Author: VU Faculty

An agent asks, "What is considered 'best practices' for entering into agency agreements with smaller wholesalers who have niche or specialty markets, many of whom are Internet based? Is it considered a good practice to verify that such a brokerage actually has the carrier appointment or program that it is claiming or request verification of the wholesaler's E&O coverage?"

"In addition to reviewing the proposed agreement for unreasonable provisions in the areas of transferring liabilities and defining duties and authorities, what is considered "best practices" for entering into agency agreements with smaller wholesalers who have niche or specialty markets, many of whom are Internet based? Is it considered a good practice to verify that such a brokerage actually has the carrier appointment or program that it is claiming or request verification of the wholesaler's E & O coverage? If there is an article on this in the VU, please direct me."

Well there wasn't a specific article on the VU about this, but there is now. Below are some thoughts from the VU faculty, along with the citation of some related VU articles.

There is no ‘best practice’ other than due diligence to establish they are who they say and have the power they claim.

It is an excellent practice to take these extra steps. I have seen many E&O claims result because the agent did not complete adequate due diligence on their broker. Also check to make sure they are properly licensed in your state and that they not only represent the carrier but that they have binding authority with the carrier.

As a certified auditor for IIABA's errors and omissions program with Westport, one of the first things I look at are the agency's carrier and broker agreements. A recommendation that seems to fit most agencies is that they need to have proof of the broker's (E&S or MGA) E&O coverage. This is usually accomplished by receiving a copy of the current dec page.

It is really interesting that over a period of 5 years, I have found only 1 agency that actually had that practice in place. While it might be a little difficult to verify the company appointment, verifying the E&O coverage should be as simple as asking for proof. If one of these brokers is not forthcoming with a copy of the dec. page it should raise red flags and they would probably end up on my "don't do business with this...." list.

Most agents I have found over the years are way too trusting of people with whom they do business. Make it a business practice to verify the validity of the broker where you decide to place business. Please feel free to contact me if you have any further questions: judinewman@aol.com.

Be wary of brokerage forms you are not familiar with. Check them out with your insurance department for proper licensing or regulatory recognition. Check out the carriers they represent…if they are E&S insurers, they should at least be on your insurance department’s “approved list.” In my state, if you do business with an unapproved carrier and an uncovered loss occurs, the retail agent is PERSONALLY liable. Check out this article:

“13 Caveats in Using E&S Markets”

You should thoroughly check out any markets you do business with for financial stability and regulatory credentials. As you say, make sure the broker or MGA has the contracts it purports to have. Verify the existence and limits of the broker/MGA’s E&O coverage. Carrier stability is critical, so review this two-part article from the VU:

"What You Can Do About Insurer Insolvency"

I would check with your E&O carrier for their advice. They may very well have sample broker review checklists and/or disclaimer letters you can use. You might also consider an E&O procedural audit:

"E&O Procedural Audits" 

"27 E&O Procedural Mistakes"