Agents or brokers are not guarantors of insurers’ solvency or their financial condition, and they are under no obligation to monitor the financial stability of the companies for which they write, especially after coverage has already been placed. Nevertheless, an agent or broker could be liable to a customer if coverage is placed with an insurer that the agent or broker knows or reasonably should know is insolvent or nearly so when the coverage is placed. Thus, if an agent or broker places coverage with an insurer that is designated by one or more of the various rating agencies as not having a high financial rating, the agency or brokerage should confirm this fact with the insured in writing. Posted on the IIABNY website is a sample letter that can be used when this situation arises.

Even without an obligation to monitor the financial condition of insurers and report changes to their insureds, many agencies and brokerages do understandably follow this practice. They do it if for no other reason than to provide a higher level of service to their customers. The relationship can be strengthened if the customer feels the agency or brokerage is watching the financial condition of the insurers with which it has placed the customer’s insurance coverage. Even so, an agency or brokerage should not advise its customers of downgrades in financial ratings of insurers unless this practice follows the two most important principles of errors and omissions loss prevention — consistency and uniformity.

It would be imprudent for an agency or brokerage to advise only some customers of a rating downgrade yet fail to advise all its customers of the downgrade. While under New York law, an agent or broker typically has no continuing duty to advise, guide or direct an insured as to insurance coverage, providing information as to the financial ratings of insurers could create a higher duty on the part of the agency or brokerage. It might be difficult to an agency or brokerage to defend an E&O claim or lawsuit when only some of its customers were advised of the financial instability of an insurer while other customers were not similarly advised. If an agency or brokerage establishes a practice of advising insureds of changes in the financial ratings of its carriers, the practice should be applied uniformly and consistently with all customers regardless of the nature or size of the account.

An agency or brokerage should establish a policy as to when an insurer’s rating becomes a cause for concern. In other words, if an agency or brokerage decides it will only write coverage for those admitted insurers rated, for example, B+ (Very Good) or above on the A.M. Best scale, the agency or brokerage must advise its customers if a company’s rating falls below that rating and subsequently provide the insured with an opportunity to replace coverage with a higher rated company. The notification of insurer downgrades and all subsequent steps taken to keep the customer informed about the insurer’s financial condition should be conducted in writing and maintained in an insured’s file. A sample letter advising customers of a downgrade is also posted on the IIABNY website.

While an insurance agent or broker has no obligation under New York law to monitor the financial ratings of the companies where coverage is placed, there may be practical benefits from a business perspective in providing this service to customers. If an agency or brokerage does monitor and report changes in the financial status of insurers to its customers, we would caution that such a practice should be conducted in a consistent and uniform manner for all customers of the agency or brokerage. The prudent insurance agency or brokerage that follows these steps will provide an increased level of service to its customers. And, at the same time it will help protect itself against a possible E&O claim or lawsuit related to a ratings downgrade.