16 Nov Excess & Surplus Lines Market – Filling a Vital Niche
Curtis M. Pearsall, CPCU, AIAF, CPIA
President – Pearsall Associates Inc.
When some think of Excess & Surplus Lines business, Lloyd’s of London might come to mind. Lloyd’s has had a foothold in the E&S business since its founding in 1688. It also had a major role in insuring and paying claims on exposures such as the Titanic, San Francisco Earthquake, Deepwater Horizon, and Hurricane Katrina. While London and a significant number of high-quality E&S companies continue to insure these “mega” exposures, the use of E&S companies seems to have gravitated to more everyday exposures based heavily on the state of the insurance marketplace. This is where the E&S marketplace is filling a critical and vital niche.
Based on your agency’s location, the E&S market is needed for exposures such as having a piece of a high-property value risk or a risk that wants extremely high liability limits. Other scenarios include a wide host of management liability lines of business, with cyber seemingly one of the more common. These are all in addition to the everyday exposures the admitted market today doesn’t have an appetite for. Without a doubt, the E&S market plays a vital role.
However, and this is a BIG however, the E&S market presents some significant challenges and issues that can raise the potential for an increase in the agency’s E&O exposure. Here are some of those issues with some best practices noted:
- The E&S market may not provide all of the coverages requested in the application. As the retailer, it is up to you to compare what was requested and what was provided. Be sure to have a process in place for this.
- Unique policy forms can drastically modify coverage. For example, don’t assume that a GL policy with an E&S carrier is the same as a GL policy with one of your admitted carriers. Secure specimen forms from the wholesaler and review them to determine any limitations on the coverage.
- Lack of binding authority – the wholesaler needs to be contacted to bind coverage, so don’t advise the client that coverage is bound until the wholesaler tells you it is.
- Lack of backdating – Typically, coverage must be bound at or before the inception date. If coverage is bound afterward, the E&S carrier may not honor the effective date of coverage.
- The lack of conditional renewal notices – In the admitted market, carriers must provide conditional renewal notices if the coverage is going to be changed. They do not in the E&S market. I suggest contacting the wholesaler to ascertain whether they expect any major differences in a renewal proposal.
- The need for policy checking – All policies should be checked, but due to the ability of the E&S market to modify (drastically) the coverage, E&S policies should be thoroughly checked to ensure the coverage is what was ordered.
Some additional best practices include:
- When you send an app to the wholesaler, have a process to verify that they have received it, and they will be able to provide a proposal by a specified date. Then follow up as you get closer to that date to verify a proposal is forthcoming.
- Include a notation in the proposal regarding when a request for coverage is needed to give the agency time to contact the wholesaler. It is best to allow three days before the effective date to ensure that coverage is bound on time.
- Include the specimen forms with the proposal to allow the client to review them.
The E&S marketplace plays a vital role but presents some significant issues and challenges. A procedure to address these challenges can minimize the chance of a problem developing.