Guess Who’s Suing
Agent’s Today?
SPONSORED BY
10/30/2012
Curtis M. Pearsall , CPCU, CPIA
Pearsall Associates Inc.
Special consultant to Utica Mutual E&O program
Marc W. Chilton
Sr. E&O Claims Specialist – Utica National Ins.
James T. Scamby, Esquire
Tucker, Heifetz & Saltzman, LLP
1
10/30/2012
General overview of the E&O Climate / stats /
trends
`
A brief look back in time in the world of Agents
E&O
x who was suing agents 30 years ago?
`
`
What altered that landscape?
`
Today’s new plaintiffs and the new kinds of claims
`
What can you do to protect yourself
`
Claims frequency…up or down? And why?
`
Who in the agency is “causing” the claims?
`
Any trends on the horizon?
`
Claims severity – how big are the claims when
they occur? Does every claim result in a payment?
2
10/30/2012
`
`
`
Frequency — nationally 6.2 claims per 100
policies – 1 out of every 16 - generally flat
over the last 5 years or so…
In Mass, frequency is 7.3% (2012 ytd),
up from 5.7% in 2011…
Severity- Average (national) is $52,000
plus $12K for defense costs (this doesn’t mean that you
won’t be the agent that gets hit with the “big one”).
3
10/30/2012
` 50% by producers
` 50% by the rest of the staff (CSR’s,
receptionist, claims staff, etc.)
`
Is anyone in your agency immune
from causing an E&O claim?
Cause of claims
4
10/30/2012
1982
Price of a stamp - $0.20
Median Income - $20,171
Michael Jackson releases the Thriller album
MRI machines introduced in Great Britain
1982
Overwhelming amount of E&O claims were
brought by agency customers
E&O cases were somewhat predictable
Types of E&O cases were usually the same
regardless whether it was a 1st or 3rd party
claim
5
10/30/2012
1982
No coverage due to:
cancellations / non-renewal, etc.
agent procuring the wrong type of policy
applicable policy conditions / exclusions
claimed misrepresentation in the application
other reasons
1982
Regardless of the reason – agent became a
viable target – a potential “deep pocket”
Were insurers suing their agents”
Yes, basically due to the contractual
relationship between the parties (agent
bound the insurer to a risk that was not
within the underwriting guidelines
6
10/30/2012
1982 – Supreme Judicial Court decides
Rae v Air-Speed
1986 – Supreme Judicial Court decides
Flattery v Gregory
Involved the death of an agency customer’s
employee and a resultant claim for workers’
compensation benefits
7
10/30/2012
The Estate attempted to make a claim directly
against the agency, pursuing claims in
negligence and breach of contract
The Estate claimed that the agent agreed, but
failed, to procure a workers’ compensation
policy for the customer
The trial court dismissed the claim on the
grounds that the agency owed no legal duty
to the Estate (or the deceased employee)
The Supreme Judicial Court reversed, setting
forth two critical rulings that remain the law
of the Commonwealth today:
-
-
that the Estate could bring a direct action in
contract against the agency as a third-party
beneficiary of the agreement between the
agency and its customer to procure workers’
compensation coverage; and
that the Estate could also bring an action in
tort, because of the mandatory nature of
workers’ compensation
in Massachusetts
8
10/30/2012
Involved an auto accident in which the
defendant / agency customer was
underinsured
The injured Plaintiff, who had no relationship
with the agency, made direct claims in
negligence and breach of contract
Plaintiff’s theory was that the agency agreed,
but failed, to procure a certain level of liability
coverage for its customer
The trial court dismissed the claim
The Supreme Judicial Court affirmed the
decision in part, and reversed it in part
9
10/30/2012
The Supreme Judicial Court held that the
contract claim was viable because the Plaintiff
was an intended beneficiary of that agreement
The Court held that the negligence claim,
however, was not viable because the agency
could not foresee any injured party relying on
its customer to expect any greater coverage
than the statutory minimum
If the coverage at issue is compulsory, an
injured third party can assert a negligence
claim against the tortfeasor’s agent.
If not, the only possible claim is in contract,
and must necessarily be based upon a claim
that there was an agreement between the
agent and its customer to procure a certain
policy, coverage amount, etc.
Notwithstanding the holdings of the two cases,
third parties continue to bring negligence
actions against agents even when noncompulsory coverage
is at issue.
10
10/30/2012
`
`
`
“Traditional” E&O claims are still prevalent
Post-Rae and Flattery claims are still commonplace
(direct action by injured third party)
E&O cases most often involve claims for BI and PD
So who is suing agents today? Why and for what?
-
Insurance Companies (and not just your own)
-
WC Trust Fund
-
Property owners, Contractors, Subcontractors,
Maintenance Companies
-
Banks
-
Other agents (retail and wholesale)
11
10/30/2012
Some insurers have come to view the E&O policy as a
substitute for their own
Agents are increasingly being brought into coverage
cases especially where its initial claim investigation
reveals discrepancies between what the insured
says and what the agent says
This allows the insurer to argue, essentially, that it
has no coverage obligations to the insured for
specific reasons but if the Court finds otherwise, it
is the agent’s fault
Insurers still bring the more traditional claims arising
out the agent’s breach of an agency agreement
where the insurer claims that the agent’s
wrongdoing exposed it to a risk that it would not
have otherwise agreed to insure (can be a difficult
case for an insurer but with the right set of facts,
they can win)
12
10/30/2012
The latest…..
Claims are being brought against agents by insurers
of third parties
Insurers are now, more than ever, looking for ways
to avoid coverage by transferring risk
Insurers will review contracts to determine if its
insured is entitled to indemnity from another party,
or if its insured has coverage as an additional
insured on someone else’s policy
If a party who is “supposed” to be an additional
insured on another policy is not and a party who is
entitled to contractual indemnification has no
recourse against the indemnifying party (because it
lacks the proper coverage), the agent of party X
who was supposed to have made party Y an
additional insured is probably going to be blamed.
It is party Y’s insurer who is going to be doing the
blaming. They will be doing what they received a
premium to do (defend and indemnify) but looking
for a way out.
13
10/30/2012
Discussion and Analysis of an E&O claim
Smith’s purchased a dwelling fire policy
Tenants were listed as “working class”
After a fire, tenants were discovered to be “co-op”
Students - Carrier files DJ action
Carrier believed client, not agent
Case goes to trial
Discussion and Analysis of an E&O claim
What did the agent do well?
What could they have done better?
14
10/30/2012
Significant issues involve when coverage is
technically effective
How important is the issue of premium funds –
what if the account is premium financed
Importance of open communication to the
client with key discussions documented in the
agency file and with written correspondence
back to the client
Discussion and Analysis of an E&O claim
Smith and Jones Roofing purchases WC through
WCTF
Employee (Mr. Nailer) suffers injuries on 9/11/06
Due to premium finance issues, assignment was
delayed – policy was ultimately eff 9/14/06
Agent did not communicate details to client on when
coverage would be effective
Resolution of case
15
10/30/2012
Discussion and Analysis of an E&O claim
What did the agent do well?
What could they have done better?
Due to the expansion of risk transfer, multi-level
contracts in the fields of construction and property
maintenance are wreaking havoc on insurance
agents –
Especially the agents for the lowest-ranking
subcontractor.
16
10/30/2012
On a large construction project, it is commonplace
for the owner to require additional insured status
on the project manager’s policy, as well as
contractual indemnification from the project
manager.
The project manager will, in turn, impose those same
requirements on subcontractors who will impose
those requirements on second tied subcontractors
If an employee of a second tier subcontractor gets
injured on the job, anyone and everyone in the chain
is likely to be named as a Defendant in a lawsuit
The owner, project manager, and subcontractor now
look to the second-tier subcontractor / employer to
take over their respective defenses and to indemnify
them.
The entire case now falls on the shoulders of the
second tier subcontractor
17
10/30/2012
If the second tier subcontractor’s policy doesn’t cover
these parties…
Everyone is going to be looking to the agent !!
Maintenance Company:
Somewhat the same scenario: instead of a construction
site, it is a business location such as a strip mall with
a large tenant which hires a local contractor to
perform some snow removal or other maintenance
work…
The entire responsibility is shifted onto the small local
contractor
18
10/30/2012
Maintenance Company:
You, as the agent, might be sued by 3 or 4 parties who
are completely unknown to you – they are not your
customers and they are not even injured or harmed
except for the fact that they are being sued
Discussion and Analysis of an E&O claim
GL policy for ABC Construction (sub contractor) thru
E&S carrier
Agency CSR issues COI to GC naming GC as add’l
insured – policy did not provide Blanket Add’l
coverage
Claim over 1 year later – no new COI issued by
agency
Resolution of case
19
10/30/2012
Discussion and Analysis of an E&O claim
What did the agent do well?
What could the agent have done better?
Discussion and Analysis of an E&O claim
Feb 2008 – warehouse collapses
Plaintiff alleges that the tenant need to insure bldg
Tenant did not advise agent that the lease involved 2
bldgs – separated by roadway
There was no coverage on Bldg # 2
Resolution of case
20
10/30/2012
Discussion and Analysis of an E&O claim
What did the agent do well?
What could the agent have done better?
Agents customarily prepare binders in connection with
real estate transactions
Due to the economy, an increasing number of
individuals and businesses are failing to maintain
property insurance on mortgaged property
21
10/30/2012
If an owner of a mortgaged property allows coverage
to lapse (be cancelled / non-renewed), what happens
in the event of a fire resulting in a total loss ?
The owner walks away, having no equity in the
property to lose, and may be judgment proof. The
bank has insufficient security to cover the
outstanding debt.
So where are the banks then going to look –
to the agent.
Banks are relying on binders, certificates, and any
other documentation they can find in these situations
to use the agent’s E&O policy as a replacement for
the property coverage that had once been in place.
Similar problems are arising in the case of foreclosed
properties, whether it be a casualty damaging or
destroying the building or a liability claim brought by
someone injured on that property.
22
10/30/2012
Discussion and Analysis of E&O claim
April 2008 Jones buys property and 60 day binder
issued to bank listing them as lienholder
Bank never requested anything further
Jones moves account to another agency
2011 – property is destroyed
by fire
Discussion and Analysis of E&O claim
At time of loss - Jones has no insurance
Bank relies on 3 year old binder as proof of insurance
Resolution of case
23
10/30/2012
Discussion and Analysis of E&O claim
What did the agent do well?
What could the agent have done better?
Agents do sue other agents for errors and omissions.
This usually occurs when one agent is (perhaps
wrongfully) sued and the liability rests with another
agent, at least arguably.
The more troubling agent vs agent case is where the
agent that is actually liable tries to shift the blame or
spread the exposure by claiming that the error giving
rise to the claim began with the prior agent.
24
10/30/2012
The distinction between occurrence based and claimsmade policies is particularly important when
considering these claims.
Sometimes, the agent that gets sued is truly not to
blame and it is necessary to asset a claim against the
responsible party.
Cases based on the “you started it” theory, however are
starting to appear more frequently.
Wholesalers are also being implicated in E&O claims,
oftentimes by the retail agent who claims that the
policy that was procured was not the policy that was
requested.
Do your wholesalers have E&O? Ask them for a
certificate. After all, they are asking you.
25
10/30/2012
Communicate
Document / Document / Document
Things you definitely want to avoid
Go to
uticanational.com
for the latest in E&O claims
and loss control information
Risk Management and other valuable
information for Utica Policyholders at
UticaCustomerCare.com
26
10/30/2012
THANK YOU!
27
10/30/2012
28
GUESS WHO IS SUING AGENTS TODAY
MAIA – THE BIG EVENT
NOV 2012
Carrier
Mr. Smith, as trustee of the 100 Willow Street Nominee Trust, sought dwelling fire insurance
for a building to be held for rental. The Agency obtained information from Mr. Smith over the
phone, prepared an application, then had Smith sign the completed application, and submitted
it to the carrier. The application, dated Nov 4, 2003, asked as to the status of the tenants and
“Working class” was circled on the application submitted to the carrier. The policy was issued,
and subsequently renewed in October 2004 and October 2005. On March 4, 2006, a fire
damaged the property. Investigation revealed that the tenants of the building at the time of
the fire were Northeastern University “co-op” students (Co-op students work for a semester,
then take classes for a semester, and continue alternating semesters between work and classes
until the degree is obtained). The carrier filed a declaratory judgment action, contesting
coverage on the grounds that it would not have issued the policy if it had been informed that
the building was occupied by students. The agency had to defend itself against the carrier with
whom they had a long standing direct relationship. The carrier paid Smith because the carrier
alleged they believed Smith over the agency. Unfortunately, the agency was saddled with a very
pro-plaintiff judge who would not allow a large portion of the agencies defenses. The jury
returned with a $650K verdict against the agency.
Workers Compensation - WCTF
The civil action is a subrogation suit brought by the Workers’ Comp. Trust Fund (WCTF) against
Smith and Jones Roofing, the employer of Frank Nailer, a roofer injured on the job. Nailer had a
pending workers compensation claim against the WCTF as result of injuries suffered on
9/11/06. The agency, submitted a workers compensation application for Smith and Jones dated
9/6/06. Due to premium finance issues that delayed receipt of the premium check, the
Massachusetts Workers Compensation Pool finally issued a Notice of Assignment confirming
that workers compensation coverage for Smith and Jones had been assigned and that coverage
was effective 9/14/06. The problem was the agency wrote a letter to Smith and Jones dated
9/7/06 acknowledging receipt of premium payment but said nothing about when the policy
would be assigned and made effective. Based on the effective date and the date of injury, there
existed a coverage problem that ended up being the agency’s problem.
There is an Appeals Court case establishing that, under the assigned risk pool procedures,
workers compensation “coverage is bound as of the date the notice of assignment states the
policy was issued, irrespective of when the premium funds are actually in the insurer’s
hands.” Case of Cummings, 52 Mass. App. Ct. 444, 448 (2001). The WCRIB Pool Procedures for
New Applications provides, in pertinent part, “The Bureau can only bind coverage if a check for
the proper deposit premium is received with the application.” This resulted in the agency
having to reimburse the WCTF for $20,000 expended in settling Nailers claim.
General Contractor
The agency placed a GL policy for ABC Construction through a wholesaler and surplus lines
carrier, First Broker Insurance for the policy year August 2003 to August 2004. The agency CSR
issued a certificate of insurance to the general contractor on a job where ABC was its
subcontractor. The initial certificate listed General Contracting Corp as an additional insured.
The CSR mistakenly believed that the First Broker policy had a blanket additional insured
endorsement. It did not. The 03-04 policy expired without incident or a claim. A renewal
application was completed for 04-05 policy period however there was never a request by
General Contracting to request a new certificate for the ongoing project. During 04-05 there
was a claim presented in which it was discovered that General Contracting was not an
additional insured under ABC’s policy. Utica (E&O carrier) argued as a defense that General
Contracting waived the requirement as they allowed ABC to continue to work after expiration
of the initial policy. Nonetheless, General Contracting argued that the CSR’s actions reflected
her intent and knowledge that the certificate should have issued and that General Contracting
should have been named as an additional insured on the renewal. They further argued that if
General Contracting had actually been named on the initial 03-04 policy that most likely it
would have carried over to renewal. General Contracting was successful with its position and
the agency ended up paying $700,000 to obtain a release.
Property Owner
On February 13, 2008, the plaintiff’s warehouse collapsed due to the weight of ice and snow.
The plaintiff alleges that the tenant at the property at that time was obligated to insure the
building. The tenant failed to advise the agent that the lease involved two properties divided by
a roadway. By the time the loss occurred, the tenant was essentially out of business and was no
longer occupying the property – either at location A or B. After the loss occurred, the property
owner did little to pursue the tenant’s carrier but rather filed suit against the tenant who being
out of business, did not defend the action. The plaintiff obtained a judgment against the tenant
in the amount of $1,085,462.85. Realizing the hollow victory against the tenant, the property
owner plaintiff filed suit against the agency pursuant to direct and third party beneficiary
theories. (In Massachusetts, it is clear that the plaintiff must prove a specific request and
promise to cover, before third party beneficiary liability will attach).
In this case the tenant never specifically requested insurance for location B, nor did the agency
ever specifically promise to obtain coverage for that building. There did exist a small problem in
that it was later discovered in agency documents the mere mention of location B but nothing
otherwise specific. The plaintiff realizing the specific request issue then tried to rely on the
description of the property as well as some underwriting/square foot calculation documents in
the agency file, and would argue that the agency should have known that coverage for the
warehouse was required.
Prior to trial the judge found that a specific request for Location B never existed and found the
“mention” in one document of location B was not deemed sufficient to hold the agency in. The
defense of this matter cost the agency $60K in legal fees.
Bank
On April 30, 2008 Jones acquired property and the agency issued a binder to the XYZ bank
listing the bank as a lienholder. This binder expired by its own terms on June 30, 2008. It
appears at no time subsequent did the bank request any further evidence of insurance. The
policy in question expired after it’s first term and Jones moved his business to another agency.
Three years later on May 5, 2011 the property is destroyed by fire and apparently Jones is not
insured. The XYZ Bank alleged it never received notice of cancellation or notice of nonrenewal.
The bank claims that it would have received a notice of cancellation or nonrenewal and if it had,
it would have actively sought it’s own coverage to protect it as the mortgagee. This is not true
as the policy expired on its terms, without cancellation or nonrenewal. This bank relied on a
three year old expired binder as evidence of insurance at the time of the fire. It is unreasonable
to do so, and in the event the mortgagor Jones changed brokers, they would not receive any
notice. This is exactly what happened. The Agency had to retain defense counsel in order to
establish that they were not the broker of record and hadn’t been for three years. In addition,
the language contained on the binder clearly noted it was only good for 60 days. The fact that
Jones moved his insurance to another agency and failed to list the bank as lienholder did not
rest with the agency.