Agent Wins in Court on an Excess Liability Claim

Sometimes, what an insurance agent says and what his clients think they hear are different things. The clients may assume that a policy provides coverage that isn’t there. They may view the agent as an expert. Later, when things go wrong, they will attempt to hold him to that standard. Such was the case for a California agent and the owners of several commercial properties.

In the mid-1990’s, these individuals owned a Los Angeles apartment building. A child fell from a third-story window in that building and suffered serious head injuries. The owners sold the building in 2001. Three years later, they formed a holding corporation that owned 23 separate limited liability companies. Each of these LLCs owned a piece of real estate, but none owned the apartment building from which the child fell.

The new corporation asked the insurance agent to obtain insurance on the LLCs and the 23 properties.  He placed primary and umbrella/excess liability insurance for the LLCs and the corporation. During the 2005-06 policy term, the mother of the injured child sued the property owners for $1 million. They made a claim with the company that provided primary insurance on the property in 1994 and a separate claim for excess coverage under their new umbrella policy. The 1994 primary insurer paid the $500,000 each occurrence limit due under the policy.

The excess carrier denied coverage on the grounds that the child’s injury did not occur during its policy period. The property owners paid $500,000 out of pocket, then sued the agent and excess insurer. They charged the agent with negligence in failing to obtain insurance that would protect them against losses arising out of properties they previously owned, and in assuring them that the excess policy would cover any claims arising out of their business.

The insurer and the agent persuaded the trial court to dismiss the suits. The property owners appealed. They argued that the agent was negligent in failing to obtain the insurance they said they asked for. Their charge to him was to obtain “an additional layer of liability protection to go up and beyond any other insurance they had.” This implied, they said, that the proper policy would have applied to past and present primary policies.

They also claimed that he “held himself out to us as an expert in insurance matters,” specifically for the family business’s type of risks. Lastly, they argued that he misrepresented the excess policy’s coverage by saying he “could not imagine any claim that came that would not be covered” under it.

The appellate court rejected both allegations. Regarding the charge of procuring inadequate coverage, the court called the owners’ coverage requests “extremely general in nature.” They did not specifically ask for coverage for past years or previously owned properties and did not discuss the apartment building where the accident occurred. “Under these circumstances,” the court said, “(the agent) could not reasonably have known that plaintiffs wanted excess insurance for past years or for properties they no longer owned.”

The court also called the owners’ statements about the agent’s expertise too conclusory to be triable. It noted that the owners did not say what the agent supposedly said to make them believe he was an expert. Regarding his alleged misrepresentation, the court said the owners made a general inquiry and that he responded with a general statement. Neither the question nor the answer were specific enough to show that he misrepresented the coverage.

This agent could have avoided this situation by asking the clients about their current and past business ventures. It is possible that the agent could have obtained an umbrella policy with a claims-made trigger. Depending on its retroactive date, such a policy, might have covered the 1994 accident. Some states restrict the classes of business for which a carrier can provide claims-made coverage, so it is important to be aware of the limitations in a particular state. Also, a suitable alternative might have been available on the surplus lines market.

Regardless, a thorough interview would likely have uncovered this concern. Then the agent could have tried to find a policy to meet the need or informed the client up front that none was available. Setting realistic client expectations can prevent many E&O claims. 

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