05 Apr Does Everyone in the Agency Know the Carrier’s Underwriting Guidelines?
It is interesting that there are E&O claims involving carriers suing one of their agents every year. Yes, the carrier is suing their agent, and with the right set of facts, they are winning! While this may be a surprise to some, this has been occurring for quite some time. What causes this to happen?
As hopefully all of the agency staff knows, each carrier has underwriting guidelines that clearly define what type of risk they want to write or those risks they don’t want to write. Some of the criteria that are typically referenced include the age and construction type of various property risks and specific types of risks (for example – roofers) that carriers want to avoid. The criteria may also include issues involving whether the risk has been non-renewed or canceled for non-payment. The guidelines are provided to the agent either electronically or on paper and can be part of the agency agreement or a separate document.
These guidelines, when adhered to, can allow the agency to bind that carrier to a risk, provided it falls within those guidelines. One of the key questions that every agency should ask themselves is, “does everyone in the agency know the carrier’s underwriting guidelines.”
The problem arises when the agency binds the carrier to a risk that, after a loss, the carrier assumes that they would not have written the account had they known the “correct information.” One situation I am aware of involved the agency binding a homeowners account for a home that was 23 years old. The problem was that the underwriting guidelines stated that the agent only had binding authority for risks 20 years old or less. The home suffered a loss, and when the carrier found out that the age of the home was not within their acceptable binding guidelines, they agreed to pay the claim (since the customer had not misrepresented the risk) but then proceeded with E&O litigation against the agent….and won!
Many of the situations where the carrier sued the agency for not adhering to the underwriting guidelines involved producers who were not aware of those guidelines. Since they play a key role in the solicitation and binding of new business risks, it is imperative that they know, or at least check, the underwriting guidelines before binding a risk.
Unfortunately, there have been E&O claims where the producer knew the guidelines but chose to ignore them to get an account written. One that comes to mind involved a producer who “lied” about the construction of a risk, stating that it was a frame home when it was a log home. While some may view this as semantics, that is not how the carrier saw it.
Be sure that the producers know the underwriting guidelines for each of the carriers. Since they change from time to time, timely notification to the applicable staff (including the producers) of the changes is also critical.