Part I: Helping Your Client Meet Third Party Requirements

Any broker with business clients is regularly asked to issue certificates of insurance to third parties in accordance with the third parties' requirements. Sometimes, the clients' insurance coverages will not meet the third parties' requirements, leading to disputes, and ultimately, to client dissatisfaction - with you, the broker or agent.

Collecting Third Party Insurance Requirements

In order to head off trouble at the outset, mutually review your clients' business needs prior to placement or renewal. If your client enters into contracts or leases or obtains permits from public entities with respect to the client's business operations, the insurance requirements of the other parties to these agreements must be taken into consideration.

The extent of your efforts in evaluating your client's needs is determined by your client. If your client's insurance program is handled by a Risk Manager or a CFO versed in insurance, the client will usually make the determination as to the extent of coverage desired and the insurance markets to be used.

If your clients are small businesses, they may look to you to recommend an insurance program that will meet their needs. You may need to review the insurance requirements in their contracts, leases, and permits in order to ensure that the required limits and coverages are obtained and placed with acceptable market security.

Inadequate Limits and Coverage

It is not always possible to address third parties' insurance requirements at placement or renewal. Your client will probably not know in advance the insurance requirements of contracts to be entered into or permits to be obtained during the policy period.

Disputes over insurance requirements often involve the level of limits or types of policies required by a third party. If the other party is open to negotiation, some of the following arguments might be applicable to your client's situation:

The limits are set at industry standard and increased limits are exorbitant. Before recommending any such argument, make sure you can support your assertion with indications from leading markets.

The risk is minimal or nonexistent. For example, if your client is a consultant providing professional services and all work is done in the client's office, general liability coverage may not be applicable or the limits may be excessive based on the exposure.

The risk might be subsumed within the contract. For example, for certain professional service contracts, the other party may agree to assume the professional liability risk in return for a reduced fee.

The insurance does not apply so that the issue regarding the level of limits is moot. For example, workers' compensation insurance is not required by law if your client is a sole proprietor or a partnership with no employees.

Market Security

Another issue that can arise is the insurers' admitted status and independent financial strength and size ratings. Some third parties may require that insurance coverage only be placed with an admitted carrier; others require that the carrier be admitted and have a certain rating (e.g., by A.M. Best Company or an equivalent rating agency); and yet others may only have the rating requirement.

If your client's insurer does not meet the third parties' requirements, some of the arguments that may be applicable to your client are as follows:

The insurer is a specialist in the area being written with a long underwriting history.

The insured is a special risk which can only be placed in limited markets.

The short-term cancellation rate would create a serious financial burden for your client and the risk will be placed with an acceptable insurer upon renewal.

Where admitted markets are required, it should be taken into consideration that some non-admitted insurers are more financially stable, offer broader coverage, and have more underwriting experience.

For self insured clients, it may be necessary to supply copies of self insurance reports and evidence of excess coverage in order to meet the financial security requirement of the third party.

As mentioned previously, make sure that you can support any assertion with facts, including indications where necessary.

Endorsements Required

Many third parties will require your client to provide specific endorsements to the required policies. Your best strategy is to ensure, in advance, that the carrier to be used will offer these coverages. Your client should be aware that there may be an additional premium charge for these additional coverages and that the additional premium charge often is greater when the coverage is added midterm instead of at placement or renewal.

One area that can lead to delays for your client is the additional insured endorsement required by a third party. You, as the broker or agent, should be familiar with the standard industry forms. Some carriers will only offer specific forms and some will refuse to complete special endorsement forms required by some public entities.