Agency E&O Exposures to Watch: Certificates, Carrier Ratings
1. Send Certificates of Insurance
I would love to share with you a story regarding a multinational company that demanded they be listed as an additional insured on dozens, maybe even hundreds or thousands, of certificates. Possibly they incur a loss of $1 billion. They might review all the thousands of certificates because they possibly did not have $1 billion of insurance coverage. (Who does?)
They might think it may be possible, and therefore they may want to learn, how much more coverage they could claim based on how many certificates named them as additional insureds.
Aghast you may be, but a company might conceivably discover several hundred million dollars of additional coverage and/or they might discover coverage under their agents’ E&O policies due to improper certificates. With $1 billion on the line, what do they have to lose versus how much they have to gain? They might think this was a strategy worth at least investigating.
Of course, this is all hypothetical, but because it has the possibility of reality, agents have an opportunity to act now. Here’s the kicker: What happens if the agent responsible for printing the certificates (printing including electronic) never submitted the certificates to their carriers? We all know the carriers do not want them.
What happens if the carrier learns, after the fact, they are potentially on the hook for a large claim (some portion of $1 billion) because they have an additional insured that is a multi-national, multi-billion company operating in a hazardous industry for which the carrier was never aware they were providing coverage as the agency did not provide a copy of the certificate? When claim dollars get large, do claimants, including insurance companies, remember verbal instructions or do they rely on whatever is required that best makes their case?
If you never send copies to the carrier, they can claim ignorance of the certificate. It puts them in a better defensive position when a claim is made and your defense can be weakened when the carrier claims ignorance. It is best to send copies of the certificates to your carriers, regardless of what they have told you. Don’t create a situation in which they can claim ignorance.
Send carriers your certificates regardless of whether they tell you not to send them. If they throw them away, delete them, incinerate them — who cares? It is their problem then. Do not try to protect your companies from themselves.
2. Notify Your Clients of Inadequately Rated Carriers
It is your responsibility to notify clients if a company is not rated or is rated poorly.
Even if the carrier is a benefits carrier, maybe the only material carrier in the state, and even if no other choice exists, the agency still has the responsibility to notify. The case law is clear even to a non-attorney like me. An agency does not have a choice but to notify. No distinction exists between property/casualty versus benefits versus life insurers either. Clients deserve notification.
Think of it from another angle: Why are companies rated if not to help protect consumers? Therefore, shouldn’t consumers be notified?
From a practical perspective, not necessarily a legal one (you would need to contact a highly specialized attorney or your E&O attorney to gain the legal perspective), some lines have higher standards than others. Surety is an example. So is life.
I do not know of any true total exceptions because even consumers placed with government backed, or in some cases, theoretically backed (it really does pay sometimes to read the fine print) insurance companies lacking adequate ratings, deserve notification.
3. Not All Insurance Companies Are Financially Equal
Understand that not all insurance companies are the same financially. Obviously, we have had mutual companies and stock companies for 150 years. Material differences exist in their financial situations, balance sheets, ability to raise money and need to disperse profits, among other factors.
One structure is not inherently stronger than the other. It always comes down to how well the company is managed. From an E&O perspective though, assuming ratings are adequate, the industry has adjusted accordingly and relatively safely, if imperfectly over time to both kinds of organizations.
Today, it seems more companies are taking on alternative organizational formats such as reciprocals, risk retention groups (RRG), and captives (which in and of themselves are not generic by any means because many different kinds of captives exist).
