For many independent insurance agencies, the excess and surplus lines market has grown increasingly important in recent years. Commercial property and casualty rates, particularly for property insurance in catastrophe-prone areas, are continuing to climb; forecasts say this will continue through 2021. For some classes, availability is a serious problem.
Some agencies may be forming relationships with one or more wholesale brokerages that have E&S licenses in a number of states. While the E&S market is an essential resource for insurance agencies and their clients, it comes with pitfalls for agency principals to watch for.
First, deciding why you need a wholesaler will help narrow your choices. It could be that you need expert help with an unfamiliar class of business. “Wholesalers have years of experience within their areas of specialty,” says a paper by Zurich American Insurance Co. Some wholesalers offer programs that provide significantly better coverage than the retailer’s standard markets.
A contract with a wholesaler formalizes the rights and responsibilities of each party. However, “I’d be wary of any agreements signed with E&S brokers, particularly hold-harmless provisions,” wrote Bill Wilson, retired director of Big “I” Virtual University who now blogs at InsuranceCommentary.com. It’s important to find out in advance whether the retailer’s errors and omissions liability policy covers contractual liability assumed under a hold harmless agreement.
The contract will also state:
- Whether the retailer has authority to bind coverage or issue certificates of insurance
- The retailer’s share of the sales commissions
- Whether the retailer is obligated to pay policy and audit premiums when the insured has not paid
- Whether the retailer must return commissions on cancelled policies
- Who owns the expirations
- Which party is responsible for state compliance requirements, such as paying stamping fees and taxes and submitting any required affidavits
Retailers should also be aware that, as the late Don Malecki wrote, “(I)f there is a problem over the lack of coverage, the wholesaler may be insulated from liability, particularly when the wholesaler acted strictly as an independent contractor and conduit.” It is vital that the retail agency review each policy both for accuracy and potential coverage gaps, and to address them with the client.
Many E&S carriers use forms based on Insurance Services Office forms. Others, particularly those issued by Lloyds of London syndicates, may be non-standard and require careful review. One question to ask a wholesaler is whether their brokers will help your agency identify gaps.
Another consideration is the financial condition of the carriers to which the wholesaler has access. A paper by the Wholesale & Specialty Insurance Association points out the importance of sorting out the few badly-managed companies, as New Jersey is the only state that provides guaranty fund protection for insureds of insolvent E&S carriers. Some agents’ E&O policies’ insolvency exclusions may limit coverage when a guaranty fund does not apply. Find out whether the wholesaler vets the carriers or whether your agency is responsible for doing it.
When there is a coverage dispute with a carrier, will the wholesaler advocate for your client and you? Some wholesalers may be very active in claims management, while others may take a hands off approach.
The wholesaler’s responsiveness is a huge consideration. Insurance Business America surveyed more than 1,300 retail agents who said that responsiveness was the most important aspect of their relationships with wholesalers.
Strong relationships with wholesale brokers can be important to your agency’s growth. Decide what you need, review contracts before signing, and set appropriate expectations. A careful approach to selecting these partners will pay huge dividends for your clients and you.
