Producer Protection Introduced During Turbulent Times

On Sept. 16, 2008, the Wall Street Journal announced “U.S. to Take Over AIG in $85 Billion Bailout.” An insurance holding company, internationally known and geographically diversified on a global basis, owning some of the largest insurers in the world required the backing of the Federal Reserve to assuage the concerns of markets. Suddenly, consumers, producers and third parties questioned the solvency and stability of other insurers. The rhetorical question was, “If AIG needs $85 billion, what’s the story on other insurers?”

With the turmoil in the financial markets dominating the headlines in 2008, the ability of insurance companies to protect their reputations and their relationships with producers came into focus. Ironically, in June 2008, Century Surety Co. created an insolvency gap legal defense insurance coverage. This coverage supplemented insurance agents’ errors and omissions policies that reflected a gap for insolvency coverage if the producer placed business with an insurer that was not rated by A.M. Best Co.

Even before the economic meltdown that began in the third quarter of 2008, the exclusion related to insolvency coverage had created problems for producers who had long and established relationships with carriers, or otherwise invested their time and effort designing and developing coverage and underwriting criteria for a specialty program. Equally important, producers could not avail themselves of the capacity and capabilities of relatively new carriers.

In an effort to support the needs of producers, Century Surety Co.’s insolvency gap legal defense insurance policy permits a designated insurance company to extend coverage to each of its duly appointed and licensed agents. The designated insurance company purchases a policy to provide legal defense coverage to its agents in the unlikely event of the liquidation of the designated insurance carrier. Demotech provides the financial analysis necessary to qualify insurers as well as the on-going monitoring of financial stability.

A limit of liability up to $2 million can be purchased. The coverage is first dollar, with no deductible or coinsurance. Pricing is company-specific. The premium is paid for by the designated insurance company to protect its producers.

In an insurance environment where internationally known property/casualty insurance companies and life insurance companies are receiving bailouts or capital infusions, financially stable insurance companies and the producers that they rely upon can obtain some degree of protection against their exposure to insolvency.

This specialty program was introduced in June 2008 to address a specific exclusion that had been inserted into insurance agents’ E&O insurance policies. However, in the aftermath of the turmoil of 2008, its development and availability is quite timely. When industry icons require substantial capital infusions and there is uncertainty in the marketplace, every financially stable insurer needs to be able to protect its producers. Fortunately, since mid-2008, they can.

Topics Carriers