By: AgencyEquity.com
Insurance agents live with the chance that a client with an uninsured loss will grasp any argument, no matter how thin, to claim that the agent should pay for the loss. An agency that insured a Philadelphia hotel management company received a first-hand lesson on this.
The company managed a Sheraton hotel owned by the University of Philadelphia. The hotel’s general manager and chief engineer formed a separate company that billed the hotel for services the company never performed. They also recruited vendors to inflate the bills for their services and share the extra charges with their company. This went on for five and a half years. Between the fraudulent invoices and the kickbacks from the inflated charges, they pocketed more than $3 million.
Then they got caught. Both men pled guilty to numerous criminal counts of wire fraud and conspiracy to launder money. They were both sentenced to jail time and ordered to pay restitution. The vendors with whom they conspired also pled guilty, were sentenced to probation and ordered to pay restitution.
While this was going on, the university initiated legal action against the management company. They wrote to the company when they discovered “financial irregularities.” Later, they advised the company that they were investigating and the company should put its liability insurer on notice. The company did so.
The following year, the university demanded $5.4 million from the management company for losses and damages. The company sent the demand to its insurer, which agreed to provide a defense under a reservation of rights, as the policy included an exclusion of coverage for criminal acts. The insurer agreed to advance the company an indemnity payment of $975,000. However, they retained the right to seek a judgment from a court as to whether they owed coverage under the policy. If the court ruled that coverage did not apply, the company would reimburse the insurer for the full amount.
The following year, the insurer asked a court to make that determination. That same month, the insurer and insured added the insurance agency that obtained the coverage to the lawsuit. The insured argued that the agency had a duty to advise them as to the appropriate coverage for their loss exposures. If the court ruled that the policy did not cover their loss, they claimed, the agency should have to pay the $975,000 reimbursement.
The agency asked the court to rule, based on the law, that it was not liable. The trial court agreed, and the insured appealed.
The appellate court was not persuaded that the agency owed the insured a special duty. The judges noted that:
- The insured’s chief operating officer held a law degree and a master’s degree in business administration
- The insured held ultimate authority to make insurance decisions, and their legal department ensured that the coverage provided required coverage and limits
- Their director of risk management never questioned the criminal acts exclusion on which coverage hinged.
- Hotel owners dictated the coverage requirements and the agency provided coverage that met them.
- The insured knew that they could always ask the agency to obtain additional coverage and limits.
Based on all of this, the appellate court upheld the trial court’s ruling in favor of the agency.
This is an example of an uninsured client suing everyone who might have played a role in their having no coverage. The agency and insured had a written compensation agreement that described the agency’s obligations. The insured tried to argue that the agency owed more than that, and they failed. The agency had a contract and they did what they promised. That is all they could do.
Sometimes an agency will get dragged into court despite doing its job. However, if it has done a thorough job for the client and documented communications, it stands as good a chance of defeating the claim as this one did.
