Agents’ errors and omissions (E&O) policies provide protection for agents for certain negligent acts committed in their professional capacity but may exclude coverage for liability related to an insurer’s insolvency. These “insolvency exclusions” typically exclude coverage if the agent places business with an insurer that does not carry a specific rating or fails to meet other requirements imposed by the E&O carrier.
Courts have almost universally upheld insolvency exclusions in professional liability policies, but the terms and enforceability of such exclusions are not necessarily consistent with the legal standard for agent liability.
Insurance agents are generally not liable for an insurer’s insolvency. The well-settled rule is that “An insurance agent or broker is not a guarantor of the financial condition or solvency of the company from which he obtains the insurance. However, he is required to use reasonable care, skill, and judgment with a view to the security or indemnity for which the insurance is sought…” Williams-Berryman Ins. Co., Inc. v. Morphis, 461 S.W.2d 577 (Ark. 1971).
Courts have outlined the basic duties of agents relating to insurer insolvency.
First, agents must ensure the insurer is presently solvent when placing the business. If the agent places coverage with an insurer it knows to be insolvent, the agent will be liable for any resulting claim against it. Williams-Berryman, 461 S.W.2d 577; see also Mayo v. American Fire & Cas. Co., 192 S.E.2d 828 (N.C. 1972); Gordon v. Spectrum, Inc., 981 P.2d 488 (Wyo. 1999); Sternoff Metals Corp. v. Vertecs, 693 P.2d 175 (Wash. App. 1984).
Most courts have found the inverse to also be true; that is, where a policy is procured in a company known to be solvent at the time coverage is placed, the agent will not be liable to the insured for a loss resulting from a subsequent insolvency. Williams-Berryman, 461 S.W.2d 577.
A majority of courts have rejected any continuing duty of an agent to actively monitor the financial condition of the insurer. However, a few courts have imposed a duty on an agent to inform an insured if the agent knows or reasonably should know that the insurer has become insolvent after procuring the policy. Merchants Bank v. Gill, 1999 Tex. App. LEXIS 3252; Glenn v. Leaman & Reynolds, Inc., 442 So.2d 1224 (La. Ct. App. 1983). This is a minority position at common law, but many states have enacted statutes imposing a duty on the agent to inform the insured when the agent receives notice of an insolvency. E.g., Fla. Stat. § 631.341; Ga. Code Ann. 33-36-8; Idaho Code § 41-3323; Ky. Rev. Stat. Ann. § 304.33-260; Mich. Comp. Laws Ann. § 500.8123; Mont. Code Ann. § 33-2-1347; N.H. Rev. Stat. Ann. § 402-C:27; S.C. Code Ann. § 38-27-420; S.D. Codified Laws Ann. § 58-29B-53; Wis. Stat. Ann. § 645.48.
Consistent with the duty to know that an insurer is solvent, some courts have found that an agent has a duty only to ensure that the insurer is licensed in the state or, if not licensed in the state, then compliant with the state’s surplus lines statutes. This simple duty is premised on the fact that it is ultimately the duty of the state to regulate the solvency of insurance companies.
In Rhode Island, state statute protects agents from liability if the agent places business with an insurer admitted to do business in the state. R.I. Gen. Laws § 27-14.4-21.
Courts in other states have similarly protected agents from liability for insurer insolvency if the insurer was licensed to do business in the state. See Wilson v. All Service Ins. Corp, 91 Cal. App. 3d 793 (Cal. App. 1979); Spires v. Acceleration National Insurance Company, 417 F.Supp. 2d 750 (D.S.C. 2006); Hobbs v. Midwest Ins., 570 N.W.2d 525 (Neb. 1997). These courts have found that the state is the proper party to protect consumers and to regulate insurance—not agents, not rating agencies, and not E&O carriers.
A few courts have suggested that an agent has a duty to investigate the financial condition of the insurer. See, e.g., Carter Lincoln-Mercury v. Emar Group, 638 A.2d 1288 (N.J. 1994). The case law is unclear as to the extent of this duty but a close examination of the decisions reveals that the duty is most readily understood as a different iteration of the duties to know that an insurer is licensed and solvent. Although a few courts have intimated that agents have a duty to independently evaluate the financial stability of the insurer, this is a distinct minority view. E.g., Carter Lincoln-Mercury, 638 A.2d 1288.
Where courts have imposed a duty on agents to examine an insurer’s financial condition, they expect the agents to consult various industry sources with an eye toward objective data. See, e.g., Sternoff Metals Corp. v. Vertecs Corp., 693 P.2d 175 (Wash. App. 1984); Master Plumbers Ltd. Mut. Liability Co. v. Cormany & Bird, Inc., 255 N.W.2d 533 (Wisc. 1977); Nidiffer v. Clinchfield, 600 S.W.2d 242 (Tenn. App. 1980).
Despite these basic legal duties imposed on agents, E&O carriers and others within the industry often emphasize the significance of an insurer’s rating. But this emphasis on ratings is misplaced. The requirements of the E&O policy are not the same as the legal standard of care. The case law reveals that ratings are not dispositive of due care and are not the legal standard for agent liability for insurer insolvency.
Courts have found that placing business with an insurer that has an unfavorable rating will not necessarily result in liability for the agent should the insurer become insolvent. In Higginbotham & Assoc. v. Greer, 738 S.W.2d 45 (Tex Ct. App. 1987), the court held that an agent was not liable for a claim relating to an insurer’s insolvency even though the insurer was rated in the lower twenty-five percent of A.M. Best’s rated companies for the year. The court disregarded the rating and instead focused on the fact that the insurer was admitted in the state and solvent. Also, in Al’s Cafe, Inc. v. Sanders Ins. Agency, 820 A.2d 745 (Pa. Super. Ct. 2003), the court found that an insurer carrying the “lowest rating in the industry” was not conclusive of the agent’s liability for placing coverage with the insurer.
Likewise, agents relying on a favorable rating may not have fulfilled their duty to the insured. In Pilkington PLC v. Perelman, 72 F.3d 1396, 1401 (9th Cir. 1995), the defendants contended that they could not be held liable for the insurer’s insolvency because the insurer had an A+ rating from A.M. Best and a positive rating from Standard & Poor’s, but the court rejected this contention, stating, “Legal authority does not support their contention that a mere ratings scan satisfied [the duty].” The court in Bussian v. RJR Nabisco, Inc., 223 F.3d 286 (5th Cir. 2000), affirmed that “blind reliance on credit or other ratings” is inadequate.
An agent’s duty is not fulfilled simply by consulting rating opinions. Courts have confirmed that an agent’s duty is to ensure that an insurer is solvent and is authorized to conduct business in the state or is otherwise compliant with surplus lines statutes. Relying on a favorable rating may not insulate an agent from liability, and placing business with an insurer with no rating or an unfavorable rating will not necessarily result in liability.
Agents must act with reasonable skill, care, and diligence. Clients expect agents to place their coverage with an insurer whose premium and policy terms are most advantageous to their interests. The rating requirements of E&O policies can interfere with an agent’s ability to do so. Agents should understand that reliance on an insurer’s rating is not dispositive of due care and they should be cautious to substitute an E&O carrier’s judgment for their own.
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