October 20, 2010

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Question:

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Ken

    So now we have to worry about our insurance companies not being solvent enough to pay a claim.  Please explain what happens if your insured and you have a large exposure and your insurance company is unable to pay. Are you liable for their failure?

BB

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Answer:

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    Though regulated by state statutes [some by federal] insurance companies are businesses like any other.  They are regulated by licenses, not too different than an alarm company may be licensed and regulated.  The insurance policy is nothing more than a contract between the insurer [the carrier] and the insured, you.  However, because of the inherent public interest issues, states not only regulate insurance carriers, but provide some safeguards in the event insurance carriers breach their contractual duties or become insolvent and unable to honor their contractual commitments to provide insurance to their insureds.

    An admitted carrier means that the insurance carrier has met the state's requirements for offering insurance.  If an admitted carrier becomes insolvent the state will step in with a state sponsored insurance fund which will provide some protection to the insured.  I do not believe the state fund will in all cases provide the same level of protection that the defaulting insurance carrier would have provided.

    If you use a non admitted carrier, then that carrier may be permitted to sell insurance in the state, but as a non admitted carrier, the state sponsored liquidation fund will not provide any benefits to the non admitted carrier's insureds when the non admitted carrier becomes insolvent.

    If your carrier becomes insolvent, or otherwise refuses to defend or indemnify you, you most certainly remain liable and exposed to anyone suing you.  Just because your carrier breaches its contract with you doesn't mean someone suing you can't look to you directly.  In fact, in most if not all states, you are the one sued, not your insurance carrier.

    Besides going insolvent, a carrier may decline to provide coverage for a particular incident or lawsuit, leaving you to fend for yourself.  A carrier could agree to defend subject to a reservation of rights, and later withdraw from the defense.  A carrier could deny coverage for a variety of reasons, thereby not providing any defense at all. 

    I recall a case where I was engaged to defend an alarm company.  The carrier was defending me under a reservation of rights.  Early into the case the carry decided to withdraw coverage.  The alarm company nevertheless insisted that I continue to provide defense, even though the alarm company knew that the insurance carrier was no longer to pay me.  The alarm company didn't want to pay either; just demanded that I continue providing legal work.  I had to make a motion to the court to get out of the case as counsel.  This illustrates the simple point that your relationship with your carrier is your issue, not the issue of anyone suing you, or people engaged by the carrier to provide you with defense.

    I was regularly hired by more than one insurance company that became insolvent.  In the few cases they were still defending where I was counsel I insisted that all pending cases be settled, and that I be paid, before things got worse with the carrier.  That diligence prevented any of the alarm companies I was representing from holding the bag.  Of course I got my fees paid too.  But plenty of other alarm companies were not so lucky and were left with no insurance. 

    I do not believe any insurance company offering E&O to the alarm industry has defaulted or become insolvent in over 20 years.  Most carriers are smart enough to insist on properly drafted alarm contracts.  Coverage is limited and excess coverage laid off on other carriers, thereby sharing the risk.  All in all, I think you can sleep well knowing you have insurance with a carrier that will not go insolvent, especially as long as the law continues to support the enforcement of alarm contracts.

    Be mindful that not all carriers are as helpful or accepting of their responsibility to provide defense and indemnity.  Some are more likely than others to look for ways to avoid coverage.  Those carriers should be avoided if possible, and it is possible in the alarm industry.  You have choices, so select your carrier wisely.