25 May Are You Vetting Third Parties?
To place coverage in virtually any market requires the availability and utilization of third-party vendors or intermediaries. These vendors likely include wholesalers, MGAs, MGUs, or other entities that provide a product or service in the P&C marketplace or the benefits arena.
Since it began in 1986, the E&O Plus Quality Management Program has included a separate Key Component focused on placing coverage through intermediaries. A key point for all agency staff to understand is that your agency could be held responsible for placing coverage through or sending clients to a company that fails to meet its obligations. If you are wondering – yes, there have been E&O claims involving intermediaries that did not honor their commitment.
Not all intermediaries are of equal standing. For this reason, there should be a vetting process in place before any business is placed with a third party. This is important for your staff to realize. Placing business with a vendor or intermediary before they have been thoroughly vetted should be a clear no-no. Are you wondering whether this has ever occurred in the history of the E&O Plus program? The answer is an emphatic yes. These cases resulted in a fair amount of unnecessary scrambling on the agency’s part. Every agency should have specific staff (typically members of the agency’s management team) responsible for approving intermediaries before any business is placed.
Some key issues and questions that should be investigated and answered include:
- Is the intermediary really needed? Does your agency have other intermediaries that essentially do the same thing?
- If the intermediary is a wholesaler, who are the carriers in which they do business? Do they meet the agency’s standard of A- or better (according to AM Best)?
- How long has the intermediary been in business? How long have they been handling the type of business/coverage you are seeking? Do they have a good track record? Are they stable? Is it likely they will be around five years from now? While it is natural for people to do business with people they know, that does not necessarily translate into a good business opportunity. Just because you have a friend who is now handling stop-loss coverage placement does not necessarily mean you should work with them.
- What if they make a mistake and something goes wrong (yes, this does happen)? Do they have E&O coverage? It is suggested that intermediaries maintain a minimum limit of $5 million in E&O protection placed with a carrier that meets the agency’s minimum AM Best rating. An agency may use an intermediary with less than a $5 million limit, but higher limits are suggested.
- Have you closely reviewed the agreement between your agency and the intermediary? Agreements can vary significantly, so they need to be reviewed and approved by a designated member of the management team before they are executed.
- Does the intermediary meet their state of domicile’s requirement regarding licensing?
Vetting third parties is a crucial issue. In my time as a reviewer with the E&O Plus program, I have heard some real nightmares, including some that resulted in E&O claims and other close calls.
It is a good idea to reinforce this issue among all staff at least annually. Awareness of third-party vetting should be part of your agency’s E&O culture.