Imagine this: you have a longtime habitational client that you’ve written direct for years. It’s a large account, no major issues and has been a great referral partner. And then you open your email to find out the direct carrier no longer has an ‘appetite’ for this account due to the hard market and will be non-renewing it. Sounds like a nightmare. But unfortunately, it’s very much a reality for many agents right now. Where do you turn? Answer: Excess and Surplus Lines Market.

The Excess and Surplus (E&S) market plays a critical role in the insurance industry, providing coverage solutions for risks that fall outside the scope of standard insurance offerings. With the industry conditions being what they are, the E&S market is being highly utilized – even by those who have never had to use it before. Since many agents may be newly navigating this specialized market, being aware of the Errors and Omissions risks that come with it is incredibly important. Let’s explore the unique E&O risks associated with the E&S market and review insights on how to manage and mitigate these challenges.

Understanding the E&S Market

The E&S market serves as a safety net for clients and businesses facing high-risk scenarios. It provides insurance coverage for risks that standard insurance companies are unwilling or unable to underwrite due to their unconventional nature, complexity, or high potential for losses. These risks may include unusual property types, specialty businesses, or non-standard coverage needs.

E&O Risks in the E&S Market

1. Complex Underwriting: One of the primary E&O risks in the E&S market is the complexity of underwriting. The specialized nature of E&S risks requires in-depth knowledge and expertise. Agents and underwriters must accurately assess and price policies to match the unique risks involved. Errors in underwriting can lead to inadequate coverage or unexpected gaps, which can result in E&O claims.
2. Documentation and Communication: Effective documentation and communication are vital in the E&S market. Incomplete or inaccurate documentation can lead to misunderstandings between insurers, agents, and clients, potentially resulting in disputes and claims. Do not tell your client that coverage is bound until you have received confirmation from the wholesaler. A good idea would be to have your clients sign off on any rejection of coverages offered or any change in policy terms you discussed with them.
3. Regulatory Compliance: The E&S market is subject to its own set of regulations, and these requirements can vary from state to state. Staying compliant with these regulations is crucial to avoiding E&O claims. Agents and insurers must ensure they are licensed and knowledgeable about the specific regulatory environment in which they operate.
4. Coverage Dynamics: Do not expect the renewal policy to look like the expiring one. E&S carriers do not have to issue a conditional renewal notice if they are modifying coverages. Review renewal proposals from wholesalers carefully, making sure to identify any changes or new endorsements being added. It would be smart to ask the wholesaler ahead of time if they anticipate any changes to the renewal policy. Make it part of your process to contact the client and review the renewal proposal to obtain their approval on any changes implemented by the carrier.

Managing E&O Risks

Making optimal use of the wholesale marketplace requires a sophisticated approach that agents must grasp and integrate into their practices. Establishing specific processes and protocols is imperative to mitigate the risk of E&O issues. It’s essential to recognize that not all wholesalers operate in the same way, and assuming uniformity across different wholesalers can be misleading. Some of the critical considerations to bear in mind include:

• Education and Training: Continuous education and training are essential to minimize E&O risks. Agents and underwriters should invest in ongoing professional development to stay current with industry trends and regulations.
• Documentation Best Practices: Implementing robust documentation practices is critical. Detailed records of client interactions, underwriting decisions, and policy terms can help mitigate disputes and support claims defense. Coverage checklists, rejection of coverages, signs off on the clients understanding their carrier is with a non-admitted carrier and disclaimers are all good ideas to implement.
• Timing: When dealing with the E&S market, it’s important to note that they may not operate on the same timeline you are used to with an admitted carrier. Contact the wholesaler far in advance of the desired effective date to determine what is needed for the renewal and if there have been any changes in the coverages or terms. When submitting an application to a wholesaler, make sure you follow up to confirm receipt of the application and will be able to provide a proposal by a specified date. Periodic follow-ups as you get closer to the effective is a good idea to implement as well. Never confirm coverage is bound until you receive confirmation from the wholesaler.
• Regulatory Compliance: Stay vigilant about regulatory compliance. Develop a deep understanding of the regulatory landscape in the areas where you operate and regularly update your procedures to remain compliant.
• Risk Management Procedures: Develop and implement rigorous risk management procedures and protocols to reduce the likelihood of E&O claims. Regularly review and improve these procedures to adapt to changing market conditions.
• Review Policy Coverage: One of the most common E&O claims surrounds not having the correct coverage in place for the client’s risk. Be sure to thoroughly review the proposal and policy to ensure the coverage that was requested was provided. If it wasn’t, be sure to find out if it can be obtained and if it cannot, make sure the client is aware and have them sign a document acknowledging this information.

Navigating the E&S market offers opportunities for insurers and agents to provide unique coverage solutions for high-risk scenarios. However, it also presents distinctive E&O risks. By understanding these risks, staying informed, and following best practices in documentation, communication, and compliance, insurance professionals can effectively manage and mitigate E&O exposures in the E&S market, ultimately providing better protection for clients and a more secure future for their businesses. Reach out to OIA for additional tips on how to navigate the hard market and avoid E&O claims!