By: AgencyEquity.com
Certificates of insurance, especially those that state that a specific party is an additional insured under one of the listed policies, can be an errors and omissions liability nightmare for insurance agencies. The possibility always exists that the policy might not actually provide the additional insured coverage.
A Montana general contractor had a project to erect a condominium building and a separate residential project. For both projects, they hired an engineering and surveying firm to perform tests on the soil below ground and provide recommendations for improvement to the soil to avoid excessive settling of the finished building. It was their practice to provide all vendors and subcontractors with a packet of information that included, among other things, insurance requirements.
The engineering firm was required to carry commercial general liability (CGL) insurance that named the contractor as an additional insured. A sample certificate of insurance with required wording was included in the packet provided to the engineering firm. The firm sent the sample to its independent insurance agent and asked that the agency send a certificate to the contractor. The agency’s office manager issued a certificate stating that the contractor was listed as an additional insured on the liability policy. She cited the specific coverage form numbers on the certificate.
The contractor then permitted the engineering firm to start work. The test pits the firm dug did not go as low as they should have. The firm reported, based on their findings, that the building would settle no more than ¾ of an inch. The building later settled more than four inches. The project owner sued the contractor.
The contractor submitted the claim to the engineering firm’s CGL insurance carrier. However, the carrier denied coverage on two grounds:
- The policy provided automatic additional insured coverage if a written contract between the engineering firm and the other party required that coverage. There was no contract requiring this coverage between the engineering firm and the contractor.
- The policy contained a professional liability exclusion that would have eliminated coverage for the loss even if the contractor had been an additional insured.
The contractor paid the project owner $2.2 million to settle the lawsuit, then sued the agency. Both parties asked the court for summary judgment, which is where the court rules based on the law when the facts are not in dispute. The court ruled in the contractor’s favor and denied the agency’s motion, then had a jury rule on the damages award. The jury decided that the agency owed the contractor $1,022,257.85 in damages, and the court tacked on an extra $180,284.14 in pre-judgment interest.
The agency appealed, claiming that the trial court should not have ruled in the contractor’s favor on the summary judgment motion and that it abused its discretion in refusing to admit certain evidence and making instructions to the jury. In February 2024, the appellate court upheld the trial court’s actions.
In a unanimous ruling, the judges found that emails the agency had sent committed it to procuring additional insured coverage for the contractor. They also cited the agency’s office manager’s testimony that it was fair for the contractor and engineer to rely on the certificate of insurance. Therefore, the agency should have foreseen the possible harm from not obtaining the coverage.
Because the agency either did not know what additional insured coverage the policy provided, or they did not ask whether there was a contract requiring the coverage, their E&O insurance carrier will pay out $1.2 million in damages.
The record does not state whether the firm had a professional liability insurance policy and why no one sought coverage under it. Possibly, the agency did not obtain that coverage and any policy another agency provided did not include additional insured coverage. Regardless, the agency issued a misleading certificate and it came back to haunt them in a big way. This shows again that agencies must know what is in the policies they sell and be able to explain to their clients what those policies can and cannot do.
