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November 2016 -- Considerations Related to Insurance Company Financial Downgrades

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                              November 2016
Volume 28, Number 11

         Considerations Related to Insurance Company Financial Downgrades

Occasionally, the financial strength of an insurance company is downgraded by one or more rating agencies. When this change occurs, insurance agents and brokers often wonder what, if anything, they should do. In this issue of The E&O Report, we discuss some of the issues insurance agents and brokers should consider following an insurer’s financial downgrade.

​​​On a Related Note
Please also feel free to let us know about any issues or topics that you may want us to address in future issues of The E&O Report. Many of the topics we write about in The E&O Report originate from issues agents and brokers bring to our attention through telephone calls and emails. If you have any ideas in this regard, please reach out to Jim Keidel​ and let him know what you have in mind. From our experience, an issue that one New York insurance agent or broker is facing may actually be much larger and affect many other producers across the state.

One issue frequently raised is the duties and responsibilities of New York insurance agents and brokers when there is a change in the financial strength of an admitted insurance company. The concern is over the coverage placed with those admitted carriers.[1] Under New York case law, insurance agents and brokers cannot be found, for the most part, liable for placing property and casualty insurance coverage with carriers authorized to do business in New York then become insolvent. In addition, insurance agents and brokers do not have a legal obligation to continually monitor the financial status of admitted insurers. In New York, there are several guarantee funds that provide protection for insureds when an admitted insurer becomes insolvent. The various state guarantee funds are as follows: 

  • Property/Casualty Insurance Security Fund
  • Public Motor Vehicle Liability Security Fund
  • Life Insurance Guaranty Fund

While these guarantee funds exist in New York, there is no guarantee fund that provides protection for insureds in connection with health insurance.

Agents or brokers are not guarantors of insurers’ solvency or their financial condition, and they are under no obligation to monitor the financial stability of the companies for which they write, especially after coverage has already been placed. Nevertheless, an agent or broker could be liable to a customer if coverage is placed with an insurer that the agent or broker knows or reasonably should know is insolvent or nearly so when the coverage is placed. Thus, if an agent or broker places coverage with an insurer that is designated by one or more of the various rating agencies as not having a high financial rating, the agency or brokerage should confirm this fact with the insured in writing. Posted on the IIABNY website is a sample letter that can be used when this situation arises.

Even without an obligation to monitor the financial condition of insurers and report changes to their insureds, many agencies and brokerages do understandably follow this practice. They do it if for no other reason than to provide a higher level of service to their customers. The relationship can be strengthened if the customer feels the agency or brokerage is watching the financial condition of the insurers with which it has placed the customer’s insurance coverage. Even so, an agency or brokerage should not advise its customers of downgrades in financial ratings of insurers unless this practice follows the two most important principles of errors and omissions loss prevention — consistency and uniformity.

It would be imprudent for an agency or brokerage to advise only some customers of a rating downgrade yet fail to advise all its customers of the downgrade. While under New York law, an agent or broker typically has no continuing duty to advise, guide or direct an insured as to insurance coverage, providing information as to the financial ratings of insurers could create a higher duty on the part of the agency or brokerage. It might be difficult to an agency or brokerage to defend an E&O claim or lawsuit when only some of its customers were advised of the financial instability of an insurer while other customers were not similarly advised. If an agency or brokerage establishes a practice of advising insureds of changes in the financial ratings of its carriers, the practice should be applied uniformly and consistently with all customers regardless of the nature or size of the account.

An agency or brokerage should establish a policy as to when an insurer’s rating becomes a cause for concern. In other words, if an agency or brokerage decides it will only write coverage for those admitted insurers rated, for example, B+ (Very Good) or above on the A.M. Best scale, the agency or brokerage must advise its customers if a company’s rating falls below that rating and subsequently provide the insured with an opportunity to replace coverage with a higher rated company. The notification of insurer downgrades and all subsequent steps taken to keep the customer informed about the insurer’s financial condition should be conducted in writing and maintained in an insured’s file. A sample letter advising customers of a downgrade is also posted on the IIABNY website.

While an insurance agent or broker has no obligation under New York law to monitor the financial ratings of the companies where coverage is placed, there may be practical benefits from a business perspective in providing this service to customers. If an agency or brokerage does monitor and report changes in the financial status of insurers to its customers, we would caution that such a practice should be conducted in a consistent and uniform manner for all customers of the agency or brokerage. The prudent insurance agency or brokerage that follows these steps will provide an increased level of service to its customers. And, at the same time it will help protect itself against a possible E&O claim or lawsuit related to a ratings downgrade.

Submitted by:                     
James C. Keidel, Esq.
Keidel, Weldon & Cunningham, LLP

[1] Please note that the agent or broker's duties noted in this issue of The E&O Report refer to placement with an admitted New York carrier. Specifically, an excess and surplus lines broker who places coverage with an unlicensed foreign insurance carrier has a statutory obligation to continue to monitor the financial status of the carrier and to advise insureds of any adverse change in the carrier's financial status.

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 The law firm also maintains offices in Syracuse, New York; New York City, New York; Wilton, Connecticut; Fair Lawn, New Jersey; Warwick, Rhode Island and Philadelphia, Pennsylvania.
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