Policy Checking: It Is the Right Thing to Do

I recently read an E&O claim in which the agency involved seemed to have completely blown it. The policy was surplus lines and did not provide the coverages the retail agent thought were promised by the excess and surplus lines (E&S) broker. The agency failed to check the policy to identify if the forms/coverages requested were included in the policy delivered. The insured discovered later, when they incurred a claim, that they had coverage only under the agency’s E&O policy. The actual insurance policy they bought did not provide any coverage.

I read an article by a claims specialist at one of the large E&O carriers discussing how much care is required in handling brokered business. The author described a hypothetical claim involving a subcontractor where the retail agency did not check the policy when it arrived. The client — a general contractor’s subcontractor — later had a fatal claim and found the policy delivered (and not checked) was not identical to the proposal made by the broker.

In surplus lines, the ultimate responsibility for policy checking lies with the retail agent. Period.

Retail agents usually argue that the surplus lines carrier or broker, or both, have a duty to provide the coverages requested and that the policy delivered must match the proposal. Also, a renewal policy should match the expiring policy, and if not, the broker should notify the retail agency of the decrease in coverages. These well intentioned arguments fail.

This is surplus lines. Surplus lines carriers are non-admitted. Non-admitted means the carrier and in some ways, the broker, does not need to comply with the rules and regulations required of admitted carriers by the state. If you or your staff do not understand all of the differences between writing with admitted carriers versus non-admitted carriers, it is in your best interest for you and your staff to take an in-depth class regarding these crucial differences. In fact, it might be fatal for you to continue to sell insurance and not know the differences between admitted and non-admitted carriers. Many differences in the rules and regulations of states exist, and you need to know all of them.

Ultimate Responsibility

The retail agent is ultimately responsible for always checking whether the forms and coverages in the policy match the proposal, or with a renewal, match the expiring policy. When a coverage difference appears, it is the retail agent’s duty to notify the client. No one else has a duty to notify the insured that they do not have the coverages they think they purchased.

A timing issue may exist. If the retail agency is working far enough in advance and assuming the broker is delivering policies fairly quickly — which I know is not reality — then the retail agent can review the policy prior to the effective date. At that point, the retail agent can go back to the broker and argue over why the broker failed to provide the coverage requested. Hopefully, the situation can be remedied prior to the effective date.

If the policy is delivered past the effective date, for whatever reason, the retail agent cannot tell the insured that the policy is wrong and they will have it corrected. The retail agent cannot make this statement because they do not have the authority to correct the coverage. The policy is what it is. From the issuer’s perspective, the policy may have been issued correctly. They may not intend to offer the coverages requested.

The agent must advise the insured that the policy, as issued, does not meet the requested specifications. But not meeting the requested specifications does not mean it has errors if the issuer issued it as they, the issuer, intended. An agent can also advise that they will try to get the broker to provide better coverage back to the effective date, but for the time being, the insured has inadequate coverage. Do not make a bad situation worse by telling an insured you can do something about a discrepancy over which you have no authority.

Policy checking can be a major pain and many solutions have been tried to decrease the cost of this process, including outsourcing. One of the shortcomings of many such outsourcing solutions, including outsourcing it internally to a lower paid person, is the policy checker must check against something. On renewals, this is easier if the agency is doing even a halfway decent job of record keeping.

The bigger exposure is with new business. For an outsourced policy checker to adequately check a policy, they must have all the documentation related to the negotiation with the surplus lines broker. This is true even if the producer is negotiating the deal and their key account manager will do the policy checking. The producer must make detailed notes or obtain the correct and desired proposal from the broker that contains all the applicable forms.

Form names are inadequate. The forms list must, at the very least, contain the form name, the form number, and the edition date. If the forms list does not contain all three identifiers, the policy checking process is impossible to complete accurately. I have seen too many forms where the name and number were the same, but the coverages were severely reduced. The only way to know something has changed, if the brokers did not provide any advisory notice, is to note that the edition date has changed or compare the forms line by line.

Admitted Business

So far, I have emphasized non-admitted coverages but I am a fan of policy checking on admitted business too. While it is mostly true that admitted carriers must notify insureds (and hopefully their agents) of coverage reductions, two holes exist in this premise. The first is that carriers make mistakes. They are ultimately responsible, but the insured will be far better served if the agent identifies the mistake early on and has it corrected prior to a claim.

The second hole is more serious and not well known. It is in the statutes of various states — many allow reductions in coverage without notification to the insured or agent for specific lines of business. I first learned of this problem in a claim involving a dwelling policy. A major personal lines carrier had reduced all DP-3s to DP-1s without notification. The agency’s saving grace was they had no idea this had happened and therefore, the court ruled they had no duty to notify the insured of the decrease. The court also ruled that the agency was incompetent across the board or else they would have known through policy checking of the decrease.

More recently, I saw a carrier reduce UM/UIM coverage by about 90% without notification. They had found a loophole in a specific state’s regulations. Did the agency have a duty to notify their insureds? I am not sure. But is it the right thing to do? YES