Author: Bill Wilson
There are some excellent excess and surplus lines markets in this industry, many providing products and services superior to those in the standard market. However, there are inherent dangers in using some E&S markets that agents should be aware of. In this article, we'll present thirteen of them.
If the current hard market is anything like past cycles, one thing you can count on is the increased use of excess and surplus lines markets. Most likely, we'll be seeing more players in the E&S markets due to increased demand and the inability of admitted markets to get regulatory approval of coverage reductions and/or rate increases.
While there are many strong participants in this marketplace, agents must proceed with caution, particularly when using markets, companies, brokers and products, they are not familiar with. Below are thirteen areas where agents should be vigilant. Before I start receiving any nasty emails, let me once again say that the purpose of this article is not to dissuade the use of E&S markets where appropriate. Rather the idea is to make sure that agents properly risk manage their books of business by proceeding with caution.
1. Know and obey state laws. Many states prohibit some lines from being written in an E&S market and laws may prohibit placing any business with an E&S carrier when there is an admitted market available to the agent. In some states, any business placed in the E&S marketplace can be placed only after a "diligent search," and must include a list of admitted carriers who declined the risk. In many states, an E&S carrier has to be on the DOI's "approved" list...in at least one state, if an unapproved E&S carrier becomes insolvent, the producer (or whomever's name is on the contract) is PERSONALLY liable – not the agency, the individual.
2. Consider that paperwork might increase. The agency will have to make sure that all personnel involved are properly licensed surplus lines agents in various states. The agency may also have to file monthly reports and be responsible for paying surplus lines taxes. It's likely that there will be less reliance on automated systems for work processing. Keep in mind that, in most instances, surplus lines licenses and tax filings will not be required to place business in an E&S market, but there are exceptions.
3. Evaluate carrier financial stability. Theoretically, admitted carriers are better regulated for solvency and usually have to meet more stringent financial requirements and tests. As far as I know, only NJ has an E&S guaranty fund. For more information on this issue check out the article "What You Can Do About Insurer Insolvency."
4. Make your clients aware of possibly more stringent policy conditions. In many, or most, states, certain laws (e.g., cancellation and nonrenewal) may not apply to E&S carriers. I've seen policies that did not require any reason for mid-term cancellation and notice of only 5 days. That can be critical, even fatal, in a hard market where it is much more difficult to move business quickly. ALWAYS use an E&S Waiver letter!
5. Be wary of more restrictive or nebulous policy provisions. It's hard enough to know what the ISO forms mean. If you're dealing with a proprietary form, with no real case law history, it may be difficult to determine what is or isn't covered. Any DOI prohibitions or restrictions on terrorism, mold, etc. exclusions might not apply to E&S carriers, so the agent should be wary, particularly if moving a client from a standard to an E&S program results in coverage reductions.
6. There could be fewer services. The E&S carrier may not be able to offer the same level of claims, loss control, audit, etc. services that an insured is accustomed to. This and product scope should be considered when comparing prices.
7. Guarantee continuing ownership of expirations. Just make sure YOU still own the business, not the E&S broker or carrier. While it may be rare that the E&S market would seek ownership of business, make sure the brokerage agreement clearly specifies the retail agent as the owner.
8. Review contractual agreements VERY carefully. I'd be wary of any agreements signed with E&S brokers, particularly hold-harmless provisions. I saw one a few years ago that made the retail agent liable for the E&S broker's mistakes...most E&O policies don't cover contractual liability. In addition, some agreements make the agent responsible for more than just negligence, including fines, penalties, etc. – you can be almost assured that your E&O policy won't cover these. There may be a limited ability to impute liability to a company when there is no contractual relationship with the carrier.
9. Outplacement could create a broader duty to insureds. Depending on statutory or case law, the agent may now be considered a broker, representing the insured rather than insurer. This may create a higher standard of care than owed by an agent of a company. Another ramification is that the knowledge of the agent may not necessarily be imputed to the insurer, leaving the agent on the limb in an E&O claim.
10. You will most likely have no binding authority. The agent may not be able to place coverage quickly, which can be an asset in a hard market, nor issue urgently needed certificates (if the agency can issue certificates at all).
11. Consider other pricing issues and ability to negotiate effectively. The premium may be cheaper, but there could be a large minimum premium requirement. In addition, by abandoning a long-term relationship with a standard carrier, the insured might lose negotiating clout if they return. Also, the agent may have little or no influence on the carrier in contractual or claims situations...this ability to be an advocate for insureds is a hallmark of being an independent agent.
12. There could be potential remarketing problems. Example of a notification problem involving an intermediary...Wholesale broker moves claims made coverage to another company...Renewal application discloses existing claim...Renewal application is not forwarded to old carrier with disclosure...Wholesale Broker moves coverage without informing agent they have not sent renewal application to old carrier...Claim rises from known law suit that is covered by old policy...Old policy is voided by notice provisions, through no fault of agent. While these are probably rare occurrences, be vigilant because they can happen.
13. Never do business with a company smaller than your agency. :-)
As indicated above, it goes without saying that there are certainly advantages in using an E&S market. In another article, we'll take a look at these issues. In the meantime, just be careful out there.
Note: Almost a dozen of our faculty members contributed to the caveats above, but wished to remain anonymous...cowards.
I read your VU library article on accessing E & S carriers. and had to conclude that your staff must have very little experience in this field. I have been in insurance since 1961 retail, wholesale and company. In all those years, I have both accessed E & S carriers and been an E & S underwriter for brokers.
Your item #2 stating agents will need surplus lines licensing is totally eroneous. If an agent accesses a reputable surplus lines broker, that broker has the appropriate licensing and handles state filings. There are a few instances where the MGA is actually a program administrator and has no surplus lines license, thus requiring the retail agent to handle state filings. But that is the exception rather than the rule.
Your item #7, I have NEVER had a broker try to own the business I placed through them. Nor do I know of any such situation and I have written business in every state in the US as well as in Puerto Rico.
#12 Have never dealt with nor heard of any broker who just "moved" a piece of business. In most states they cannot legally do that. If the expiring carrier is not offering renewal for any reason they are required to send non-renewal.
It has been my experience as an agent, that the service I get from surplus lines is far better than that received from admitted carriers. They want my business. Admitted carriers change their minds about what they want almost as often as they change their underwear. Not the case with Surplus Lines.
I can give you numerous examples of E & S companies who have been in business, doing the same classes of business, in the same states for over 30 years. I can't think of one admitted carrier that applies to.
Frankly, I was disappointed with the article as it is misleading to your readers. I can certainly understand why your faculty did not wish to attach their names.
Thank you for taking the time to express your opinions. It's always nice to know that people are reading the articles on our web site. Since you were kind enough to take the time to write, I'll return the favor by responding to the points you made in your email. I ran them by the contributors to the article to get their responses and I'm compiling them below.
The gist of the article was not to malign the E&S marketplace...it's is a critical component of the industry, especially during the current hard market, and I agree that the majority of business transacted in the E&S market is done in a highly professional manner. The purpose of the article, though, was to point out some potential pitfalls and caveats that agents might not consider in the rush to place business with any market. Many of the points we attempted to make apply to both admitted and nonadmitted markets.
With that general theme in mind, I'll respond to your individual points.
Regarding Item #2, your point is well taken. In most cases, a retail agent does not have to have an E&S license to use an E&S market. I've amended the article to reflect that this is the exception and not the rule. However, we'd have to disagree that the need for an E&S license is "totally erroneous." Agents sometimes find it necessary to place business with an E&S broker or MGA in another state.
Sometimes these agents do not have the appropriate resident surplus lines license if the state does not permit nonresident surplus lines licenses. Our understanding is that CA, DC, DE, GA, MA, MI, NM, PA, PR, SC, TN, TX, VT, VI, and WV restrict surplus lines authority to residents only. In such cases, the retail agent will need the E&S license in order to serve as the resident surplus lines licensee.
As a TN resident, I have maintained both resident agent and E&S licenses for this very reason...almost every agency in the state that I've dealt with has at least one person with an E&S license. As many states adopt the new NAIC license models that permit nonresident surplus lines licenses, this issue is becoming less of a problem.
In at least one state, the law requires that the agent be licensed with the carrier providing the coverage through the E&S market. If you fail to do so, the carrier can be fined up to three times the premium received. One of our faculty members teaches this in every "laws" class he runs and advised that the latest prosecution under this law resulted in a fine of over $3 million dollars.
Two of our faculty members cited dealings with several E&S brokers that themselves require the agency to maintain an E&S license and file taxes if the broker doesn't have an office in that state.
So, while in a majority of instances, the retail agent doesn't need an E&S license, there are certainly situations where that's not true and, in general, it's probably a good idea to have both licenses. That is why we made that point...to have omitted it simply because it's the case in a minority of situations might lead someone to believe that there is never a need for a surplus lines license.
Regarding Item #7, while you've obviously never encountered an issue of ownership of the business, it does happen. However, it is probably quite rare, so I've amended the article to reflect that. This appears to be more of a problem in placing business with RRGs, PGs, captives, and other alternative markets. If a reciprocal or pool is used, the retail agent usually has no ownership rights. Having trained agents for almost fifteen years, I can assure you that many of them are not aware of these issues.
I know right now of a national organization that is attempting to modify its contract so that it will own the business, not the agent placing the business. I doubt that they'll be successful, but agents must be advised that this can happen if they do not read their contracts carefully. I've seen agency/broker agreements with hold harmless clauses that were scary in that they required the agent to hold the E&S broker harmless for virtually ANY E&O claims, even those solely the fault of the broker. Agents must know that such contract provisions do pop up and they must carefully review all brokerage agreements.
Several of our faculty members, as part of their consulting practices, frequently review agency/company and agency/broker contracts. While it may not be that common, one of them cited a recent review of a contract between a retail agency and an E&S broker that did give the broker ownership of the business. Again, though this may indeed be a rare occurrence, to omit this caveat in the article would be a disservice to the agency reader.
Regarding Item #12, we'd have to disagree. Again, these issues may not happen every day and many E&S markets may never engage in these practices, but they do happen. As one of our faculty members said, "I have seen limited remarketing by E&S brokers. It has usually been when the E&S broker lost its original market or is looking to grow with a new program/market. The point is well advised on non-program business, but not likely on program business."
Another faculty member had this story to tell:
"While I’ve never dealt with a broker that just 'moved' a piece of business, I have dealt with E&S carriers who change their minds about things mid-term. I wrote a sizable account that used some independent truckers to haul some of their tankers. As a result, I ended up writing some of those independent truckers as well. I used a very reputable E&S broker and the coverage was place with an E&S carrier.
"The independent truckers were all garaged in a rural area but every couple of days they had to drop a full tanker and pick up an empty to head back out. The tankers were dropped at the company’s main location which was located just west of a fairly large city. All of this was disclosed when the accounts were written but the carrier later decided that since they were going into an area with a much higher rate, they changed the rating territory and the premiums doubled! The sad part was that these guys were only in the higher rated territory for about an hour every other day. The remainder of the time they were out in rural areas making stops at dairy farms.
"It was wrong but there was nothing that could be done since E&S carriers are not regulated the same way as admitted markets. Every one of those accounts canceled, the cancellation return premiums were based on the higher rate and guess who got stuck paying the excess cancellation premiums? Yeah, I did! It cost me over $9,000. The carrier refused to honor the originally quoted premium even when it caused cancellation of those policies. Not that it was necessarily the broker’s fault, but the broker never went to bat for me at all…and continued to do the same thing to other agents as well."
With regard to the legality of moving business, cancellations, nonrenewals, etc., most of the states I've dealt with in the past have little or no regulation of these issues. Usually, the only protection the retail agent has is the brokerage agreement and civil law. If the contract doesn't have any restraints on the actions the E&S broker can take, then there is little else to fall back on with regard to regulatory action.
Again, these are exceptions, not the rule, but since things like this have and can happen, it's important that agents be aware of the possibilities so that they can protect their business and their clients.
As you can see, there are all kinds of exceptions to the norm in the E&S marketplace. Our intent was not to imply that these circumstances are widespread, but to make it clear to agents that they should always be vigilant in these areas when using an E&S market. To just say, "most E&S brokers don't do this stuff" would make the article pointless.
BTW...many of our faculty members are well versed in E&S markets, either currently or through past business activities. A few of them deal extensively with E&S brokers and at least one, in fact, owns an MGA with markets that are largely nonadmitted.
Finally, the reason that we rarely associate individual comments to specific faculty members in our articles (i.e., most of the opinions are anonymous) is not because our faculty members are bashful or ashamed of their comments. The purpose is to insulate them from deluges of emails or phone calls (their bios and contact information are on the web site) from folks who have additional questions or want to debate an issue.
One of my roles is to serve as the go-between for our readers and faculty. All of our faculty members have full-time jobs (many are self-employed) and they are not compensated (with money) for their participation in the Virtual University. They each do it largely as a public service to the industry, serving as volunteers for "Ask an Expert" questions, contributing articles, and otherwise making my job a lot easier. While we'll never get 100% of our readership to agree with 100% of what they say, each faculty member was hand-picked for their expertise and they all do the best they can to express their opinions in a reasonable, thoughtful, and conscientious manner.
Finally, I am proud to point out that, despite being a telecommuter, *I* personally change my underwear every day...well, almost every day. :-)
Again, thanks for writing and I hope this sheds light on the logic and rationale behind the article.
- Bill
Bill Wilson, CPCU, ARM, AIM, AAM
Director, IIABA's Virtual University
Email: QuoteNotes@aol.com or Bill.Wilson@iiaba.net
Web Site: http://vu.iiaa.net
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Well, we are not done with this yet.
Your reply to my item #2 an agent placing E & S business with a broker in another state and the E & S broker does not have a license for the state in which they are placing the business with a retail agent....well, well, well. I think you will find that MOST of the states in the good old USA have restrictions against that very situation.
The E & S brokers are trying to circumvent the residency requirements by having the retailer file the taxes. "Courtesy" filings, again in most states are also in contravention of the law, so a retailer cannot have a resident surplus lines agent handle the filings. My point was and is, if a retailer is dealing with an E & S broker, out of state, who does not have the appropriate licensing for the retailer's state, the agent needs to question whether or not the broker is is in compliance with state law. My experience has been, usually not.
For a retailer to obtain an E & S license for one or two pieces of business and have to comply with the reporting provisions for such licensing is well, you know. It is simpler and smarter to access a broker (with the company you need) in your own state.
When you are dealing with national brokers such as Burns and Wilcox, Greshem, AON and a few others, they have the appropriate licensing in the appropriate states. I have been in the position of having to handle the surplus lines tax filings and understand the ins and outs. My whole point is, if an agent is writing multi-state business, they need to have the appropriate licensing themselves and access brokers who have done likewise. The whole issue of E & S licensing is quite complex. However, accessing quality properly licensed E & S brokers is not. Also note, Florida also does not allow non-resident surplus lines licenses the reason being they don't want out of state brokers doing business here. They want them to have an office and a resident agent. Which makes sense if you think about it.
#7 Owning the business. I'm sorry, but any agency principal who does not carefully review ALL contracts before signing deserves what they get. Yes, I do, in fact, know a few brokers who tried that tactic. However, they ended up with no agency base and had to change their contract. As to hold harmless agreements, again I do know of a few who tried that tactic, however look at the first sentence in the paragraph.
#12 Okay, they probably do. However, I have done business in all but a few states in the US since 1961, and have never had a broker remarket, without first advising me. It is common courtesy and standard operating procedures to prevent E & O for the brokers I deal and have dealt with. But I do take exception to your comment that most of the states you have dealt with have no regulations re cancellations, non renewals etc. Again, I have to state that my experience has been just the opposite. I have yet to deal with a state that does not require surplus lines carriers to follow the same cancellation, non renewal laws as admitted carriers.
BTW, I did not think you were maligning surplus lines markets. However, it has been my experience that there has been entirely too much misinformation and bad press given to those markets. I definitely think it is advisable, prudent and just plain good sense for an agent to understand the laws in the states he is doing business in and especially how the E & S marketplace works.
Thanks for your reply and keep up the good work.
Thanks again for responding. Here's some more info from our faculty members:
Item #2
According to one of our faculty members in Florida, "Matt Wester at the Florida Surplus Lines Service Office says that for a Florida agent to send an application to an E&S house that is not domiciled in Florida, the retail agent must have a surplus lines license. That agent must also file taxes. He says that in FL a courtesy filing is one in which a nonlicensed retail agent accesses the E&S market through a non-Florida house and a FL surplus lines agent not otherwise involved in the transaction files the taxes." (However, on the latter point, while it isn't supposed to happen, practicing agents in Florida tell me it does happen frequently.)
Apparently, if this is correct, there is nothing illegal about the retail agent who is placing the account having an surplus lines license and filing the taxes. I'm also told that Florida permits non-resident surplus lines agents to place RRG and PG business as well as permitting, within regulatory guidelines, direct procurements by risk managers.
Another faculty member provided an E&S state requirements chart from the NAII that indicates that the following states expressly permit courtesy filings: CO, CT, DE, MA, MN, MS, NM, NC, OK, WA. The remaining states either prohibit the practice (19 states) or their laws are silent and subject to regulatory interpretation. According to him, it is common practice, where permitted, for smaller E&S brokers, as well as some larger program managers, to deal with retail brokers in a state in which they are not licensed.
Following up on the basic premise of the original article, it may not be cost effective for an agent to maintain a surplus lines license for one or two placements a year. Those agents should probably use only resident E&S brokers and walk away from risks they can't handle. However, if the hard market requires even greater use of E&S markets, it can make good business sense for agents to maintain a surplus lines license...the faculty member cited immediately above recalled getting his surplus lines licensed for direct placement of a single account with an E&S insurer...the premiums were in excess of $1.2 million (the brokerage commission will pay for a lot of paperwork and filings!).
Item #7
Probably agents that don't carefully review contracts DO "deserve what they get," but from a practical standpoint, many agents are small and have limited expertise in this area. They're well intentioned and earnest, but don't have the skills to review these contracts in the manner a good attorney would, and their clients certainly don't deserve what might happen. Your point, though, is well taken...I'll try to add a checklist to the article with some information that might help but, when in doubt, hire someone qualified to review these contracts!
Item #12
Somewhere in my poorly organized, but massive, filing system, I've got a reference guide on cancellation and nonrenewal laws for E&S business by state, but time grows short. Just from experience and input by others, I know that Tennessee and Texas are two states whose cancellation/nonrenewal laws don't apply to E&S lines. I'd guess there are others, but I can't say explicitly what states. In the states mentioned, the only thing that governs cancellation and nonrenewal is the E&S policy itself...which isn't regulated in those states.
One of our Florida faculty members says that Florida does have cancellation and nonrenewal laws that apply to E&S business, but they're different from admitted business...surplus lines statutes being 626.9201 and admitted statutes being 627.4133, 627.728, 627.7281, and 627.7295. According to him, the ability to cancel is much more restricted for admitted vs. surplus lines.
Again, thanks for taking the time to respond. I've learned a lot myself about these issues!
- Bill
For another slant on these issues, read "The Importance of E&S Markets."