Bizarre Exclusion in Agents E&O Form

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I was looking over an agents E&O form last week and my review of the insolvency exclusion yielded this exceedingly surprising result:

The exclusion applied to claims arising from an agent’s inability to pay.

The policy was written for an MGU/Wholesaler, so this wording probably would not be in a retail agent’s policy.  Still, it’s quite troubling to me.

Imagine this scenario:

You’re an MGU/Wholesaler, and you have an agent that has financial troubles.  They cannot pay certain invoices.  Maybe they collected money from the insured; maybe they did not.  But still — no money comes to you.  So you allow the policy to cancel, or effect cancellation if you had underwritten it.

The uncovered insured later sues not only the agent, but you for his lack of coverage.

You have done nothing wrong.  Why would the policy not extend coverage?  I find it incredible that the policy excludes that cause of loss.  I don’t believe I’ve ever seen it before.  Could the next step be an exclusion in a retail agent’s form if the insured is unable to pay?  Horror!

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