E&O Insights: Key E&S Issues Agencies Need to Know

Regardless of whether the market is hard or soft, for agencies to be successful will typically require that they have an active, ongoing relationship with at least a couple of excess and surplus lines (E&S) wholesalers. The E&S industry has played a vital and significant role in securing the coverages the standard market is not interested in for as long as insurance has been part of our society. As agency producers and customer service representatives deal with the E&S marketplace, there are several key issues to understand to avoid potentially significant errors and omissions (E&O) issues.

What is the timeframe?

Based on the marketplace and the type of coverage you are trying to place, E&S wholesalers may need more time than many would think. So, if you are thinking that you may need to use the E&S market, allow sufficient time. How much time is necessary depends on the type of business and whether the wholesaler has the “pen” for that class of business. To be safe, allow 45-60 days.

What app is needed?

The standard ACORD application is likely to suffice in the majority of submissions. However, there will be situations where the carrier the wholesaler is using has its own app. While the carrier may give you a proposal based on the app you sent in, it may require its own app for binding purposes. When you receive the proposal from the E&S wholesaler, review it to see if this is an issue. Don’t hesitate to contact the wholesaler to explain what you are working on and ask what app is needed.

Does the proposal provide the coverages you requested?

This is an issue not readily understood by many agencies. When an agency completes an application and forwards it to the wholesaler, there is a good chance the wholesaler will not be willing to provide all of the coverages requested. Examples include complete assault and battery exclusions for hospitality industry clients, complete exclusions for bodily injury to subcontractors on policies issued to owners, developers, contractors, etc., and lack of theft and vandalism for vacant properties. Plus, there is the potential that certain loss-control requirements will be stricter regarding security service and other protective controls when vacancy is involved.

It is best to presume the coverage provided on the proposal is not as broad as you requested. E&S markets have historically been able to handle risks the standard market is not interested in because the E&S market can modify coverage by adding specific endorsements (typically exclusions) that carve out exposures of concern.

It is also possible that the proposal will reference various exclusions, which can be significant. To better understand the coverage and any and all limitations, request that the wholesaler provides you with a specimen policy of the policy form and the applicable exclusions. This is the only way to know what coverage is being provided compared to what you originally asked for. This specimen policy should then be provided to your client/prospect for review. The client/prospect may advise you that the coverage is not at the level that he or she requires and, as a result, rejects the coverage offered. It is better to find this out before the coverage is bound than before a loss occurs.

In addition, don’t count on the wholesaler to tell you what it is not providing. That is up to your agency to figure out.

While timing is important with all coverages, it is more critical on E&S business. On your proposals that contain coverages underwritten by the E&S market, include any conditions that must be met to ensure that coverage can be bound in a timely manner. E&S markets will not backdate coverage, so a reference to when binding instructions are needed should be included.

Is coverage the same?

Let’s “fast forward” to the next year. The new business account you wrote in the E&S market last year is coming up for renewal. Your agency receives 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, that 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 the coverage was at least the same?

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

The excess and surplus lines marketplace is a great segment of our industry and is unique. Knowing the differences now could save you from a giant errors and omissions headache later.