As the market for insurance changes, agents are increasingly placing business through wholesalers, including surplus lines brokers and managing general agencies. This requires heightened awareness and special procedures on the part of agency personnel.
In this section, "wholesaler" means any facility through which you place business, other than the so-called “standard” companies with which you have direct appointments and contracts. The insurer may be an admitted insurer or a surplus lines insurer. If coverage is placed with a surplus lines insurer, a surplus lines tax and stamping office fee must be added to the premium, and either your agency or the wholesaler must have a Texas surplus lines license.
Remember that the agency has no authority to represent the carrier in these transactions, so binders, certificates, and policy changes must be requested from the wholesaler, and many times the wholesaler must request these from the carrier. Changes are often not effective until the wholesaler has received confirmation from the carrier.
A review of the top ten causes of E&O losses reported to IIAT makes it apparent that an agency's risk of incurring a loss is increased when the agency is dealing with wholesalers. The reasons are obvious: Policy forms may be different, the agency's relationship with the insurer is different, insurance laws and rules regarding wholesale placements are different, and more parties are involved in the transaction.
The issues of non-admitted carriers and nonstandard coverage forms are significant and may lead to an E&O claim if proper procedures are not in place.
To operate skillfully, professionally, and within the law in the non-admitted marketplace, agency staff should be familiar with applicable statutes and rules (see Understanding Surplus Lines).
Unusual coverage differences in surplus lines policies present a significant potential exposure. Because surplus lines insurers are not required to file their forms for approval, you should find out the differences between the policy form you are quoting and others and disclose any unusual features. Since policies are not standard, the agency must thoroughly examine any contract and advise the insured of limitations, restrictions, or conditions that are unusual. Coverage checklists (personal lines, personal lines ISO and commercial lines) and standardized disclosure forms can minimize your exposure.
Surplus lines policies with nonadmitted companies often contain unusual payment terms. For example, many policies contain a minimum earned premium (such as 25%), meaning that if the policy is canceled early in the policy term, the company will keep 25% of the policy premium. In addition, some policies are written on a minimum and deposit basis, meaning there will be no return premium even if the insured's exposures change. This is a particular problem when the policy premium is based on sales or payroll or some other auditable exposure, since the company will not return any premium if the final audit determines that the sales or payroll is less than the original estimated amount. And finally, most surplus lines policies are subject to short rate cancellation. All of these special payment features should be disclosed to the insured in order to avoid problems later.
While wholesale market placements are an important tool for an agency to use, they also represent substantial E&O exposures and must be handled with extreme caution and rigorous procedures.
In This Section:
Best Practices Ideas for Placing Business With Wholesalers
Sample Letters / Documents / Wording
The Best Practices for Avoiding E&O Claims When Placing Business with Wholesalers
- Use caution when selecting surplus lines brokers, MGAs and other wholesalers (see E&O Tip #2)
- Be familiar and comply with all state laws and regulations regarding surplus lines business (see Understanding Surplus Lines)
- Conduct a diligent search of the marketplace before placing business in a non-admitted carrier
- Inform the insured whenever coverage is placed in a non-admitted carrier, including the fact that losses will not be covered by the guaranty fund in the event of insurer insolvency (see Sample Letter)
- Use the Surplus Lines Checklist when placing coverage in a nonadmitted carrier
- Inform the insured whenever you do not have an appointment with the insurer - see a sample disclosure required by the Texas Department of Insurance
- Do not issue binders, certificates, or other evidence of insurance on behalf of a surplus lines insurer under any circumstances, unless you have a surplus lines license
- Do not issue binders, certificates, or other evidence of insurance on business placed through a wholesaler—request these items directly from the wholesaler, unless the wholesaler has given the agency specific written authorization to do so
- Promptly request changes from the insurer and advise the insured that coverage is not in effect until confirmed by the carrier
- Notify the insured of any nonstandard policy terms (including payment terms), conditions, restrictions, or limitations (see E&O Tip #1)
- Keep informed on financial issues related to these specialty insurers and pass that information on to clients
- Prepare a written procedure for dealing with placement through wholesalers (See Sample Procedures)