Case Studies-Using Wholesalers

Wholesalers Case Study #1

The Scenario

The insured purchased a policy for a jet ski rental operation. The agent placed the coverage with an offshore, nonadmitted carrier, due to the difficulty of the risk. Following an accident in which a customer of the insured was injured in a jet ski accident, the insured found that the carrier was not handling the claim promptly. In fact, the insurer had become insolvent. The insured made a claim against the agent. The insured alleges they were not told by the agent of the significance of having coverage with a nonadmitted carrier.

The Issues

  • Placing coverage with a nonadmitted carrier.
  • Failure to advise the policyholder of the significance of nonadmitted carrier placement.

The Outcome

In this case, the customer had signed a waiver releasing the jet ski rental company from liability in case of injury. The waiver was legal and the case was settled by payment from the agent of a nominal amount of money for the cost of defense of the insured.

Prevention Tips

This is a rather common error when an agent faces a difficult-to-place risk. It requires special care and handling to advise policyholders of the differences between the standard and nonstandard markets.

  • Observe all statutes and regulations pertaining to placement in a nonadmitted market.
  • Perform a diligent search of the market before placing coverage in a nonadmitted carrier.
  • If coverage must be placed in a nonadmitted carrier, verify the financial status of the company prior to placing business there.
  • Have the insured sign an acknowledgment of placement in the nonadmitted market that includes the effect on guarantee association payments and other issues.

Wholesalers Case Study #2

The Scenario

The insured operated a bar and coverage was placed by the agent with a nonadmitted carrier. The agent was to have added the building owner as an additional insured under the policy. A patron of the bar was injured in a slip and fall accident and sued both the insured and the owner of the building. At the time of the accident, the building owner was not named as an additional insured. Prior to the settlement of the claim, the bar went out of business and the nonadmitted insurer was declared insolvent. The claim against the bar was for over $1 million.

The Issues

  • Failure to conduct a diligent search of the admitted market.
  • Failure to comply with state regulations regarding placement of insurance in a nonadmitted market.
  • Failure to notify the insured of the consequences of placement in a nonadmitted market.
  • Failure to include building owner as additional insured as requested.

The Outcome

Since the bar owner and the insurance company were out of business, the agent represented one of the remaining sources of recovery in this case. There was no file documentation to support the agent’s assertion that the insured had been notified of placement in a nonadmitted market.
$350,000 payment to injured party in excess of the agent’s retention.
$104,131.20 in defense costs

Prevention Tips

It was difficult to tell from the agent’s file if coverage had been placed through a licensed surplus lines broker. Without proper documentation, the E&O carrier was not able to defend the insured successfully.

  • Follow all statutory requirements pertaining to placement in a nonadmitted market.
  • Keep complete records of all transactions with surplus lines brokers and nonadmitted carriers.
  • Notify the insured in writing and have them sign and acknowledge receipt of information regarding the consequences of placement with a nonadmitted carrier including the lack of a guarantee fund.

 

Wholesalers Case Study #3

The Scenario

The insured applied for residential property insurance with the agency. Following a series of disasters, coverage was not widely available in admitted markets for property situated in a coastal area. The agent therefore placed coverage in a nonadmitted market. A fire loss occurred and the insured suffered a coinsurance penalty due to the underinsurance of the property. Coinsurance provisions are not generally included in standard market property insurance. The agent alleges that he advised the insured to increase the limit. The insured stated that the agent had not so advised him.

The Issues

  • Placing coverage in a nonadmitted market.
  • Failure to advise insured of inadequacy of policy limits.

The Outcome

The E&O carrier and agent settled the claim with the insured within the agency’s retention.
$7,404.88 in defense costs

Prevention Tips

In this case, the agent’s file was well documented showing an offer of higher limits and indicating the insured’s rejection of that recommendation. There would probably have been a defense verdict, but the case was settled to avoid prolonged litigation.

  • Document all conversations with an insured regarding placement in a nonadmitted carrier.
  • Perform a diligent search of the admitted market for placement of all risks.
  • Advise the insured in writing of any restrictions in coverage versus that available in standard markets.
  • Have the insured sign and acknowledge any nonstandard policy provisions.