Financial ratings give insight into a carrier’s ability to pay claims, which, along with the potential of financial loss, are ultimately the reasons businesses purchase insurance.
However, insurance companies can only pay claims if they have the funds to do so. It is not uncommon for an insurance carrier to become insolvent, leaving it unable to pay claims.
Additionally, beyond claims, an insurance carrier is responsible for costs associated with legal services required to defend a claim. Litigation costs today can amount to significant amounts that most businesses and consumers would be unable to pay without the financial backing of an insurance carrier. If an insurance carrier becomes insolvent, then it can no longer meet its policy obligations to pay loss costs or defense costs on behalf of its insureds.
Even if an insurance carrier isn’t insolvent, it can still be financially impaired, which could impact its ability to pay claims. The guaranty fund is only in place for insurance carriers that have gone insolvent, not those that are financially impaired. However, even if the guaranty fund is available, it may not cover certain types of claims and typically has a cap of $300,000. It is not uncommon for an insurance agent’s errors & omissions claim to exceed that amount, leaving them responsible for the excess amount.
Reviewing an insurance company’s financial rating should be part of your assessment in determining where you place your E&O coverage. If you place your coverage with an unrated or low-rated carrier, then you are potentially exposing your agency to a significant financial loss should that carrier become insolvent or impaired.
About the Author
Amanda Juratovic is assistant vice president of errors & omissions operations for the Big “I” Professional Liability Program. Learn more at independentagent.com/EO.