RISK MANAGEMENT
The hard market will force more retailers to access the E&S market
By Donald S. Malecki, CPCU
E&S insurance policies quite often are not the same as those being provided in the standard market. ...For that reason, obtain all information from the wholesaler in writing, so there can be no misunderstanding later.
"One person's food is another person's poison" is an adage that can be applied in various settings. From an insurance perspective, the current hard market is an example. Insureds face price increases and coverage restrictions, while insurance companies start turning red ink back to black. For excess and surplus lines insurers, who specialize in writing hard-to-place business, the definition of "hard-to-place" suddenly includes a much larger segment of the insurance marketplace; and they find themselves once again called upon to provide markets for coverage that traditional insurers no longer are willing to serve. As a result, more and more retail agents will find themselves having to access the E&S market in order to obtain coverage for some of their insureds. And, unless they have an E&S license and a contract with an E&S company, these retail agents will be accessing this market through wholesalers.
Role of retailers
Regardless of whether or not coverage is obtained from the traditional or E&S market, the retailer is the party acting on behalf of his or her client and, therefore, will be responsible if there are any coverage disputes. For that reason, the retail agent must read and understand the insurance contract and explain its provisions carefully to the client. Remember--E&S insurance policies quite often are not the same as those being provided in the standard market. There may be coverage restrictions and limitations that were not in your client's previous policy. For that reason, obtain all information from the wholesaler in writing, so there can be no misunderstanding later.
The case of Broadus v. Essex Insurance Co., et al., 621 So. 2d 258 (Sup. Ct. Ala. 1993) clearly points out that the retail agent has sole responsibility for his or her client. The insured brought suit against the retailer, wholesaler, and the insurer because coverage was denied. The Alabama court said that the wholesaler's sole function was to act as an intermediary between the retailer and the insurer, and that the direct lines of communication were between the wholesaler and the insurer. Any communication from the insurer to the retailer went through the wholesaler, an exposure that without documentation presented potential problems.
The insured's (plaintiff's) theory in this case was that the wholesaler exercised or reserved the right to exercise control over the manner in which the retailer ran his agency. Therefore, it was vicariously liable for any misrepresentations that the retailer might have made to the insured concerning the extent of coverage of the insurer's policy.
In turn, the theory went, the insurer was liable under general agency law because, according to the insured, the wholesaler dealt with the retailer as the insurer's general agent. From the perspective of the court, evidence was lacking to prove these relationships.
Whether the retailer was said to have had an agency relationship with the wholesaler when he dealt with the insured so that the wholesaler could be vicariously liable for the retailer's actions depends, the court said, on whether the wholesaler reserved the right to control the manner in which the retailer ran his agency. The record revealed that the wholesaler did not have the right to--and did not--control the retailer. Instead, the retailer acted at all times as an independent insurance agent or broker on behalf of his client (insured). The wholesaler's role, on the other hand, was to pass information upon request between the retailer and the E&S insurer.
In pointing to the case of Land & Associates, Inc. v. Simmons, 562 So. 2d 140 (Ala. 1989), the court reiterated what it had said there: "... the right to determine if an alleged agent is conforming to the requirements of a contract does not, in itself, establish control."
From the court's perspective, both the wholesaler and retailer merely cooperated with one another in order to secure insurance coverage for the insured. The court concluded that by passing information between the insurer and the wholesaler, and performing certain administrative duties in connection with the policy on behalf of the insurer, the wholesaler did not create the kind of relationship with the retailer that would subject it to liability under the doctrine of respondeat superior (i.e., master and servant).
The court therefore concluded that when an independent agent or broker fails to procure insurance coverage for his principal (insured), the principal may sue either for breach of contract or in tort. Because the wholesaler and retailer acted independently of each other, the court went on to say, the wholesaler was not liable for fraud. It also follows, said the court, that the insurer cannot be liable under the insured's theory, if the wholesaler is not liable.
Wholesalers, of course, need to be careful about how much direction they provide, because they could cross the line and be considered to be exercising control over the retailer. In fact, one of the justices in this case, in expressing a dissenting opinion, felt that way.
Single most common problem
Undoubtedly the single most common problem confronting all parties in the retailer, wholesaler and E&S insurer relationship has to do with the issuance of insurance certificates.
For example, one wholesaler recently lamented that some retailers are issuing insurance certificates confirming the issuance of additional-insured endorsements even though completion of certificates is the sole role of the wholesaler. Retailers, in other words, are misrepresenting information on these certificates, since they also are not the authorized representatives of the insurers listed.
What these retailers in effect are doing is "rolling the dice." If something happens where a certificate holder seeks coverage, as represented by the certificate, and finds that none exists, the retailer is in trouble.
Actually, it is the wholesaler who should sign certificates because he or she is the insurer's representative. Thus, even if a retailer were to be given permission to issue a certificate, in a situation where the policy or policies reflect additional insured status, the retailer could still be adversely affected if a problem were to arise, because the retailer is not an authorized representative of the insurer but is representing that very fact by signing the certificate.
What wholesalers need to do is to issue a standard boilerplate warning on all communications to retailers to the effect that the retailer has no authority to acknowledge additional insured status on certificates and he or she assumes all liability for doing so without the wholesaler's permission.
This is something retailers see on quotations issued by insurers. It is not unusual for quotations to say that certificates are used to confirm coverage and limits and not to confer coverage and limits. The latter requires the insurer's permission.
A number of other examples could reveal the pitfalls facing the retailer in cases where a wholesaler is involved. It is no secret that some wholesalers are understaffed and overworked. Some of them, therefore, may take whatever shortcuts are possible.
The retailer very often is in a dilemma. He or she wants to expedite matters to serve the client, but finds that following the proper protocol will likely work to the retailer's detriment. It boils down to the retailer's tolerance for taking risks. Insurance is said not to be gambling. However, the players often are gamblers at heart.
Whatever authorization is given from the insurer down needs to be in writing because, in the final analysis, it is not what the insurer or wholesaler says or even believes as being the intent that is important but, instead, what the actual insurance policy provisions say. If the policy does not reflect agreement among the parties, it may take long and costly litigation to resolve the matter. *
The author
Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is an active member of the CPCU Society, on the Examination Committee of the American Institute for CPCU, and an active member of the Society of Risk Management Consultants.