Carriers will sue their agents?

The answer is yes. They will and actually this has been a part of the E&O world for many years.

Recently, I was reviewing E&O policies from a number of carriers. I am always looking to see what coverages are being added, what enhancements are being introduced and also what exclusions E&O carriers are now adding to their coverage form. In one coverage form, a particular E&O carrier has an exclusion for claims made against the agency by insurance carriers. So if the agency is hit with an E&O claim from one of their carriers, there is no coverage. This surprised me as I am not sure I have seen this exclusion in the past. While I am surprised, the addition of this exclusion is extremely noteworthy.

Why would an insurance carrier sue one of their agents? Aren’t they your friends, your business “partners”? In the ideal world, yes.

Let’s look at one of the primary expectations carriers have of their agents. There are certainly expectations of growth and profitability; that’s a given. However, for the relationship to develop and stay strong, there is an expectation of trust; trust that the applications being submitted accurately reflect the exposures of that specific client. Wouldn’t you agree that sounds pretty reasonable?

While it may be reasonable, it does not always happen. In any given year, upwards of 5% of E&O claims involve insurance carriers suing their agents. Typically, this will evolve when a client has a loss and the carrier determines that the risk is not exactly what the agents purported it to be. If the “incorrect” issues are deemed to be material, the carrier has a variety of options. They can void the policy, returning the premiums back to the client. The other option, probably more common, is for the carrier to pay the claim and bring suit against the agency. Without a doubt, the carrier is winning many of these claims.

The questions on the application are there for a specific reason. Agency sales staff should not be guessing at the answers as an incorrect “guess” could have significant negative results.

Claims by insurance carriers against agents are not going to go away. Carriers are taking this “trust” issue seriously and they have every right to do that. Agents should check to see how their E&O coverage addresses this issue. They should also reinforce (on a continuous basis) the message with their sales staff that honesty in their dealings with their carriers (including wholesalers) is a must.

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