Use these guidelines to manage your E&O exposure in working with the E&SL market.
The previous article focused on state legal and regulatory requirements for writing business through Surplus Lines markets and provided an overview of the procedures in dealing with carriers, brokers, and clients.
To implement these procedures, follow these guidelines:
E&O: SURPLUS LINES RISK MANAGEMENT GUIDELINES
- Give your client the Surplus Line Broker-prepared proposal/quote and binder and highlight the statements shown in the previous article. If you use your own proposal format, refer to the Surplus Lines-prepared document on your proposal and attach the Broker-prepared one to the proposal.
- Add your own generic statement to your proposal format in the form of a statement that the Surplus Line company is not subject to supervision, examination, or financial oversight by the state insurance authority and not protected by the state guarantee fund.
- Add your own statement to your proposal that it might be necessary at times to use a Surplus Line company; that these companies might use more limited and restrictive coverage forms, which are not approved by the state department of insurance; nor do these companies use rates that are approved by the state.
- Add a statement to your proposal format, coverage summary and/or renewal cover letter that advises the insured to review the policy coverage and especially the policy exclusions; the statement should advise them that if they have any questions or don’t understand something, they should contact the agency immediately.
- If you use a coverage summary form, add a statement that indicates that the descriptions of coverage, exclusions, etc. are summaries only and not contract language, and that the insurance policy contract should be reviewed.=
- When a Surplus Lines company is used, have the client acknowledge that they understand there might be some risk involved; if when the client rejects the coverage, have them acknowledge that, as well. If you don’t feel comfortable doing this, let the client make the decision and then write a letter to them confirming whatever action has been taken.
- Be sure to have the CSR or producer review the form and compare it to the expiring policy, noting any changes, reductions, or coverage enhancements. This includes checking ISO edition dates on forms. Surplus Lines companies are notorious for using older versions of ISO forms or using endorsements that are different from those currently used. This review is essential when moving from a standard admitted insurer to a Surplus Lines company.
- With all new clients and with renewals, try to do a “face-to face” coverage review at least annually, with contacts in between, to see if any risk changes are or will be taking place.
- Be careful in using ACORD binders, certificates of insurance, and with adding additional-insured requests. Use the proper form and don’t take shortcuts. (This tip applies to all activities in the agency.) If the client asks to have the standard ACORD form modified in some way, get the company underwriter’s permission to do so and acknowledge your understanding in writing to the underwriter (or the Surplus Lines broker if they are authorizing the modification). You probably won’t be issuing certificates or binders or adding additional insureds because you’re not authorized to do so. However, make sure that you understand what’s being requested before you ask the Surplus Lines broker to make the change.
- In drafting the statements discussed in guidelines 2, 3, 4, and 5, check with your E&O underwriter and your agency association to see if they have any resource information that you might use. Once you’ve written the draft, have your attorney review it. Be prepared to explain the relationship between the agency, client, Surplus Lines broker and company and show the attorney sample waivers used by brokers and required by your state.
CONCLUSION
Although I don’t support federal regulation of insurance, I believe that national standards for handling Surplus Lines business would benefit both independent agents and their clients. For example, the NAIC might develop such regulatory standards for administration by the states.
Due diligence by all parties in the agency/client/company relationship has always been essential. The rapid transformation of our industry, combined with the dramatic expansion in the scope of risk, has intensified the need for effective communication, responsibility, and ethical behavior.
Bear in mind that the retail agent (you) is the focal point in the process: You’re relaying information, applications, etc. back and forth between the Surplus Lines broker and your client. Because the broker has no client contact other than the application, it will be difficult to bring them into any problem that the client might perceive — increasing the need for due diligence on your part.