2021 May PIA Vermont by PIA Northeast

May 2021• Vermont

PAGE 20

MARKET CHANGES ripple through the insurance industry

Agents and wholesalers need to work together

E&S MARKETS 9

E&S is not the Wild West

Selling in a hardening market

Effects of COVID-19 on E&S

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DEPARTMENTS 4 May 2021 • Vermont

In brief

9 Legal 15 Sales 29 E&O 31

Ask PIA

Readers’ service and advertising index

COVER STORY 20 Market changes ripple through the insurance industry Agents and wholesalers need to work together

FEATURE 27 A slight course correction The effects of COVID-19 on an essential marketplace

Statements of fact and opinion in PIA magazine are the responsibility of the authors alone and do not imply an opinion on the part of the officers or the members of the Professional Insurance Agents. Participation in PIA events, activities, and/or publications is available on a nondiscriminatory basis and does not reflect PIA endorsement of the products and/or services. President and CEO Jeff Parmenter, CPCU, ARM; Executive Director Kelly K. Norris, CAE; Communications Director Katherine Morra; Senior Magazine Designer Sue Jacobsen; Editor-In-Chief Jaye Czupryna; Advertising Sales Executive Susan Heath; Communications Department contributors: Athena Cancio, Alexandra Chouinard, Patricia Corlett, Darel Cramer, Roberta Lawrence, Zack Littrell, Crystal Ringler and Calley Rupp. Postmaster: Send address changes to: Professional Insurance Agents magazine, 25 Chamberlain St., Glenmont, NY 12077-0997. “Professional Insurance Agents” is published monthly by PIA Management Services Inc., except for a combined July/August issue. Subscription rate for members is $13 per year, which is included in the dues; subscription rate for nonmembers is $25 per year. Professional Insurance Agents, 25 Chamberlain St., P.O. Box 997, Glenmont, NY 12077-0997; (518) 434-3111 or toll-free (800) 424-4244; email pia@pia.org; World Wide Web address: pia.org. Periodical postage paid at Glenmont, N.Y., and additional mailing offices. ©2021 Professional Insurance Agents. All rights reserved. No material within this publication may be reproduced—in whole or in part—without the express written consent of the publisher.

COVER DESIGN Roberta Lawrence

IN BRIEF

FIVE MINUTES WITH …

Guidance from a wholesaler What do wholesalers look for when partnering with an agent? Personally, I look for the relationship. The retail brokers need to feel comfortable communicating what they have and what they need to the E&S brokers.

Rich Martino of Risk Placement Services is the president of the New England Surplus Lines Association. PIA Magazine asked him some questions about the state of the wholesaler market and working with agents. How has COVID-19 affected the E&S marketplace? At the beginning of the COVID-19 pandemic, carriers stopped writing business income coverage because they didn’t know how the pandemic would affect those types of claims. Many carriers already were starting to pull back writing hotels and motels prior to the COVID-19 outbreak due to poor loss experience, but the pandemic made many carriers stop writing the class all together.

Rich Martino Executive Vice President, Branch Manager Risk Placement Services Hopedale, Mass.

Luckily, even with the effects of COVID-19, we did still experience growth as overall rates were increasing prior to the pandemic, and continued to do so throughout. What are the other issues/trends that are affecting the E&S market today? The biggest trend in the marketplace is consolidation, both on the retail broker side and E&S side. We are seeing many independent E&S brokers merging with national brokers—leaving fewer competitors. Due to this consolidation, many of us have the same markets and products, so we have to show brokers what sets us apart. A perfect example of this is that we can use our clout to get better terms and pricing on accounts. E&S brokers have to make sure that we are constantly looking for new retailers, so that we can establish a relationship with them. Where do you see the marketplace heading? I believe that the E&S market is constantly evolving when it comes to technology. The future of the E&S marketplace is online. More retail brokers are looking to get that instant quote and the ability to bind. Gone are the days when the retail broker submits an application and waits days to get the quote. As E&S brokers, it is important to make sure that we have the tools, such as online quoting, that retail brokers want. We are adding new products to our online portal constantly to stay ahead of our competition.

The success of a relationship is the ability to teach. Many brokers are generalists and may not have expertise in a certain risk. It is important for E&S brokers to help them understand our policy terms and not just present them.

The brokers that do the most business with us are the ones that look beyond price. They want the best coverage for the best price, and not just the lowest price. Building that relationship helps both the E&S broker and the retail broker understand that we are in this business together. What are wholesalers concerned about when they work with a retail agent? Over the years, I have found that most retailers are honest, reputable and do what is best for their insureds. If I had to choose something to be concerned about, it would be that we are one more step removed from the insured. We have to have faith that the insured is telling the retail broker the true story of the account. Even with that, many retailers are great in getting that information, whether it is from the insured or doing research on their own. I think this comes from the improved education that the retail brokers are getting from the E&S brokers and the insurance industry. Final thoughts? I believe that the retail broker is one of the biggest tools the insured can use when it comes to insurance. The agent can find the insured the best coverage for the best price that can’t be replicated online. Insureds can’t be educated online like they can be with an independent agent. I believe that the independent agent will continue to be an important part of the insurance process in the years to come. Automation will have a key part in that process, but it will be in conjunction with the retail agent.

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BY THE NUMBERS

Excess & surplus lines

Nine bizarre coverages you may not know exist When you think of the excess- and surplus-lines market, your mind might go to amusements parks, county fairs, or music festivals. But, here are some off-the-wall coverages that may surprise you:

LEGS

TEETH

HANDS

Heidi Klum—known for strutting the Victoria’s Secret runway—insured her legs for

Aquafresh sponsors actress America Ferrera—and insured her teeth for

Commonly, surgeons insure their hands. But, so did 13-year-old Harvey Lowe—a Yo-Yo champion. Lowe's sponsor insured his hands for

$10 MILLION.

$2.2 MILLION.

Her left leg is worth less than her right leg because she has a tiny scar.

$150,000.

VOCAL CHORDS

HOLES-IN-ONE

A nasty case of laryngitis can ruin a singer’s career. Mariah Carey insured her five-octave voice for

It’s rare that a golfer will score a hole-in-one.

TOURNAMENTS OFFER BIG PRIZES for such feats. Contest owners are insured for that.

$35 MILLION.

ALIEN ABDUCTION Did you know that

OVER 200,000 PEOPLE

in the U.S. alone pay premiums for insurance against alien abductions?

FREE TACOS

HAIR

TASTE BUDS

Taco Bell promised a free taco to every U.S. citizen if a piece of

Australian cricket player Merv Hughes took out a

Food critics and restaurateurs play a huge role in the success of the restaurant industry. Famous food critic Egon Ronay insured his taste buds for a massive

MIR SPACE STATION HIT A TARGET when it returned to Earth. Without its E&S policy to cover that promise, Taco Bell would have risked bankruptcy.

$370,000

policy on his unique mustache— which makes him one of the most recognized cricket players in the world.

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$400,000.

NEWS TO USE

Placing business with wholesalers An agent will place a client’s policy in the excess-andsurplus market for a variety of reasons, which include: • an exposure of high limits is unacceptable to the retail producer’s regular markets; • the risk is too new or too specialized to be fully understood and priced by the regular markets; • the only avenue to access an exclusive program for a particular client base is through a wholesale broker; • coverage from a wholesale broker may be obtained from a market that imposes no volume requirements; • a wholesale broker is the only means to place a policy when the retail broker is not a licensed E&S broker; • a wholesale broker has the expertise that a retail broker lacks, or is unable to maintain; or • the markets are hardening. The reasons may vary, but the process to place the business in the E&S marketplace is similar in each state. Develop solid relationships with several brokers to match the risks types you write, and to get market depth. Avoid an overlap in services between brokers. Letters of agreement. Generally, a mutual understanding about the way you will conduct business will be outlined in a letter of agreement. However, in addition to establishing the criteria for a complete application submission, you need to resolve some things ahead of time. You will want to know: • if you have authority to issue certificates of insurance; • what is needed to bind coverage; • if payment made to the wholesale broker is deemed payment to the insurer. (In other words, who is responsible for premium that does not get paid by the wholesale broker?); • the expected response time for quoting the risk and/ or receiving an indication of the wholesale broker’s interest in the risk; and • the proper procedures for reporting claims. Additionally you will need the following: • evidence that the broker is licensed properly; • a certificate of insurance issued by the wholesale broker’s errors-and-omissions insurer; and • assurance that you will be advised clearly if coverage offered is not consistent with coverage requested. 6

Insurers that are not licensed in your state write policies in this market. This transaction type is regulated, and you must be familiar with the rules and stay in compliance. Licensing. To transact insurance with an unauthorized insurer, a producer who is licensed with E&S authority must be involved. Consequently, either you or the wholesale broker must have an E&S license in the insured’s home state. Home state has a specific definition. Do not assume the broker is licensed in state—get verification. White list. State regulators keep a list of insurers that have met the qualifying financial standards established for unauthorized insurers. You must verify that the wholesale broker is placing a policy with an insurer on this list. Export list. States require insurance for risks placed with unauthorized insurers generally to be unavailable in the authorized market. A list of risks that are deemed to be hard to place with an authorized insurer is maintained by state regulators. You must check if the risk is on this list. If not, you are obligated to obtain declinations from authorized insurers that your client’s risk is unavailable. Disclosure. Insurance placed with unauthorized insurers generally is not eligible for consumer protection with state guaranty funds if the insurer becomes insolvent. Your clients need to know about the absence of this protection. Tax collection. You need to collect the E&S tax (as well as stamping fees or other applicable fees) and pass them on to the E&S broker, who must make appropriate filings with the home state. Federal law prohibits any state other than the home state of the insured from requiring any premium tax payment for E&S insurance. Policy forms. Rates and forms in the E&S market are not filed with the state regulator. Consequently, the forms and endorsements can deviate from the standard forms. Changing a few words in a form can impact the coverage, so examine these policies carefully. Policy termination. E&S insurers are not subject to cancellation and nonrenewal laws in some states. Consequently, the terms for canceling and nonrenewing the policy must be found in the policy itself. Renewals. Policies do not renew in the E&S market, so you need to keep track of all expirations and follow up with a new application submission (if required). This article is adapted from QS90689, which can be found in the PIA QuickSource library (pia.org).

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E&S is not the Wild West Many independent insurance agents likely view the excess-and-surplus lines market of the insurance industry as some cross between the Wild West and Mary Poppins’ carpetbag. They think it is a place where policies exist that, if they were in Vegas, may be mistaken for gambling. Unlike standard insurers, these carriers and the policies escape the strict regulations of the admitted market, so they can have the flexibility to offer any policy an insured may be willing to purchase. However, that lack of strict oversight has a tradeoff. Insurance producers must take certain steps to guarantee a customer does not give up protections in the admitted market unless necessary to obtain insurance coverage. Depending on the type of policy and the state laws, policyholders may give up the guarantee of advanced notice of nonrenewals and other legal protections nobody

considers until they actually have a problem.

LEGAL

CLARE IRVINE, ESQ. Government affairs counsel, PIA Northeast

These protections also exist because E&S was effectively the Wild West of insurance. Strict laws and regulations may have applied to admitted markets, but E&S had freedom to devise policies to cover any risk conceived. Yet, just as the Wild West has faded into the past and largely been replaced by fast growing cities and suburbia, the E&S

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market has become far more stable—even if it is still less regulated than the admitted market. The increased stability has changed the risk calculations for policyholders substantively. Now, the bigger issue is under what conditions a carrier can choose not to renew a policy, rather than the long-term stability of the carrier. Even with the current economic situation, the stability of E&S carriers along with the rest of the market shows that the risks for policyholders have decreased. Yet in some states, the hurdles to place a policy in the E&S market date back to the days of the Wild West, and they no longer reflect the realities of the industry.

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Insurance has become an essential product in American life, from auto insurance to renters insurance to travel insurance and, of course, health insurance. People know they should buy insurance, yet the complexities may escape them—and the number of catchy television advertisements marketing the policies does not help them either. To protect consumers, states highly regulate the insurance policies most people need. However, states cannot regulate every policy, and insurers do not have broad ratings for every risk. E&S insurance escapes this scrutiny for numerous reasons. Broadly, these policies cover risks complex enough for people with resources to assess policies beyond what an animal on TV says. These are distinct business or high-value properties for which the purchaser of insurance presumably would have the ability to review the policy. A similar rule applies in securities law—only sophisticated investors can invest large sums of money into privately held companies. Unlike publicly traded companies, private companies have minimal financial reporting requirements and significantly less oversight. These laws make it difficult for people with median incomes and no substantial savings to risk their money on investments that lack government and public oversight. The laws have been adapted with time and they have their own flaws, but the general principle is to discourage people from effectively gambling their financial futures. While these rules may have a purpose in the world of investing, insurance has changed drastically over the last several decades. E&S

116889

E&S grows up

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may have once been an unregulated area that sometimes veered into the gambling territory, but that has not been true for several decades. In 1988, the Excess Line Association of New York was founded by New York state to “act as a facilitator between the brokers and the regulators.”1 The founding of ELANY helped give oversight over the E&S market while keeping it a step removed from the state insurance department. ELANY has the authority to monitor the marketplace, educate the various participants, and lobby on behalf of the E&S industry. Other states have similar E&S associations that oversee the marketplace for insurance departments without being regulators.2 These bodies do not regulate the E&S market near the levels insurance departments regulate the admitted market yet, they have a stabilizing influence. They bring order to the nonadmitted market, help hold carriers accountable, and make it easier for retail brokers to understand the policy options for their clients.

These losses almost destroyed Lloyd’s of London. Yet, the society had come under more regulation from the British government, and it was forced to put measures in place to protect itself. Actuaries and lawyers sorted out the mess, which took over a decade to resolve. Such changes added restrictions to policies (e.g., U.S. general liability policies, which have limited exposure to the ongoing pandemic among other catastrophes). It also made governments pay more attention, particularly in the United Kingdom where so many people lost what they had considered safe investments. American E&S insurance faced a similar reckoning during the 2008 recession. Dodd-Frank created the Federal Insurance Office and effectively put states on notice that they needed to rethink aspects of the insurance market. States

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London (almost) fell Casually talk about E&S insurance, and someone will reference the London Syndicate. While it may sound like something out of a James Bond film, it is just industry jargon for the E&S policies that go through Lloyd’s of London—a system that is several hundred years old. For many British investors, becoming a member of Lloyd’s was an essential step to joining the upper class.3 This caused extensive losses when the insurers backed by these investments found themselves facing massive claims in the early 1990s. The exposure for asbestos particularly was destructive for the members of the syndicate.

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took the opportunity to re-evaluate the laws governing areas of the industry, particularly E&S markets, while making other changes to reflect a changed economy with insurance an important component of the financial services of the country. New York state went so far as to merge the banking and insurance departments into the Department of Financial Services—New Jersey made a similar decision in the mid-1990s when it created the Department of Banking and Insurance.

Stability and modernization Modernizing the oversight of the E&S market as carriers become more stable has hardly carried over to the actual process of placing policies in the marketplace. The requirement that stands is the diligent-effort requirement, in which retail brokers need to obtain three declinations of coverage for a policy in the admitted market before they can place the risk in the E&S market (if the risk is not on the state export list). Some states, such as New York, still require these declinations in an affidavit signed presumably by the person at the insurance carrier who declines to offer a policy. The problem with this practice is that few people quote policies in the admitted market through actual people anymore. Web portals allow producers to assess whether a policy exists. It would be difficult to argue this system greatly harms customers. Producers can quickly pull up quotes from numerous carriers and greatly expedite the process of buying insurance. Similarly, they can learn that coverage does not exist for a risk and that they must call a wholesale broker with similar speed. Even if producers know coverage does not exist for a risk, they still can confirm it before going to a wholesaler. The declination requirements complicate the entire process and adds unnecessary delays. A consistent legislative priority for PIA Northeast and other associations—especially on the E&S side of the industry—is to overhaul these requirements to better reflect how producers place insurance. Right now, there is little incentive for retail brokers to split commissions with a whole-

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saler when they move a risk into the E&S market, and the delays make it harder to obtain insurance. It also increases the risks to consumers when the professionals need to spend so much time on outdated paperwork rather than finding them the best insurance policy.

Conclusion The west may have once been wild, but it now includes some of the fastest growing cities where California-based technology companies test their new gadgets. Once upon a time, people risked their lives traveling in covered wagons west of the Mississippi River—now they hop on a plane in the morning and get there with time for a round of golf, barring the ongoing travel precautions. The E&S marketplace has stabilized greatly to the benefit of policyholders. Even if some of the unique risks may teeter toward gambling territory, modern gambling is highly regulated. Now is the time to re-evaluate and modernize the process of placing these policies to reflect the reality of today’s insurance industry. Irvine is PIA Northeast’s government affairs counsel. 1

ELANY (elany.org/about-us)

New Hampshire, a state that does not mandate automobile insurance, has such an association but not Connecticut, the insurance capital of the world.

Many Lloyd’s Investors Facing Loss of Fortunes, The New York Times, 1993 (nyti.ms/2OWIwYx)

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Best practices to selling in a hardening market The insurance industry is comprised of cycles. Hard-market cycles happen to course correct when rates are inadequate, when there are recessions and economic turnarounds, or when unforeseen events occur, such as the COVID-19 pandemic. However, even though the hardening of the market is happening at a financially inconvenient time, it doesn’t mean that independent agents and their clients won’t overcome these burdens. Now is the time that to show your clients how much you really care about their wellbeing and their insurance protection. Instead of trying to sell your clients insurance, talk less and listen more. During the last hard-market cycle, I knew an agency owner who was working on a renewal for a business owner with 30 employees. During the discussion, the business owner began to cry over the premium increase of his policy. While the business owner had a budget that

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would help him continue to run his business, it didn’t factor in such an increase in his insurance premium, and he needed the insurance to keep his business up and running. As they talked, the agent and the business owner found a solution to reduce the insurance premium, so the business could continue to stay open. While that was not ideal, it was necessary. Of course, insureds always need to sign off on any reduction in coverage.

SALES

EMILY HULING, CIC, CMC, CSP President, Selling Strategies

You may insure businesses that have to buy less coverage now, so they are still in business later. As in the example earlier in this article, it’s important to work with these clients by offering sound advice and options. Don’t forget to schedule a talk when everything settles down and they can afford to re-examine their insurance coverages.

tion will help you demonstrate your value, which will make it harder for your clients to switch to online or direct writers.

Sales techniques during a hard market

For those clients who do leave your agency, give them a call (they can ignore an email) 60 days after the effective date to see if they still are happy with their choice.

Right now, the conversation can’t be your agenda—it must be about your clients’ best interests. Your main goal should be how you can help your clients with what’s going on in their lives and businesses. In addition to talking less and listening more, agents need to be more tactical and institute a “no surprise” policy at their agencies. Rather than just sending out the renewals with the increased premiums, make sure you build trust with your clients by preparing them for the increases. Be proactive. Let your clients know what’s going on with their insurance carriers and pricing. Reach out before the renewals are sent, so your clients are aware of the changes before they receive the actual increases. During a hardening market, you need to take it one step further. When everything is status quo, everyone wants to communicate electronically, or by clicking a button—no one wants to be a bother—so if you are out of practice with your phone conversations, it is time for a refresher. It is a good idea to make phone calls to your clients before the renewal notices are distributed. Remember, the person who initiates the phone call is the person who frames the content and tone of the conversation. Being proactive strengthens trust and improves client retention. Pay close attention to your companies. If you move your client to a different carrier, be aware of the differences between the current and new policies. Alert your clients to changes in carriers, payment terms, and of course, coverage differences. An effective way to stay on top of carrier changes is to assign licensed agents to be company resource experts. That way, they can act as the go-to resources for everyone in your agency for specific carriers. On a shared drive, create folders in which company information (policy form changes, billing changes, underwriting memos) can be updated by the resource person and accessed by all. Make carrier updates an agenda item for staff meetings. This is especially important now that most of us are working remotely. Unfortunately, conversations are no longer spontaneous or overheard in the office anymore to pick up important information.

Looking beyond price Price is only one component of cost. Level of trust, sound advice, prompt response, personal relationship, and being local and an active member of the community all factor into an insurance buyer’s decision. Educate your clients about why the price has gone up, not just that it is going to increase. Explain what’s happening in the marketplace. Communicate your value as an independent agent and the ability to place their insurance with the best company to suit their needs. Proactive communication and educa-

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For those clients who do leave your agency, give them a call (they can ignore an email) 60 days after the effective date to see if they still are happy with their choice. By then, they will have their new policy and bill. Ask them if it’s what they expected. Are the deductibles, coverages, price, and service what they thought they would be? Offer to review the new policy with them to see how it compares to the one they had with your agency. There is a good chance they will see the difference. Remember: Insureds rarely, if ever, will contact you to say they’ve made a mistake. Regain lost business by reaching out to them.

Sales opportunities While the COVID-19 pandemic has left many people struggling, don’t assume that all of your clients are unable to pay their insurance premiums. Some of your retired personal-lines clients don’t have mortgages and other monthly

payments and they are spending less on dining out and vacations. Instead, many of them have used money and time over the last year completing home improvement projects. Reach out to these clients to make sure their insurance coverages are providing adequate protection for any changes. Conduct account reviews. Account reviews strengthen personal relationships with your clients. They help build and sustain trust. They uncover areas that need better or different coverages. Make account reviews an essential part of your agency’s business plan right now. Review your prospect list. Many business sectors are growing. If you position your agency correctly, it is the perfect time to go after new business. Consider developing a niche in construction, landscaping, cleaning companies, grocery stores, online marketers and recreational vehicles. Develop a solid marketing plan to generate new business.

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There are challenges in every hardening market, but there are opportunities, too. It is essential that you talk with your current clients, keep the lines of communication open, and listen to them. However, it is just as important that you look for new opportunities to help your agency continue to grow. Being proactive and thanking your clients for their business will make a huge difference in your agency’s success. For the past 25 years, Huling has worked with insurance and financial services organizations that are driven to continually improve and with people who want to excel. Her work has helped create top-performing sales, service, and leadership organizations.

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BARBARA SIMPSON-WINSKY, CPCU, AIS, ASLI, ARM, ARE, CRIS Vice President, Property & Casualty Team Leader, Russell Bond

MARKET CHANGES ripple through the insurance industry

Agents and wholesalers need to work together

nce termed the market of last resort, the excess-and-surplus marketplace now is an important insurance segment that represents 16.2% of all property/ casualty business in the U.S.—as of the end of the year 2019. Today, the E&S marketplace is viewed more as a solution finder for independent agents.

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We all know the insurance market moves in cycles—from soft to hard markets. It is when the insurance marketplace begins to harden, like it is now, that the relationships agents have cultivated with their wholesaler partners truly show their value, which in the end will benefit the clients of the agencies and carriers alike. This article will review 10 tips on how independent agents can work with their wholesale partners during the hardening market to achieve the best results. No. 1: Tell the story. Wholesalers are intermediaries and the better they know the story from the agent, the better they will be at finding the right nonadmitted market for your client. Be prepared to answer questions like: How did this risk come to you? Why is this coming to the E&S market? What is the opportunity? The more you can share, especially if the risk had losses, the better the wholesaler will be at finding a viable solution. No. 2: Send a complete submission. E&S stamping offices reported an overall 15% increase in written premium in 2020, what does that mean? The nonadmitted carriers are inundated with submissions, which they prioritize based primarily on four items: 1. How complete the submission is; 2. The agent’s relationship with the wholesaler—the 80/20 rule applies here; 3. What the opportunity is; and 4. If the wholesaler can get to the target premium and coverages. The basic components of a completed submission should include: completed ACORD applications; supplemental applications; currently valued loss runs and a detailed email outlining the opportunity and timelines. Incomplete submissions get the acronym GIGO—Garbage In, Garbage Out. The days of getting submissions on a cocktail napkin are gone. No. 3: Understand the exposures. Many carriers apply a “class limitation” form to commercial general liability policies or other restricting forms limiting coverages. It is vital that the wholesaler understands current operations, any discontinued operations and the future growth plans. Wholesalers ask questions to clarify and understand exposures. Agents need to help them to provide the most comprehensive proposal for a client without major gaps in coverage. Great tools can include: websites, YELP reviews and Google Earth pictures of the building. No. 4: Know the timeline. On one hand, wholesalers want independent agents to make sure one of their direct admitted carriers is not interested in writing the risk before the wholesalers spend too much time on an application. On the other hand, everything cannot be marked as soon as possible. This is especially true if the wholesaler needs to send a complex risk to one of its brokerage markets, which typically requires ample time to secure a quote. However, some of the best opportunities come to wholesalers when agents have exhausted all their other options with their carriers and they need a quick turnaround. In this scenario, call the wholesaler and explain the situation. If it is a short fuse, it will not behoove the agent to send it to multiple wholesalers. No one wants to practice quoting. Respect the wholesaler’s time and be clear and upfront about the timeline.

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No. 5: Set a realistic target premium. Once again, Willis Tower Watson’s rate prediction forecast is a double-digit rate increase for the p/c industry in 2021. Understand that when an admitted market, with all the bells and whistles, comes in with a 10% rate increase, most likely a wholesaler will not be able to compete with their nonadmitted markets. Agents should offer wholesalers suggestions for target premiums, which should keep in line with the clients’ expectations. This should help agents and wholesalers avoid declining policies later because the desired premium could not be achieved. No. 6: Know the coverage options. Selling a competitive quote is important, but securing proper coverage is key, which includes offering a menu of options to the client. Ask for coverage options and work with the wholesaler for cross-selling opportunities. By offering and providing insight to the clients on these additional coverages, the agent can act as their trustworthy adviser, and stand out over the competition. No. 7: Perform a form review. It is a common practice for nonadmitted carriers to deviate from the standard Insurance Service Office forms, and use their own forms instead. It is always a good practice to ask if forms: 1. are excluding or limiting coverage; 2. are giving conditional coverage, warranting action from the client to have coverage; or 3. are providing additional coverage, but on a limited basis. Examples of this could include: cyberliability or miscellaneous professional liability included

on the general liability policy. These forms may be more limited in coverage than a stand-alone policy. Additionally, ask your wholesalers what their experience has been with that nonadmitted carrier with their handling of claims. No. 8: Allow time for remarketing renewals. Many in the E&S market still are seeing double-digit rate increases with many of their markets on both new and renewal policies. Many of the nonadmitted carriers are getting out of classes or taking major pricing increases to improve their profitability margins. This can lead to either a nonrenewal or a huge rate change at renewal, in addition to more restrictive forms. Help your wholesalers help you. Talk to your clients well in advance of the expiration date and find out what their projected exposures will be along with any material changes in operations. The more time your wholesalers have to do their due diligence and remarket the risk (if necessary), the better they are able to obtain the best renewal quote for your client. No. 9: Understand common E&S terminology/concepts. Here are the top three: 1. Minimum Earned Premium. Most policies are 25% MEP at time of binding meaning that even if the named insured cancels a month later, the carrier will be charging 25% of the annual premium (three months of premium) plus taxes and fees. It is essential to make sure you have the down payment for the MEP and taxes and fees when you tell your wholesaler to bind coverage so that your agency is not on the hook if your client does not pay.

2. Minimum and Deposit. When an admitted carrier performs a premium audit on a general liability risk after expiration, typically it will charge an additional premium or issue a return premium to reflect the true exposure (e.g., payroll, sales) for that policy period. Whereas when a nonadmitted carrier performs a premium audit, it is considered minimum and deposit, meaning it will charge an additional premium to reflect the true exposures, but it does not issue any return premium. It is important that when an adjustable general liability policy is written in the E&S marketplace that a realistic exposure base is used, not an over-inflated one. 3. Solvency of nonadmitted carrier. Understand that in most states, nonadmitted carriers are not protected by the state guaranty fund. It is vital that you are placing the risk with a financially stable market that has an AM Best rating of “A-” or better. No. 10: Build a relationship with your wholesaler. Your wholesaler wants to build a relationship with you and get to know you both professionally and personally. There is nothing more rewarding or valuable for a wholesaler than to have a strong relationship with you, the agency partner. Like any successful relationship, it should be built on trust, respect and open communication lines. Plus, when you have a solid relationship, it is more fun, and who doesn’t like fun?

The cycle continues The hardened market will continue this year, which is a difficult message to deliver to commercial-lines clients—many of which the pandemic has affected negatively. Insurance cycles are driven by many factors, including: the supply and demand of capital, interest rates and economic confidence levels. In 2020, the p/c industry was affected by the COVID-19 pandemic, a continued uptick in natural catastrophes, and civil unrest. With the rapid speed of the COVID-19 vaccine being released, hopefully, life will look a little more normal by summer. This will help our industry and the small businesses, as consumer confidence will improve. Through it all, your E&S wholesaler will be there for you, as a solution finder for your next hard-to-place risk. Simpson-Winsky, CPCU, AIS, ASLI, ARM, ARe, CRIS, is the vice president of property & casualty for Russell Bond & Co., a wholesaler based in Buffalo N.Y., with an additional office in New England. As an E&S wholesaler, Russell Bond operates as an intermediary between the agent and the carrier for hard-to-place risks.

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PETER BUCCINNA Assistant vice president, Business Development, XS Brokers

A slight course correction The effects of COVID-19 on an essential marketplace

At the beginning of the COVID-19 pandemic, many in the industry wondered what the pandemic’s impact would be on the insurance world—specifically on the nonadmitted excess-and-surplus marketplace. After 14 months of this ever-evolving challenge, the major areas of impact have focused on specific industry classes that have been directly impacted by the shutdowns and capacity limitations. Additionally, restrictions put in place in many states and localities have reduced revenues and closed many affected businesses.

Once it became apparent that COVID-19 was going to linger, the industry’s ability to enact changes immediately benefitted insureds. From dealing with a large flow of cancellations, requests to lower coverage and payment extensions, to addressing coverage and claims issues related to the pandemic—all of this came to the forefront quickly and the adaptability of this marketplace was able to handle it nearly overnight.

Without a moment’s notice the E&S industry had to adapt to a new world—not just in how business and marketing was being done, but the very nature of the exposures and risks that were being submitted. The hardening market already had begun at the same time as this significant disruption. The fundamental purpose of the E&S marketplace is challenging, but the flexibility and freedom from rates and forms allows this marketplace to act as a safety valve during times like this.

The hardening market that started in 2020 has continued into 2021. With specific coverage concerns and government COVID-19 restrictions in the hotel, motel, bar, restaurant, and fitness centers aside, the broader nonadmitted market has continued to tighten up without pause.

The changing markets

Recently, some of the identified underwriting challenges in the nonadmitted marketplace include a number of new

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ventures now being submitted as COVID-19 restrictions ease, and businesses opening again after being closed for more than a year. Depending on the state or locality, some of the changing alcohol and liquor laws have added additional underwriting challenges, which include home delivery and new take-out options for restaurants and liquor stores. One recently identified newly emerging exposure is ghost kitchens—takeout and delivery restaurants that are only accessible through an app, with no in-person or counter service provided to patrons. Additionally, one of the more nuanced areas of coverage is in the professional liability and management liability areas. Employment practices liability insurance coverage has been turned sideways because of COVID-19—not just in the expected classes such as bars, restaurants, taverns, motels and service industries, but across the entire class. Many carriers paused entirely or will only write coverage for insureds who purchased the coverage in the past. This is when having an advocate who can navigate the marketplace and bring the best options to the table provides the most value in a wholesale broker. In addition to EPLI, the errors-and-omissions, and directors-and-officers marketplaces continue to become more challenging and restrictive. The biggest area of new growth and insured need is in the cyber and tech E&O areas, with exposures up dramatically because of the COVID-19 pandemic and the increase of employees working remotely. Navigating a challenging risk quickly is the only way to set the expectation and value in a wholesale professional-lines broker. Wholesalers that made the investment in technology for a remote workforce were better positioned to flip a switch last March. And, marketing teams that were quick to embrace virtual meetings and technology platforms allowed for seamless marketing efforts. Then, they were able to operate effectively and reach out to retail brokers, guiding them through these marketplace disruptions.

What stays the same Despite all of these changes, typical underperforming property classes have not changed, and they continue to see standard markets leaving specific property classes. At the moment, COVID-19 is not the largest driver of the market challenges. Rather, the challenges are found in capacity, and the general 10%-20% rate increases for which carriers are looking. Retail brokers are in a difficult spot. Some still are challenged with COVID-19 restrictions and a challenging economic situation, while they still are trying to sell a rate increase or reduction in coverage to their insureds. This is when a retailer needs an approachable nonadmitted E&S broker. This is why the nonadmitted marketplace exists.

The ever-present E&S market In this challenging market, a retail insurance broker needs a wholesaler broker who can communicate a factual storyline regarding a specific risk. The nonadmitted E&S marketplace acts as a safety valve. This marketplace always has been positioned to make fast underwriting appetite changes, as the exposure landscape quickly changes with many factors in play all at once. The COVID-19 pandemic was one of these times. 28

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Most E&S wholesalers always have been able to place coverage for product liability. For example, in March of 2020—when phones were ringing off the hook for coverage on manufacturing and distribution of personal protection equipment for general consumers and medical facilities—being able to effectively understand the exposure and reach out to carriers to deliver this narrative allowed coverage to be placed quickly. This narrative of new exposures, and quick underwriting and marketplace access continued, with a variety of general liability needs from COVID-19 testing centers, field hospitals, and food distribution sites. There is a need for a strong partnership with a wholesale broker who understands the current marketplace. The nonadmitted carriers are being flooded with submissions and the need to be able to have a resource who can take the time to analyze the individual submission— and providing the best solutions for the insured has only become more important during the pandemic.

Looking forward With the continued consolidation in the wholesale broker marketplace, the efficiency, scale, and one-sizefits-all tactic has opened up opportunities for wholesale brokers who understand that relationships and accessibility to markets go hand in hand, and provide a more meaningful approach for retail brokers. Buccinna is the assistant vice president in Business Development with XS Brokers. His insurance career has spanned 22 years, and he held positions in underwriting and marketing focusing in the nonadmitted E&S marketplace.

Risk management and COVID-19 considerations The task of making coverage determinations must be left to the carrier— as it is the carrier’s responsibility to determine whether the facts of a given claim trigger coverage under the policy it issued. Put another way, the insurance policy is a contract between the insurance carrier and the policyholder; the agent is not a party to the contract, and he or she does not have a duty to interpret coverage under the contract. If you have been reading the trade journals and national news periodicals, you would note that there has been much reporting on carrier denials of COVID19-related claims—specifically centering around business interruption claims. Litigation also has started in several states regarding the economic impact to businesses, alleging that business income coverage should respond to claims arising from the government shutdown. From this, it appears there is a new trend in which the customer requests that the agent speaks with the customer’s legal counsel to discuss various coverages. While it may be a natural instinct to want to assist your customer—and show your customer’s legal counsel your knowledge of insurance products and how they respond—you should avoid this at all costs. At best, you will provide a road map for your customer’s legal counsel to attack the carrier that you have a contract with to sell insurance; at worst, you will help the customer’s legal counsel build a case against your agency. It is a no-win proposition. If your customer contacts your agency to request that a producer speaks with the customer’s legal counsel to discuss insurance coverage, you should kindly decline and refer the customer to the carrier, since the carrier determines how it will interpret the insurance contract in relation to the customer’s claim. Further, if you receive inquiries from your customers regarding general questions on how coverages work, it is acceptable to respond in general terms. However, you always should encourage your customers to tender a claim—if they feel they have one—and allow the carriers to determine whether there is coverage. Do not answer hypothetical questions about coverage, because there are many variables that could alter a coverage determination. Always document these communications to avoid he said/she said scenarios in which the message you provided is misinterpreted. Documenting back the question along with your response will provide a record of that communication, should one be required later. Some other issues to consider as your clients’ exposures change, states begin to reopen, and employees return to the workplace include:

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E&O

THOMAS CASELLA, JD, MBA, SCLA Senior risk management specialist, Utica National Insurance Group

Watch for backlogs at the individual staff level. Make sure your agency is staffed to handle an increase in claim activity or shift in agency workflow properly. “Lay-up” vehicles need to be reinstated when put back on the road. If you had customers take vehicles off of a policy due to the stay-at-home order in their state, follow up with those customers to remind them that the vehicles need to be put back on the policy before those customers start driving them again. Check on carrier timelines for reversion of extended coverages. For carriers that offered extensions of coverage for changes in customers’ usage—such as personal vehicles used for food delivery—determine when those extensions are set to expire, and advise your customers accordingly. Check all policies on renewal. Watch for removal of business income coverage, additional exclusions, such as a viral pandemic exclusion, or limitations to coverage that were not on the expiring policy. Be sure to document to your customer—either through a coverage checklist or a coverage letter/email—the policies that contain virus, bacteria, communicable disease, and/or civil authority shutdown exclusions or other restrictive language.

Pay close attention to the terms and conditions in excess-and-surplus lines placements. E&S carriers are not subject to the same notice requirements as admitted carriers, and can make changes the day before a renewal; reach out to your E&S brokers early to start the renewal process and review those proposals carefully. Have a list of agency-billed customers who are in a cancellation hold. Be on top of who owes premium and provide timely nonpayment cancellation requests to your carriers. Don’t forget about workers’ compensation–other states coverage. With many companies with staff members who are working remotely, it is advisable to send a notice to your commercial-account customers to suggest that they verify the states that their employees are working from, and confirm that they are listed properly on the workers’ compensation policy declaration page or not excluded on the declaration page. If a change in coverage is required on their policies, your customers should advise you as soon as possible. Additionally, we have noted a trend in errors-and-omissions claims arising out of the categorizing of employees on the workers’ compensation application— particularly 3c. Other States. This is applicable to contractors who travel to out-of-state job sites, sales representatives in multiple states, and employees working remotely during COVID-19 shutdowns, among others. Do not overlook this exposure.

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Don’t forget As always, ensure that you are documenting all communications from customers and use your agency management system to track progress on all new policies, binds, renewals, change requests, etc. If you are approached by legal counsel who wants to have a discussion or make a recorded statement, kindly decline, direct the person to the carrier in question, and notify your E&O carrier. Accurately—and in a timely manner—report all claims to carriers that are submitted by your customers, especially claims-made basis and claims-made and reported coverages. Stay on top of guidance from your state’s insurance commissioner, as well as the state governor, and state and local health departments. [EDITOR’S NOTE: To help you stay updated, see the latest news on the PIA Northeast COVID-19 resource page at pia.org.] By staying informed, communicating with customers and carriers, documenting all communications and transactions, avoiding making comments about the coverage of claims and maintaining adequate staffing levels, you should be wellpositioned to manage most, if not all, of the challenges presented by this pandemic. Utica National Insurance Group and Utica National are trade names for Utica Mutual Insurance Co., its affiliates and subsidiaries. Home Office: New Hartford, N.Y. 13413.

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Accrued vacation time, horses and more Seawall damage Q. During a windstorm, a dock broke loose from another property and crashed into a seawall on our client’s property. No one knows who owns the dock. Our insured has a Dwelling Fire Policy (DP 00 03). The insurer has denied a claim for damage to the seawall under General Exclusions, Item 3. Water. Its claims manager and adjuster both take the position that this damage was an indirect result of tidal water and, therefore, would fall under this exclusion. We cannot see why this exclusion would apply for damage caused by the collision of the dock into the seawall. Doesn’t the exclusion refer to damage caused by the water itself? A. The General Exclusions language of this policy states that the exclusions apply to “loss resulting directly or indirectly” from any of the excluded causes. The damage to the seawall is clearly an indirect result of one of the excluded causes, i.e., “water damage, meaning ... waves, tidal water ... whether or not driven by wind.” Because waves, driven by wind, broke loose the dock and carried it into your client’s seawall, the company appears on solid ground in denying this claim. —Dan Corbin, CPCU, CIC, LUTC

Exiting employees’ accrued vacation time Q. I’m an agency owner and one of our employees is leaving, but she has not used all of her accrued paid vacation. Must I pay her the value of that vacation? A. It depends. Some states regulate this issue and require an employer to pay the departing employee the value of any unused vacation. Vermont does not have a statute on this issue. However, the Vermont Supreme Court has ruled in Grady v. Union School District No. 32 that whether an employer is required to pay for unused vacation is a matter controlled by contract. That means that a contract, whether express (an employment contract) or implied (an employee manual), promise vacation pay at termination for unused, earned vacation, then it is owed. If the contract is silent on the issue, than unused vacation time is not redeemable. Connecticut is silent on the issue—and in the absence of an agreement to the contrary—an employer does not need to pay the value of the unused vacation to the employee. However, Connecticut law states that employers must advise their employees of their wage-and-hour rates and schedules, and make availPIA.ORG

able the workplace’s benefit accrual policies. As these have been deemed to constitute an implied contract in many cases, an office that formally states that unused paid vacation can be cashed out must follow through on this promise. However, as befitting the contractual nature of this arrangement, an employer may state that the policy is that unused vacation is forfeited upon separation. Be sure to check your employment agreements and any representations made to employees regarding this issue.

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New Hampshire law explicitly states that accrued vacation (along with other listed benefits) is deemed wages and must be paid upon termination. New Jersey’s statutes do not explicitly regulate the provision of benefits; however, in cases including Butler v. Bakelite and Owens v. Press Publishing, New Jersey courts have interpreted paid vacation as deferred compensation for employment and failure to proffer this earned compensation upon separation can give rise to violation of the state’s labor laws. The New Jersey Department of Labor and Workforce Development clarifies that, “If the employer chooses to provide these benefits, they must be administered uniformly in accordance with the established policy or employment agreement. An individual may have a basis for a claim if the employer fails 31

to adhere to the policy or agreement.” This wording implies that employers may craft their employment agreements or other memoranda memorializing the terms of employment to express a policy whereby unused vacation is not redeemable upon separation. Statutes in New York are silent on the issue, but courts have stated that in the absence of a formal workplace policy that states that unused paid vacation is forfeited upon separation, the value of the accrued vacation should be paid to the departing employee upon separation. New York’s Department of Labor addresses the issue, citing Glenville Gage Co. Inc. v. Industrial Board of Appeals of the State of New York, Department of Labor.—Clare Irvine, Esq.

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No license, no permit Q. We have a company that added a 16-year-old to his parents’ auto policy, even though this teenager doesn’t have a license or a permit, nor accidents or tickets. Many people neglect to add their children to their policies when they start driving, so it is the company’s policy to add the children automatically when they turn 16. I thought a company could add unlicensed drivers only if they are proven to have been driving (e.g., had an accident or ticket). Who is right? A. The typical manual rules (e.g., Insurance Services Office Inc.) indicate a rate to be charged for a youth who is an applicant or a resident household member who customarily operates an auto. Youths who are not licensed cannot be an operator of an auto and ought not be rated on the policy until they obtain a learner’s permit or become licensed.—Dan Corbin, CPCU, CIC, LUTC

Horses Q. I received a marketing newsletter that implied that horses are not covered for liability under a homeowners policy if they are away from the premises (e.g., at a show). Is this true? What about lawsuits when a personal riding horse causes an auto accident? A. Under the ISO Homeowners Policy, there are no specific restrictions in liability coverage for horses, unless the horses are used in farming or another business pursuit.—Dan Corbin, CPCU, CIC, LUTC

BAP additional insureds Q. Suppose a certificate holder requests additional insured coverage on the business automobile policy, as well as the general liability policy. Can I just state on the certificate that the certificate holder is an additional insured on the BAP, or must I actually endorse the policy with the Designated Insured (CA 20 48) endorsement? A. Unless the certificate holder wants a copy of the endorsement, it won’t matter if it doesn’t get endorsed on the policy. The coverage is exactly the same for that certificate holder whether the endorsement is actually issued or not. —Dan Corbin, CPCU, CIC, LUTC

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