This is the hardest market since 1987-1988 and that was a casualty hard market. I do not have any idea when such a hard property market existed in history.
Hard markets are always caused by a shortage of surplus. Hard markets are not caused by one or two years of poor loss ratios. In 2023, insurance companies made record profits. Lack of profits is not the problem, no matter what your carrier is telling you, unless your carrier is especially incompetent.
When companies run short of surplus, agents’ E&O exposures increase for many reasons. An obvious reason is agents must do so much more work with the same staff. Increasing workloads materially naturally increases error rates.
And hard markets are a tough time to hire and train new people, which are tough to find anyway. Agents might then be hiring slightly less qualified people and training them in a tough environment, which is going to increase error rates too.
The additional exposure is also increased when the agency tries to save their clients money. When switching carriers, a careful coverage comparison is required. If any coverages are reduced or eliminated, the agency needs to advise the client correctly and preferably in writing. Then give them the choice rather than making the choice for them as to which policy they prefer. Failure to take these extra steps increases E&O exposures significantly.
This exposure is especially large if the agency moves a client to surplus lines. Even if surplus lines is absolutely the only solution, if coverages are reduced or lost, the agency must explain the lost coverages. Then, in surplus lines, the agency must advise the client of the extra risks relative to surplus lines such as the lack of a guaranty fund and options to reduce coverages without notice.
Exacerbating the situation further, some carriers are greatly increasing deductibles. It seems reasonable that if they take away coverage, rates should decrease but that is not happening. This causes more frustration resulting in clients doing more shopping. This means more work at renewal to keep clients. After all, what happens when a client’s deductible is significantly increased and the agency does not offer better options or at least a good explanation?
The size of these deductible increases creates an ethical issue too. I believe agents owe, on an ethical level and not just an E&O prevention level, an explanation of the trade-offs between roof deductibles, for example, and affordability. Some of these deductibles are now so high that financially, it’s a toss-up as to whether insurance is worth the price. This is especially the case where roof coverage is limited to actual cash value, a de facto huge deductible.
These coverage reductions, including sky high deductibles, has reversed 75 years of coverage progress. Agents used to have a find a property market and then marry that coverage to a separate liability market, even in homeowners. They earned 20%-25% more commission too. At 12%-15% commission, agents are going to have to do the same thing. Difference-in-Conditions (DIC) policies will be required. Whether it is wind/hail coverage as one policy and a property policy that provides normal coverage, other than wind/hail, or maybe wildfire coverage (which has existed for decades in California), agents combining different property coverages is the inevitable solution. Regular carriers have announced plenty loudly that they are giving up on insuring natural catastrophes.
Combining different forms creates complexity, and complexity leads to E&O exposures. And combining the different forms at lower commission ratios creates additional pressure. Pressure correlates to mistakes.
Returning to the subject of guaranty funds, I suggest agents become familiar with their state’s guaranty fund limitations. Most states’ guaranty funds have severe limitations. To qualify for coverage from the fund, clients must meet specific requirements, usually size requirements. These requirements have not been updated in decades so many more clients will be excluded today from guaranty fund coverage than 20 years ago. When clients are placed with carriers that go insolvent (insolvencies are correlated with hard markets) and they do not get the claims paid, they often have no choice but to sue their agents and hope they get money. If they are excluded from coverage because they’re too big, or if the guaranty fund is too underfunded, or simply if they take too long (five years to make a payment is not unusual in my experience), they may have a reason to sue because the agency failed to do adequate due diligence on their client’s carrier and/or failed to explain that while the agency placed the client with an admitted market, it might as well have been surplus lines from the guaranty fund angle because the client was too large to qualify for guaranty fund payments.
This is especially true as more and more accounts are placed in surplus lines and exotic markets. Agents will need to do thorough due diligence on these markets. I encourage readers to research some of the articles in Forbes online and the Insurance Journal regarding insurance frauds, real and/or possible in the eyes of some, that have caused significant problems and lawsuits over the last three years.
Hard markets create E&O exposures for all these reasons and possibly one more reason: Carriers tend to not pay claims as easily or at least initially rejecting otherwise legitimate claims. I am definitely hearing this is the case from just about 100% of all the agents with whom I’ve spoken on this subject. Friction like this causes insureds to get angry and sue.
Take care and remember that one of the best ways to avoid many of these situations is to place business with the most financially solid carriers, carriers truly looking to grow. Take steps to improve your procedures and verify your employees are following those procedures. Be sure to provide clear caveats and disclaimers to your clients. And check those policies!
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.
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