Coverage placed with Insolvent Insurers


ItA?a,?a,,?s no secret in the industry that the pricing cycle for property/casualty insurance has been unfavorable for several years.A, And the entire country knows whatA?a,?a,,?s happening with the economy and, in particular, the equity and credit markets.A, Taken together, these circumstances are hitting insurers very hard.A, Standard & PoorA?a,?a,,?s recently offered its outlook for the property/casualty sector over the next 12-18 months, and with downgrades expected to exceed upgrades, it isnA?a,?a,,?t promising.


But this news isnA?a,?a,,?t concerning to just insurance carriers.A, Insurance brokers are nervous, wondering what will happen to them if a carrier with whom theyA?a,?a,,?ve placed coverage goes under.A, What responsibility, if any, does the insurance broker bear to the insured if a carrier becomes insolvent?


Some courts which have considered the issue have held an insurance broker has an obligation to investigate the financial soundness of the insurance carrier, and to refrain from placing insurance with a carrier the broker knows or should know is insolvent. See, e.g., Williams-Berryman Ins. Co. v. Morphis, 461 S.W.2d 577 (Ark. 1971); Nidiffer v. Clinchfield R.R., 600 S.W.2d 242 (Tenn.Ct.App. 1980); Sternoff Metals Corp. v. Vertecs Corp., 693 P.2d 175 (Wash.App. 1984).A, While recognizing that an insurance agent is not a guarantor of the financial condition or solvency of an insurance company, these jurisdictions have applied the general rule that brokers are required to use reasonable care, skill, and judgment with a view to the security or indemnity for which the insurance is sought.A, These courts generally believe an insurance broker is required to perform varying levels of investigation before placing coverage with a carrier, and failure in such respect may render the broker liable to the insured for resulting losses due to the insolvency.


The gripe most agents have with this general rule is that it potentially imposes liability upon them for the failures of state regulators.A, State departments of insurance regulate the amounts of unimpaired capital and surplus that insurance carriers must maintain, and force them to deposit securities with insurance commissioners.A, If the insurance commissioners arenA?a,?a,,?t doing their jobs to ensure carriers are solvent, why should the brokers take the blame?A, ItA?a,?a,,?s a fair question, and some jurisdictions have in fact held the broker has no duty to investigate the financial condition of an insurer authorized to do business in a state because that duty is already imposed on the insurance commissioner. Wilson v. All Serv. Ins. Corp., 153 Cal.Rptr. 121 (Cal.App.3d 1979). A, Others have essentially split the difference, holding the brokerA?a,?a,,?s duty to act with reasonable care includes a) evaluating the financial stability of an insurance company with which the broker intends to place insurance, b) informing the insured if the investigation reveals evidence of financial infirmity, and c) informing the insured the broker nonetheless intends to place the policy. Carter Lincoln-Mercury, Inc., Leasing Division v. EMAR Group, Inc., 638 A.2d 1288 (N.J. 1994).

A, For practical purposes, brokers who place relatively straightforward risks with admitted carriers traditionally have not had to concern themselves with this problem. Even with todayaEUR(TM)s market uncertainty, that is unlikely to change. If admitted carriers become insolvent, guaranty funds typically cover losses, and these days itaEUR(TM)s even possible the government will step in to assist.

This problem is most frequently encountered with hard-to-place risks which require the broker to access the surplus lines market. Although some states regulate surplus lines insurers more closely than others, insurance commissioners arenaEUR(TM)t typically going to hold them to the same reporting/deposit standards as admitted carriers. Thus, while rating agencies like A.M. Best will provide brokers with financial ratings of surplus lines carriers, those ratings wonaEUR(TM)t provide the same level of security as insurance commissioner mandates. Rating agencies sometimes fail to downgrade insurersaEUR(TM) ratings as quickly as they should. There have been instances of non-admitted carriers receiving an A+ rating one year, going into receivership the following year, and being liquidated the year after that. Now more than ever this scenario is easy to comprehend. ItaEUR(TM)s likewise easier than ever to be wary of both regulatory and ratings agencies.

While all brokers are rightfully nervous about these claims during these unstable times, those who frequently place risks in the surplus lines market are most likely to be at risk over the coming months for claims of placing insurance with insolvent carriers. Surplus lines brokers should not panic, as itaEUR(TM)s impossible to determine right now how great a risk that will be. Some states have surplus lines guaranty funds which may provide some level of protection in the event these carriers go under, and with a new bailout or stimulus package seemingly approved each month, one never knows when or where lawmakers will next act to lessen the sting of financial losses.

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