insurer insolvency exclusion
An exclusion found in the majority of insurance agents and brokers
errors and omissions (E&O) liability policies. The exclusion precludes
coverage for claims made against an insured agent/broker because
an insurer with which the agent/broker placed coverage is unable
to pay an otherwise covered claim due to the insurer's insolvency.
While insurance agents are not generally liable for an insurer's
failure to pay a loss resulting from an insurer's financial impairment,
there is certainly the possibility of a customer bringing an action
alleging that the agent/broker was negligent in recommending the
insurer. More favorable versions of this exclusion (for the agent/broker)
"except" (and thus cover) claims against the agent/broker when,
at the time coverage was placed, the insurer had received an A.M.
Best's rating equal to or higher than some specified rating (e.g.,
A– or B+). In addition, some insurers will agree to modify this
exclusion by endorsement to make it inapplicable to the insolvency
of certain specifically listed insurers or to insurers that have
received a Demotech Rating equal to or higher than some specified
rating (e.g., A). It is important to note that these requirements
apply to the rating at the time the policy was placed, which means
that the insured agent/broker should be diligent about checking
ratings every year. The rationale behind these types of exceptions
is that if an insured agent or broker had arranged coverage with
an apparently solvent insurer (as evidenced by an acceptable Best's
or Demotech rating), the insured should not be penalized by forfeiting
coverage.
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PLI XV.E