Volume 24, Number 1

The excess lines market has always been an important element in allowing a broker to obtain insurance to satisfy the needs and requirements of its insured. The types of businesses in which those insureds are engaged, for which the excess lines market has been a necessity, are varied. Yet the excess lines market has always had a strong and particularly close relationship with insureds in the construction industry. During the last few years, the admitted market for construction risks has greatly constricted. As a result, access to coverage in the non-admitted market has become more important than ever and is used with greater frequency.

Excess lines polices, however, may sometimes severely limit coverage for the very risks to which a contractor or subcontractor are exposed. As one New York Court has noted, some of the policies provide “an illusion of coverage.”^[1] That said, it comes as no surprise to brokers that subcontractors intent on winning a job are often more concerned with obtaining a liability policy, any policy, than the coverages provided by the policy. Of course, all that changes when the insured receives a disclaimer from the liability insurer for defense and indemnification for a construction-related personal injury claim based on the limitations and exclusions contained in that excess lines policy. An errors and omissions claim might arise and bring with it compliance with the state’s excess lines statute. Accordingly, in this issue of The E&O Report, we will review some items New York insurance agents and brokers should keep in mind when obtaining an excess lines policy.

In order to procure coverage from the excess lines market the producing broker must use the services of a duly licensed excess lines broker.^[2] The broker’s duties are governed by New York Insurance Law §2118 and the regulations promulgated thereunder.^[3] Basically, the statutes and regulations can be summarized as requiring the excess lines broker “to use due care in selecting the unauthorized insurer from whom policies are procured under his license” and complying with the statutes and regulations promulgated thereunder.

Among the excess lines broker’s many responsibilities is that the declarations page or cover note of the policy procured under its license, as well as sworn affidavits stating the insurance requested could not be procured from authorized insurers, are submitted to the Excess Lines Association of New York or ELANY. However, the excess lines broker, who is required to file the affidavits, is excused from procuring them if the producing broker provides the affidavits.^[4] The producing broker’s conduct thus comes under the auspices of the statute and regulations.

In practice, our experience has been that the producing broker first attempts placement in the admitted market, obtains the requisite declinations from admitted insurers, prepares the affidavits and then submits them to the excess lines broker for filing with ELANY. At least this is how it is supposed to be done; failure to follow any step in this procedure is where E&O claims and regulatory problems may arise for both the producing broker and excess lines broker.

Consider the classic scenario. An insured, electrical subcontractor, pursuant to the subcontract, is required to obtain commercial liability insurance before beginning work on a job. A policy is procured in the excess lines market in accordance with the insured’s needs “as expressed at that time,” but there is a failure to comply with the regulations. The insured does not know, or care, that the policy as issued contains a broad “employee exclusion” that will exclude coverage for any claim against it and any additional insured under the policy. The producing broker sends the Certificate of Insurance to the owner and general contractor, the subcontractor begins work and all is right with the world. However, an accident occurs and an “employee exclusion” based disclaimer is issued by the insurer to the owner, general contractor and subcontractor. When the lawsuit is brought against the owner and general contractor, a third-party action is typically commenced against the subcontractor claiming the subcontractor failed to procure coverage in accordance with the construction subcontract. This development, in turn, forces the subcontractor to sue the producing broker for failing to procure coverage, with claims the insured had told its broker it wanted to be “fully covered” and asked for the “best coverage available.” A lawsuit might also be brought against the excess lines broker by both the insured^[5] and producing broker.

As you know from prior issues of The E&O Report and our loss prevention seminars, we will defend this type of claim on the grounds there was no “specific request” for coverage other than what was procured and, based upon New York law, should succeed based upon that defense.^[6] But, then the issue of compliance with the excess lines statutes and regulations come into play.

As to producing brokers, they often believe that (1) the surplus lines broker has all the responsibility with regard to statutory compliance and that, (2) in the event of any failure on the producing broker’s part, the statute merely provides for an administrative remedy, a fine, imposed by the New York Department of Financial Services. This is correct but does not tell the entire story.

There is no private right of action for violating the statute or regulations as to both producing and excess lines brokers^[7] (meaning that an insured cannot sue based on failure to comply with the statutes and regulations). The failure to comply provides the “standard of care” by which the broker’s actions will be measured in a negligence cause of action for failure to procure.^[8] Thus, thinking that non-compliance is a minor or merely administrative matter will not relieve a broker of liability to its insured for non-compliance, regardless of what the Department of Financial Services does or does not do.

Any insurance agency or brokerage that is involved with excess lines placements should be sure to know the requirements and follow all the statutes and regulations that govern such placements. By doing so, the agency or brokerage will help protect itself from a potential violation and fine imposed by the New York Department of Financial Services and limit the potential for an E&O claim or lawsuit being made against it by a customer.

Keidel, Weldon & Cunningham, LLP concentrates its practice in the defense of insurance agents and broker’s errors and omissions claims and litigation, errors and omissions loss control counsel and education, insurance coverage analysis and litigation and insurance regulatory matters. Please direct any comments or questions to James C. Keidel, Esq. by mail to the main office of Keidel, Weldon & Cunningham, LLP, at 925 Westchester Avenue, Suite 400, White Plains, NY 10604, telephone at (914) 948-7000 or e-mail at jkeidel@kwcllp.com. The law firm also maintains offices in Syracuse, New York; New York City, New York; Wilton, Connecticut; Bayonne, New Jersey; Warwick, Rhode Island and Philadelphia, Pennsylvania.

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