What can be worse than an insurance agent making a major mistake on a submission to a carrier? Trying to fix the mistake after a loss has occurred but before the carrier knows about it. A New York City agency tried to do this, and it did not end well for them.
The insured was a limited liability company whose principal member was also a cousin of one of the two agency principals. The LLC owned a property that had been insured under a policy that contained a protective safeguards endorsement (PSE). This endorsement required the insured to maintain an automatic sprinkler system in the property. The insured building had never had a sprinkler system.
In 2018 the insured emailed a “copy of the … Policy” (probably just the declarations page) to the agency and asked them to get quotes for replacing coverage. He instructed them to have any new insurance company inspect the property.
Based on the copy of the policy, an agency principal created a submission and uploaded it in the system of one of his carriers. Notably, he assumed that the building had a sprinkler system because of the PSE on the incumbent policy and indicated as much in the submission. The system generated a premium discount for the sprinkler system and included a PSE in its quote.
The carrier’s underwriter issued a proposal based on the submission that included the PSE on the list of applicable policy forms. The proposal contained an “IMPORTANT INFORMATION” notice warning that any policy issued would include the PSE and that failure to maintain a sprinkler system could result in a claim denial. The agency forwarded the proposal to the insured but did not include either the forms list or the important information notice. The insured accepted the quote and a policy was issued. The insured testified that he never reviewed it.
A few months later, fire damaged the building and the insured hired a public adjuster. Believing that the adjuster would provide a notice of loss to the carrier, the agency did not send one. The adjuster discovered the PSE on the policy and advised the agency to have it removed. The day of the fire, the agency made repeated contacts to the carrier asking to have the endorsement removed, retroactive to the inception date. Unaware of the fire loss, the carrier made the change.
Three days later, the carrier received notice of the loss. One of the agency principals falsely told one of the carrier’s property claim adjusters that he learned of the fire late in the day that it happened. In fact, he requested the policy change because he knew about the fire. Following an investigation, the carrier denied coverage eight months after the fire.
The insured sued the carrier, who counter-sued its agency. The carrier accused them of breach of contract by not providing all relevant information about the risk and not promptly giving notice of the loss.
The court ruled in the carrier’s favor and awarded them $1,236,004 in damages for the litigation costs they incurred. “This litigation,” the judge wrote, “is undeniably a result of (the agency) convincing (the carrier) to remove the PSE effective at inception without disclosing the fire.”
The court ordered this agency to pay its carrier almost $1.25 million because the agency:
- Did virtually no independent information gather about the risk
- Did not determine whether the building actually had a sprinkler system
- Assumed that the previous coverage was correct without verifying that
- Tried to correct its mistakes only after a significant loss occurred
- Attempted to deceive the carrier into removing a policy provision before the carrier learned of the loss
This is not the way an agency wishing to protect its reputation, not to mention its errors and omissions liability insurance coverage, should operate. An agent should verify the accuracy of at least the most essential information on an application before it goes to a carrier. When he makes a mistake, he should work with his E&O carrier to minimize the harm but take responsibility. By not being forthcoming and deceiving the carrier, this is very damaging to the agency’s relationship with their carriers and clients alike.
