E&O Claim Example – Carrier Insolvency

Scenario: An insurance agent places a small manufacturing client with a regional carrier rated “B-” by AM Best at the time of placement. The agent is aware the rating is lower than the agency’s preferred threshold of “A‑”, but the carrier offered competitive pricing and broad coverage. The agent does not document any disclosure to the client regarding the lower rating or the potential risk of financial instability.

Six months later, the carrier experiences rapid financial deterioration following a series of catastrophic losses. AM Best downgrades the company from “B-” to “C‑”, and then places it under regulatory supervision. A few months later, the carrier is declared insolvent and enters liquidation.

Claim Trigger: At the time of insolvency, the client has a recently opened property claim for a fire loss totaling $400,000. Because of the liquidation proceedings, the claim is delayed and ultimately only partially paid through the state guaranty fund – well below the full amount owed.

The client then files an E&O claim against the agency, alleging:

• The agent failed to warn them that the carrier was lower‑rated and financially unstable.
• The agent failed to monitor the carrier’s rating and notify them when the carrier was downgraded.
• The agent placed them in a position where insurance coverage could not be fully honored.

E&O Issues: During the investigation, the agency is unable to produce:

• Documentation showing the client was informed of the carrier’s rating at the time of binding
• Signed acknowledgement of lower‑rated carrier placement
• Any record of carrier rating monitoring or downgrade alerts
• Evidence that the client was offered alternative markets or advised of the risk

Outcome: The case could result in a $175,000 settlement, based upon the difference between the client’s loss and the guaranty fund payment, plus legal costs and reputational damage to the agency.