(This is the third of a ten-part series highlighting significant coverage issues in agents’ E&O policies. Take a look at your E&O policy. If it includes the wording described below or something similar, you may need an E&O makeover. Contact Gunnar Kephart at IIAT Advantage E&O at 800.880.7428)
Company Insolvency Exclusion
Look for this wording:
“The coverage under this policy does not apply to any claim based upon, or arising out of, or related to, directly or indirectly, the insolvency, liquidation, receivership, rehabilitation, bankruptcy, or financial inability or refusal to pay, of any organization, including but not limited to the insured or any insurance company, reinsurer, self-insured program, trust, risk retention group, or risk purchasing group.”
Virtually all E&O carriers place some type of insurer exclusion on their policies, either in the exclusions section of the basic form or by endorsement. E&O carriers have come to the conclusion that an agent’s selection of insurers to represent and place business with is wholly within the agent’s control. If the agent places business with a company that has a poor financial rating or no rating at all, E&O carriers believe it is a risk that the agent has assumed.
However, the exclusions vary significantly from one insurer to another. Some policies exclude any E&O claim arising out of placement with a low-rated or unrated insurer, even if the insurer is solvent. You need to take a look at your own policy, or any prospective policy, to determine the exact scope of the insurer exclusion.
Ask the following questions:
- What is the Best rating threshold for application of the exclusion? Some exclusions apply if the insurer is rated less than “B” while others apply a threshold as high as “A-.”
- Does the exclusion apply to claims arising out of placement with such a carrier (a) whether it is insolvent or not (worst) or, (b) when it becomes insolvent, even if the claim against the agency does not arise out of the insolvency (bad), or (c) the insurer’s inability to pay a claim due to insolvency (better)?
- Does the exclusion apply even if the insurer had a favorable rating at the time of placement but later became insolvent (bad), or only if the insurer’s rating didn’t meet the threshold at the time the policy was placed (better)?
- Are there any other exceptions to the exclusion? In addition to a Best-rating threshold, many E&O policies include an exception for insurers protected by a state guaranty fund.