Volume 26, Number 2
Some Thoughts on Insurance Company Ratings
During the past few months, we have been contacted by a large number of New York insurance agents and brokers with various questions related to insurance company ratings and other issues that may arise when a downgrade occurs. Those questions have included such topics as to what, if any, are the duties of the agent/broker to notify an insured when a change in a company rating occurs and what best practices should an agency or brokerage follow when a change in the insurer’s rating takes place. In this issue of The E&O Report, we offer some guidance on insurance company ratings and what an agency or brokerage should do if an insurer that it deals with is downgraded.
There are several companies that provide ratings for insurance companies, but A.M. Best is the most popular of the companies that rates the financial stability of insurance companies. A.M. Best analyzes the data concerning insurance companies; then based upon an analysis of their financials, A.M. Best issues ratings indicating the financial strength of the insurer. A.M. Best’s financial strength ratings indicate the insurance company’s ability to meet its obligations to its insureds. The ratings scale includes six “secure” ratings – A++ and A+ (Superior); A and A- (Excellent); and B++ and B+ (Good). The scale also includes 10 ratings for companies it views as “vulnerable.” Those 10 ratings are as follows: B and B- (Fair); C++ and C+ (Marginal); C and C- (Weak); D (Poor); E (Under Regulatory Supervision); F (In Liquidation); and S (Rating Suspended). In addition to the companies that it rates, there are many companies A.M. Best follows but does not issue a credit rating. Those companies are designated by A.M. Best as NR – Not Rated.
As we have discussed over the years, both during our seminars and in past issues of The E&O Report, there is no duty or obligation under New York law for a retail insurance agency or brokerage to monitor the financial rating of an insurer that it has placed customers. Although no legal obligation exists, there are some best practices for agencies and brokerages to follow if it learns of a change in a company rating. It is our recommendation that an agency or brokerage that learns of an insurer rating downgrade should inform the customer of the rating change. Doing so will help customers understand the strength of the company that insures them and allow customers to make an informed decision as to whether to remain with that company or instead seek possible alternatives. Informing the customer of a change in the carrier rating will also help protect the agency or brokerage from an errors and omissions claim or lawsuit that is based on a rating change. We recommend an agency or brokerage learning of an insurer downgrade send a letter to any of its insureds who have polices with the insurer at issue stating something to the effect of the following:
(Sample Insurance Company Rating Downgrade Letter)
Insured’s Name and address
Re: Financial Condition of (Fill in the name of the insurer)
Policy Number (Fill in the policy number)
As you are aware, you are currently insured with ________ (fill in the name of the insurance company). At the time when your insurance policy was obtained, the insurance company had a rating of __ with A.M. Best, which is a company that rates the financial strength of insurance companies. We are writing to you at this time to inform you that the A.M. Best rating of this insurance company has now been changed to __. If you would like to have us explore other possible insurance coverage, or if you have any questions concerning this change in the A.M. Best rating, please feel free to contact us.
Very Truly Yours,
(The name of the of the agency or brokerage)
Besides helping to protect both the insured and the agency or brokerage, notifying an insured of an insurer downgrade is also important due to the insolvency provision that is contained in many E&O policies. The typical insurer insolvency endorsement provides that in the event of the insolvency of a non-admitted insurer, the E&O policy will not provide coverage to the agency or brokerage for a claim or lawsuit if at the time of the placement of the subject insurance coverage for the customer the insurer had an A.M. Best rating lower than B+. In interpreting this type of endorsement, E&O carriers have taken the position that the time of the “placement” means both the time the initial policy was procured and also the time when any renewals occur. This stipulation is something an agency or brokerage should keep in mind at renewal time for customers who have an insurer that has an A.M. Best rating that has been reduced during the policy period to a rating below B+. In such a situation, an alternative should be explored at renewal time to determine if insurers with a higher A.M. Best rating are available to provide the coverage. For admitted carriers, the E&O policy MAY provide coverage for insolvency. Specifically, Westport and Fireman’s Fund, the E&O carriers of IAAC Inc. (IIABNY’s membership services division), do not have an exclusion for admitted carriers backed by a state Guaranty Fund and therefore provide coverage, subject to the terms and conditions of the E&O policy. If you are insured with another E&O carrier, check the insolvency exclusion and contact IAAC if you have any questions.
While there is no legal obligation to do so in New York, the best practice for the prudent insurance agency or brokerage to follow is to keep apprised of the ratings of the insurance companies that it conducts business. By doing so, the agency or brokerage will not only help protect itself against potential E&O claims or lawsuits, but it will also help protect customers and keep them better informed of the status of the insurance company providing coverage.
James C. Keidel, Esq.
Keidel, Weldon & Cunnningham, LLP