by Javier Gonzalez, Vice President of Sales
Given the recent trends in the financial market and the number of insurance carriers that are under financial review, now is a good time to look into the insolvency provisions within your E&O policy. Most insurance agents E&O policies provide some level of coverage for claims relating to the insolvency of their client's carriers. However, the specific provisions, such as the carrier must be rated "A-" or "B+" or better by AM Best at the time of placement, may very. Most agencies would welcome this type of enhancement, but be aware, there are also other provisions which may constrict the amount of insolvency coverage you really have. Below are a few examples:
Some E&O carriers require you place business with a company with a minimum financial category rating of "X," or "XII." Going further, some E&O carriers specifically state that the carrier you are placing business with must not have been downgraded for one year prior to placement of the client's coverage even if it is an "A" rated carrier. With the recent trend in the insurance industry, relative to the to financial stability of insurance carriers, there are several carriers under review and a few of them have already been downgraded. This could leave you with uncovered insolvency claims.
Another example we have seen is an insolvency coverage enhancement within some policies but only for admitted carriers. This would obviously not provide insolvency coverage for non-admitted carriers or risk retention groups (including captives, self funded plans, or other similar arrangements). Many insolvency provisions found in an insurance agents and brokers E&O policy do not allow for coverage for state guaranteed plans or funds as they may not be rated by AM Best, so naturally they do not fit the "A-" or "B+" or better provisions. Many insurance agencies use several rating agencies such as Moody's, S&P, or Demotech. It is important to remember that most E&O carriers only recognize the ratings published by AM Best Company. Be sure your agents are aware of this as they may be using these other rating agencies to determine a carriers financial credibility while ignoring a potential gap in their own coverage.
So the next time you are told you have "B+" or "A-" or better insolvency coverage in your E&O policy, ask if there are any special provisions that might affect your agency. You may be surprised with the kind of insolvency coverage you really have.