Insurance Agents/Brokers

Insurer Insolvency

As the number of insurer rating downgrades and insolvencies increase, insurance agents and brokers face exposure to insurer insolvency. Does the agent or broker have liability if an insurer becomes insolvent? The easy answer is it depends. Each state has its own laws and regulations concerning the question of agent/broker liability for insolvency, and very few clear cases have been litigated on this issue.

The best known and most often cited case concerning agent/broker liability for insurer insolvency was tried in Texas in the 1980s. In Higginbotham & Associates, Inc. v. Greer, 738 S.W.2d 45 (Tex. App. 1987), the court set forth the general rule that an insurance agent or broker is not a guarantor of the financial condition or solvency of a company from which he obtains insurance. The agent or broker is required to use reasonable skill and judgment with a view to the security or indemnity for which the insurance is sought, and a failure in that respect may render him liable to the insured for resulting losses.

In Higgenbotham the court concluded that an agent or broker is not liable for the insured's lost claim due to the insurer's insolvency if the insurer is solvent at the time the policy is procured unless at that time or at a later time when the insured could be protected the agent knows, or should know, of facts or circumstances which would indicate that the insurer may be at risk.

An example often used from that case is that if the insurer is rated B+ or better at the time of placement, and the agent or broker has no other indication of financial concern for the insurer, the agent or broker would not be liable for the placement of coverage with an insurer which subsequently was insolvent. However, if the agent or broker had or should have had an indication of financial weakness, such as a rating lower than a B+, the agent or broker may be liable for any claims not honored due to a subsequent insolvency.

Agent and broker liability from insurer insolvency is still not clear now because the Higgenbotham case is only one case, and could be determined to be out of date in subsequent litigation. In addition, it is a Texas case that has a fairly simple fact pattern. A more complex situation in another state might produce a completely different result.

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