Have I got a program for you!

By: Robert Burns - E&O Underwriting Manager

Occasionally we will get a request to confirm coverage for an indemnity agreement for a wholesale broker. Generally it will be to provide coverage for the sale of a specialty program. It usually goes like this: a producer has been running into a specialty account (e.g., a pollution contractor, a campsite, ski hill) for years but didn't have the market with coverages to be able to write it.

Then one day they run across a program in an industry publication or with a marketing representative. It might be a vendor at a trade show. The program being offered seems to have everything that is needed. Upon inquiry all the answers seem to be there; the wholesaler will do everything. The producer picks up an application and sends it off to the wholesaler. They'll take care of developing the proposal and delivery. The agency can sit back and collect the commission.

First the agency has to sign an agreement and provide a certificate of liability for errors and omissions. Sometimes the wholesaler requires to be added to the agency's E&O policy as an additional insured.

The first question is, will the agency E&O program protect the agency for liabilities associated with the program?

Utica's policy covers contractual transfer. It is generally common for E&O policies to cover contractual liability, but not universal, so it is important to verify coverage.

Utica provides an additional insured form; not all companies do. These, and all matters should be carefully reviewed prior to concluding any terms. All of this may lead to a very satisfactory sale with some commission and a new client. In my opinion, it is better to avoid adding a wholesaler as an additional insured and any indemnification agreements should be mutual.

The second question is the program good for the agency?

In speaking with agencies that sell specialty program business, I have observed some common practices.

First, they ask who owns the expertise. Wholesalers may have a great deal of expertise, but it's their expertise. It's the agent's town and the agent's reputation. The knowledge that builds the program is the primary currency of the agent and the foundation of the agent's service. When the agent hands over proposal development to a wholesaler, they in effect become a referral.

But what is the client's understanding? Usually the agency client still considers the retail agent to be responsible for the coverages that they buy.

Agents who do a lot of program business invariably demand that they own the expertise. They will join industry organizations and associations. They visit a number of carriers and wholesalers to study the coverage standards for that industry. They look into risk management techniques and become familiar with industry claims practices. They develop brochures and sales materials that explain their service.

All of this requires investment of time and capital for association dues, travel and education. For that reason an early question is how big is the market? Is it worth it to develop the program for one account? How big a territory is the agent willing to cover? This may also require obtaining non-resident licenses. Will the agency need to purchase qualified sales leads?

The second consideration is the placement of the agency brand. Will the agency value be associated with the program? Is there the potential for ancillary business?

After the agency has decided to pursue a particular market, the agency must prepare itself and its staff. Support staff must be trained as to special needs and coverage. Clear and efficient workflows must be outlined. Claims staff must be aware of coverage terms peculiar to the industry.

Does the line or program integrate well with other agency business? Can the agency staff support the activity? One question is whether or not there is sufficient back up. Does service require one or two people? Can sufficient staff be cross-trained to serve as back up when the primary support staff is away from the office? Does the revenue potential extend beyond the simple commission? Will the business qualify for contingency?

If, after reviewing all aspects, the agency decides to pursue a program using a wholesaler or managing general agent (MGA), the agency should keep these points in mind:

• Remember, your agency will seen by the client as the one responsible to them for a quality product.
• You should require that any wholesaler provides you with full notification of any changes in the program on subsequent renewals. This is obviously necessary when excess and surplus lines are used.
• Make sure that all staff thoroughly review any notices applicable to the program from the wholesaler or MGA. Require that the providers include a full listing of forms showing form descriptions as well as form numbers and edition dates.
• Make sure that the producer understands the responsibility of making sure that they keep up to date on the program, not just for the initial sale but on renewals as well.
• Provide the training needed for both the Customer Service Representatives and Account Managers.
• Require that the wholesaler provides the agency with proof of errors & omissions liability insurance.

There's always one more detail in any venture that is worthwhile. Programs in the marketplace can provide great ways to grow revenue. Tending to some of these details can gain the benefit while avoiding some of the potential problems.