insurer insolvency exclusion

An insurance insolvency exclusion is found in the majority of insurance agents and brokers errors and omissions (E&O) liability policies.

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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.