any conditions, such as the protective safeguards endorsement.

Many agencies actually require the customer to sign the form acknowledging that the form has been explained to him or her, that the client understands it and agrees to the coverage (exclusions, etc.) noted.

There is certainly the possibility the client will advise you that the coverage is not at the level he or she requires and thus does not want the coverage. It is better to find this out before the coverage is bound or before a loss occurs.

Presuming that the coverage was ordered, when the policy is received, review it to make sure it provides the coverage you think it does.

Another Claim

Here is another E&O claim that deals with an agent placing professional liability in the E&S market. Please note that many of the issues addressed in the previous claim also apply here.

The agent was looking to place a claims-made professional liability policy with full prior acts coverage. The proposal provided by the E&S broker contained a retro date.

Unfortunately, the agent did not do the proper review and thus did not make note of the difference between the retro date and his requested full prior acts coverage. The policy was ordered and eventually delivered to the client who, in turn, suffered a loss that was precluded by the policy retro date.

Contractors

With contractors (and potentially other classes of business), there is a very good chance the E&S proposal will contain an endorsement typically referred to as the classification limitation endorsement.

`This endorsement states that the coverage is provided only for the exposure of which the E&S carrier is aware. There is no coverage if the contractor performs work for other exposures. Agents definitely want to be on the lookout for this endorsement.

Other Issues

Due to market conditions, you may be forced to move the account from the standard market to the E&S market. You can count on the coverage not being the same, so be sure to bring the differences to your customer’s attention.

Let’s now fast forward to the next year. That new business account you wrote in the E&S market last year is coming up for renewal. Your agency gets a renewal proposal from the wholesaler. Is the coverage the same as it was last year?

Don’t count on it!

Unlike the standard marketplace where carriers are required to issue a conditional renewal notice when they plan on including some new exclusions or restrictive language, this requirement does not exist in the E&S market. It is up to the retail agent to compare the renewal terms against the expiring coverage to identify any new forms that carve out certain exposures.

Without this comparison, the agency will be hard-pressed to bring those differences to the customer’s attention. Put yourself in your customer’s shoes. If you were not advised of any differences, wouldn’t it be logical to assume that the coverage was at least the same?

As with new business, ask the wholesaler for a specimen of the form if there is a reference to a new exclusion and you are not familiar with exactly what the new exclusion does. Then bring this form to your customer’s attention. Throughout all of these conversations, whether dealing with new business or renewals, agents should be certain to have documentation detailing the discussion and the ultimate decision. There will be times where that documentation should be in the form of a letter or email back to the customer detailing the discussion and decisions.

A Little Homework

The E&S marketplace is a great segment of our industry, but it is different. A key way how it’s different involves not assuming the requested coverage is equal to the coverage provided. Doing a little homework upfront could just save you from a giant E&O headache later.