Broker E&O underwriters bracing for wave of Covid-19 claims

Broker E&O insurers including Swiss Re Corporate Solutions are facing a potential surge in claims from US retail agents and brokers sued by insureds alleging that they failed to properly advise about purchasing appropriate coverage for Covid-19 business interruption losses, The Insurer can reveal.

According to sources, Swiss Re Corporate Solutions’ offshoot Westport Insurance Corporation, Utica National and Allianz would be expected to see a significant share of claims as the three largest insurers of independent agent and broker E&O in the US.

As political sabre rattling continues over attempts to force insurers to retroactively rewrite coverage to include pandemic exposure, a successful outcome for the industry would mean that most insureds will not be able to claim under their business interruption policies.

That is expected to trigger a deluge of lawsuits from SMEs against retail agents and brokers for failing to warn them that their policies did not include the coverage.

Multiple sources have cited anecdotal evidence of E&O claims coming in related to retail brokers and agents alleging that they did not obtain adequate coverage for policyholders.

There are already legal actions being filed against intermediaries over the denial of payouts by carriers on Covid-19-related claims that insureds say were covered by the policies bought through the broker or agent.

“When insureds realise there is no coverage in their policy for BI they will pivot and look to their retailer and claim that they failed to provide them with the appropriate coverage”

Of the reported lawsuits brought against insurers in the US so far in the fallout from the coronavirus outbreak, a number have also named brokers as defendants.

San Francisco restaurant John’s Grill has filed a lawsuit against The Hartford and its subsidiary Sentinel Insurance Company as well as insurance agency Norbay Insurance Services.

It alleges The Hartford was in breach of its insurance obligations for denying claims for business interruption losses caused by San Francisco city closure orders prohibiting on-premises dining due to the Covid-19 pandemic.

But it also names Norbay because the agent has joined The Hartford in denying the claim on the policy it sold to the restaurant.

Another lawsuit filed earlier this month against The Hartford’s Sentinel Insurance Company by a plastic surgery practice in Harris Count, Texas also names the Houston operation of retail broker Alliant Insurance Services.

The action brought by Sean Boutros, MD, PA, also relates to BI claims for losses incurred as a result of civil authority orders.

“Defendant Hartford and its agent, Defendant Alliant, have accepted plaintiff’s policy premiums with no intention of providing any coverage under the insurance contract related to a viral outbreak like the Covid-19 outbreak or the governmental orders,” alleges the suit.

Insureds to turn on brokers

Although the lawsuits naming brokers don’t currently specifically allege mis-selling or bad advice – they are still pursuing insurers for what they claim are covered claims – sources said it is inevitable that if actions are not successful they will refocus on the way the agent sold and represented the coverage.

One senior broking source told The Insurer: “When insureds realise there is no coverage in their policy for BI they will pivot and look to their retailer and claim that they failed to provide them with the appropriate coverage.

“[Claims activity on] insurance agents E&O coverage is going to spike, specifically in the small account arena. My concern is for the large aggregators who will see a disproportionate number of claims from smaller insureds.”

The small independent agency space has been the scene of heavy consolidation by retail aggregators in recent years, including publicly traded giants such as AJ Gallagher and private equity-backed firms including Acrisure, Hub International, Assured Partners and Broadstreet.

“Lawyers have already begun to circle the wagons”

Sources have questioned the integration of businesses that have been bought at an annual deal count well into the tens or more in some cases.

It is not known, for example, to what extent risk controls are in place around the standards and quality of advice at rapidly acquired firms, or how E&O coverage is purchased at the individual company level or centrally by the parent and what limits are in place to cover a potentially large aggregation of claims.

For those agents that are part of larger aggregators and those that have remained independent, the expectation is that they will be the subject of client actions where attempts to claim from insurers are unsuccessful.

“Lawyers have already begun to circle the wagons,” one broking source said when asked whether the E&O market was likely to see claims from independent agents and brokers.

Indeed, a brief search online highlights multiple lawyers offering services to insureds looking to claw back some of their losses by filing lawsuits against their agents or brokers claiming they were never told pandemic coverage was not included.

Broker E&O market for small agents

According to sources, Swiss Re Corporate Solutions subsidiary Westport Insurance Corporation and Utica National have the lion’s share of the market for small agents and brokers, with the two firms endorsed by two large trade bodies.

For more than 25 years, the liability program offered by The Independent Insurance Agents & Brokers of America, more commonly known as the Big I, has been underwritten by Westport. As the Big I notes on its website, Westport “has been the premiere choice of IIABA member agents for insurance agents and brokers E&O insurance”.

Westport’s offering provides limits up to $20mn per insured and can pay out first dollar of defense costs.

Utica National, part of the Utica Mutual Compensation Insurance Corporation, has been writing agents E&O business for more than 50 years. It is one of the companies endorsed by trade body Professional Insurance Agents, or PIA.

Liberty Mutual is another insurer whose coverage is endorsed by the PIA, as is the agent E&O program offered by CITA Insurance Services, understood to be backed by Munich Re subsidiary American Alternative Insurance Corporation, as well as an offering through wholesale broker US Risk.

The Big I also promotes Allianz as an alternative provider of this E&O protection.

E&O options are also provided on the websites of smaller regional trade associations.

Insurance Agents & Brokers, which partners with Pennsylvania, Maryland and Delaware associations, highlights products from Utica National, Westport, Allianz, Penn National and USLI on its website.

Huge influx of claims

Speaking on a PLUS E&O coronavirus website last week, Western Litigation/GB Specialty’s senior vice president of claims Barbara Serafini also highlighted the importance of brokers not making decision on coverage.

“Maybe [brokers should] avoid communicating directly as to what their views and opinions are regarding coverage and simply say ‘this is a new area and we don’t really know how it is going to place out’,” she said.

“I do think there is going to be quite a few claims coming out of this, both for the failure to report anything and the failure to place or recommend these coverages… I do think we are going to see a huge influx of claims of that nature,” the executive added.

In a briefing talking about potential broker E&O exposures in the UK coming out of the pandemic, law firm RPC highlighted factors that it said would be critical to determining liability for past placement of insurance policies.

They will include what enquiries brokers made about a policyholder’s business and its exposure to disease outbreaks, what insureds were told about the availability of additional cover added to standard wordings, and whether clients would have paid a higher premium for this wider cover.

It would also depend on whether those alternative policy wordings would necessarily have responded to the losses individuals or businesses are incurring.

“Plainly there are many who would never have foreseen themselves susceptible to the consequences of a global pandemic whatever advice brokers might have provided about the issue,” said the RPC bulletin.