In 2012 and 2013, Jim Shields and I tried a three week jury trial against a major insurance retail broker, Insurance Alliance, a Marsh McLennan Agency Company. The jury verdict was in excess of $11,000,000. We also successfully tried a two week arbitration of the same case against CRC Insurance Services, a leading worldwide wholesale broker, and our client was awarded in excess of $5.9 million.
In both of these insurance contract lawsuits, our client did not receive the type of insurance coverage from the surplus lines market that it ordered and paid for. Because the insured did not have the correct coverage, a devastating property loss almost threw them into bankruptcy. Throughout the course of both lawsuits, many valuable lessons came to light for insureds who must access the surplus lines market for insurance to protect their valuable assets.
It is Important to Understand the Relationships
Surplus lines insurance companies and agents are not “admitted” or licensed to do business in Texas. Instead, they are “approved” to sell surplus lines insurance in the State of Texas by the Texas Department of Insurance. A insurance retail agent cannot directly deal with surplus lines companies, unless they have a surplus license. Thus, the need for interaction between the retail agent and the surplus lines agent…and the need to know whose license is being used to place the insurance. Understanding who the players are, identifying the contracts between them and the commissions earned are valuable pieces of information should a dispute arise later on about the coverage that was purchased.
The typical process to procure a surplus lines policy involves an insurance retail agent, a wholesale surplus lines broker, the insurer’s broker and the insurer, particularly for a policy placed in the London market. In Texas, the insurance retail agent and all brokers involved in the placement of a policy are called “insurance agents.” For the purposes of this article, I will delineate each person by their role, so you will understand where you or your company stands in the procurement process.
When you as the potential insured request coverage, you will usually contact an insurance retail agent. That agent will locate a wholesale broker/surplus lines broker who has relationships or contracts with the insurer’s broker and the surplus lines insurer. The insurer’s broker will negotiate the insurance coverage, the premium (which is passed back down the line), until the retail agent can present it to the potential insured.
You, as the potential insured, usually have no direct contact with anyone in the chain, except for your insurance retail agent. This becomes important when you requested a particular type of insurance coverage, but you were sold a different policy because of sales pressure further up the chain. Because you have no way of knowing the basis for the decisions made by the parties, there are a number of practical steps you can take to ensure that the correct coverage is issued and that your interests are protected.
Lesson #1 – Define Your Relationship with Your Retail Broker
Make sure that you negotiate and verify the terms of your relationship with your retail broker. There are many details to consider, such as the roles, responsibilities and obligations that the retail agent owes to you, the potential insured.
The insurance retail agent may offer a Broker of Record Letter Agreement. It is in your best interest to have the retail broker contractually bound to specific terms in a written agreement. It provides accountability and predictability, and ensures that your interests are clearly spelled out. There are standard Broker of Record Letter Agreements and Risk Management Agreements that are available. The retail agent typically earns an additional commission to act as a Risk Manager. The point is to make sure that you and your retail broker enter into such an Agreement.
By entering into a Broker of Record Letter Agreement and/or Risk Management Agreement, the relationship and obligations of the insurance retail agent or agency will be more readily established. If a non-procurement or coverage issue arises after the policy issuance date, it is much easier to resolve if the obligations of the insurance retail agent are clearly defined. If litigation arises at a later date, you can seek attorney fees against the insurance retail agent or agency in a breach of contract claim for failing to obtain the insurance coverage ordered by your company.
Lesson #2 – Obtain Copies of All Agreements Between Brokers
All insurance agents involved in the placement of an insurance policy in the State of Texas owe you, the insured, the duty to make a reasonable effort to obtain the insurance coverage requested. They also have the responsibility to timely inform you if they are unable to place the requested insurance. Timely notification of non-coverage allows you time to access different markets or to buy additional insurance to cover any shortage.
Because of these duties, it is also critical for you to know and understand the terms of any agreements between your retail broker/agency, the wholesale broker and the London broker. While you cannot influence or negotiate terms between relationships to which you are not a party, you can ensure that your interests are protected.
Advantages of Obtaining Copies of All Agreements
When you obtain copies of all the agreements between the various agents and brokers, you will be able to determine the names of all persons involved in the process. If the wrong coverage or inadequate coverage was obtained, that information makes it much easier to pursue legal action.
Another advantage is that you will learn exactly how much commission is being earned by each insurance agent involved in the placement of your policy. You will also determine if that insurance agent has agreed to be bound to make “reasonable efforts” to place the insurance coverage requested. The agent or broker should also agree to timely notify the retail agent of any non-procurement issues.
You will also learn if your retail agent/broker has entered into any agreements with the wholesale broker that could be harmful to your interests. If your best interests are not protected at all levels of this process, your company’s assets could potentially be exposed to unintended risk.
Be aware that the wholesale broker will usually rely on a standard agreement that favors their interests. For example, these agreements typically contain an arbitration, indemnity, hold harmless and release provision that releases the wholesale broker from any liability if coverage is inadequate or misplaced. This attempt to avoid potential liability is not acceptable, especially when the wholesale broker stands to earn a sizable commission, and that broker is the expert in the surplus lines market and has the relationships to that market.
What do you do if they refuse to disclose these agreements? Remember, you are the customer and the one with the checkbook to pay for the policy (and the commissions that will be earned). Hiring an experienced attorney to represent you in this process is ideal.
Lesson #3 – What to Do if They Refuse to Disclose Their Broker Agreements
If the insurance retail agent or wholesale brokers refuse to give you copies of the broker agreements, claiming confidentiality, then you have two choices. You can either use a different retail agent or have your current retail agent and the wholesale brokers agree in writing to the following:
The agreement between the retail agent and the wholesale broker,
or between the wholesale broker and the London broker,
is not binding or enforceable against __________ (name of your company),
This or similar language (please consult your attorney) will protect your company’s interests if the requested insurance coverage was not obtained, or the amount of insurance was inadequate. In either situation, you would have a potential breach of contract claim against the insurance retail agent/agency, as well as a potential negligence claim against the wholesale brokers involved in the placement of the company’s policy.
As the insured, you cannot blindly rely on insurance retail agents to protect your interests. It is much wiser to be proactive at the beginning of the procurement process to avoid pitfalls later down the road. By insisting on a written agreement with your insurance retail agent, your relationship will be clearly defined and the duties and responsibilities delineated. Obtaining copies of all agreements between the various parties involved in the procurement process ensures that your interests are protected.
Being an active participant in the process is well worth the effort if it is later determined that the wrong type of coverage was purchased. Our clients learned that lesson the hard way, but hopefully the information we gleaned from the resulting litigation will help you avoid being in the same situation.
When litigation embroils your company or business, contact Shields Legal Group to learn more about how we may help you navigate those waters. Please visit ShieldsLegalGroup for more information.
Please note: This article is for general information purposes only and should not be considered legal advice. You should not act on any information contained in this article without first seeking advice from your legal counsel.