Two of the guidelines insurance agents should follow to prevent errors and omissions liability claims are:
- Keep personal insurance and commercial insurance separate because they do not mix well
- The insured should sign the insurance applications
A New York City agency did not follow these guidelines and received a summons as its reward.
The agency obtained commercial umbrella coverage for a real estate developer in 2011. The producer signed the application on the insured’s behalf. The insured had provided a spreadsheet to the agency listing 27 properties for which he wanted umbrella coverage. The spreadsheet described each property and listed the underlying liability insurance information for each.
While some of the properties were protected by commercial general liability (CGL) insurance, the spreadsheet designated Allstate as the underlying carrier on some of them. Allstate provided Homeowners insurance, including Personal Liability coverage, on these properties, not CGL insurance.
The application the producer signed contained a box to be checked next to the statement in which the insured agreed that all primary insurance complied with the Umbrella policy’s underlying insurance requirement. An earlier statement on the application required underlying insurance to be CGL coverage with at minimum certain stated limits. This was plainly not the case for the properties insured by Allstate.
The policy renewed annually for the next eight years. In 2019, an individual tripped and fell in front of a vacant lot covered by both Allstate and the Commercial Umbrella policy. While the court’s opinion does not describe the injuries, they were sufficiently serious that Allstate almost immediately notified the umbrella carrier. It offered its full policy limit of $1 million, but the demanded damages exceeded that amount.
When the umbrella carrier investigated, it learned that the property in question was covered by Homeowners insurance, not CGL insurance. The carrier determined this to be a material misrepresentation on the insured’s part, and it sued to have the policy rescinded. The insured contested the carrier’s claim and countersued the agency.
The court ruled that a reasonable argument could be made that the misrepresentation was not material, so it denied the motion for rescission. Unfortunately for the agency, the court also refused to dismiss the claims against it. In fact, the judge found the agency’s arguments almost without merit. He found no basis for the agency’s argument that state law prohibited malpractice claims against insurance agencies. Rather, he found that the agency may have failed in its “common-law duty to obtain requested coverage for [its] clients within a reasonable time or inform the client of the inability to do so.”
The agency also tried to argue that it could not be sued for breach of contract because there was no enforceable contract with the client. However, the agency was charging the insured a service fee; the judge ruled that the service fee was a consideration that created a contract. He also rejected the argument that the insured lied to the agency, finding no part of the record supporting the claim. Accordingly, he ruled in the insured’s favor.
This agency was given a spreadsheet that clearly listed a carrier known for providing Homeowners insurance as providing underlying coverage. Either the producer missed that or decided it didn’t matter. Compounding the error, he checked the affirmation box on the application and then signed the application, rather than having the insured sign it. This made it difficult for the agency to argue that the insured made the misrepresentation. Lastly, it apparently did not obtain updated applications during the eight years of coverage.
The agency’s sloppiness and failure to implement a basic E&O loss control technique cost it. Determine what the coverage is, don’t mix personal and commercial policies (they are designed for different risks,) get the insured’s signature on the applications, and update the applications regularly. These simple practices help keep agencies out of court.
