Often, rules, laws, regulations, and the like are not what control the ultimate outcome of any particular E&O claim. Frequently, juries and judges tend to draw their conclusions from gut reactions to the facts of a case, rather than strict adherence to a regulation, a statute, or prior case law.
It is not that regulations, etc. are ignored, but rather that the issues are always subject to interpretation by the fact finder. The elements can be applied to fit whatever the decision maker favors. In other words, juries and judges often do whatever they feel is right and tailor their decisions to the applicable law, instead of the other way around. This article is an example of how this can play out.
An E&O Claim From A Policy An Agency Did Not Write
In 2002, “Acquiring Agency” bought “Selling Agency”. At the time of the asset-only sale, Selling Agency had a large “Client” with a complex insurance program consisting of multiple Property and Casualty and Life and Health policies. The “Producer” who had handled this insurance program for many years did not want to work for Acquiring Agency and quit his job. He was later hired by “Competing Agency”. In violation of his non-compete agreement, the Producer solicited Acquiring Agency's Client.
Litigation ensued between Acquiring Agency and the Producer, and the Client became aware of this litigation. The following year, 2003, the Client left Acquiring Agency and moved most, but not all, of its business to Competing Agency, where the Producer was still employed.
In late 2003, a claim was asserted which the Client believed should have been covered under one of its Employment Practices Liability Insurance (EPLI) policies, either with Acquiring Agency or with Competing Agency. Each policy, the older ones with Acquiring Agency and the newer one with Competing Agency, were written on a claims-made basis. The alleged Wrongful Act occurred during an earlier policy period. However, the claim was made under the later policy written by the Producer while employed at Competing Agency.
Both the Client and its legal counsel were unsure as to which agency should receive the claim report. Since Client and counsel were aware of the litigation arising out of the non-compete agreement, they decided that the Client would contact Acquiring Agency about the EPLI loss. An account representative there, in an effort to be helpful (and perhaps because he hoped to bring the Client back to Acquiring Agency) took information from the Client, and indicated he would make sure the claim got reported.
Unfortunately, the only policies the Acquiring Agency account representative had access to were the earlier policies - which would not provide coverage for a claim asserted in the latest policy year. At trial, the Client testified he had asked the account representative to make sure the claim got filed anyway and that he had agreed to do so (this was denied by the account representative). The account representative did not follow up and never contacted either Competing Agency or the Producer. Because the current carrier was not notified and had no knowledge of the claim, the insurer did not send any denial, nor otherwise correspond with the Client.
Litigation Arguments
In 2004, the Client learned that the account representative at Acquiring Agency had not filed a claim with any carrier. Once the claim had been reported and denied, the Client sued Acquiring Agency. The Client stated that Acquiring Agency had several options open to it, any of which would have prevented a loss of coverage. They based their argument on 3 points:
- If Acquiring Agency had notified the insurer for the 2002 policy year, that carrier's denial would have prompted an analysis of where coverage was available which ultimately would have led to the correct insurance company.
- Acquiring Agency should have contacted Competing Agency and advised there might be coverage for the claim under one of the policies Competing Agency had procured.
- Because Acquiring Agency had been the Client's broker for a long time and was still the broker-of-record on other policies, it had an affirmative duty to notify the proper carrier of the claim — even if it was not the agency for that particular policy. Alternatively, Acquiring Agency should have formally advised the Client it was unable to identify the proper carrier to put on notice.
Summary Judgment Rejected Motions for summary judgment on behalf of Acquiring Agency were denied. Interestingly, the Federal Judge who heard the motion concluded, as part of the decision, that there was “some duty” on Acquiring Agency, but was unable to articulate what that duty was, or how Acquiring Agency had breached the duty.
An additional factor also was significant and bears mentioning. When the Producer wrote the new EPLI policy through Competing Agency, the insurer insisted on a retroactive date which was the same as that policy's effective date. As a result, there would not have been coverage for the loss under the new policy. This would have been the error of the Producer and Competing Agency and exposed those parties to an E&O claim.
However, the new insurance company's denial was based only on “late notice” rather than on the fact the Wrongful Act took place prior to the retroactive date. We believe the insurance company limited its denial to late notice because legal counsel for the Client strategically offered information to the new carrier that only supported such a limited basis for denial. This was to help the E&O claim against Acquiring Agency and to prevent an E&O claim against the Client's current Producer.
At trial, the court refused to allow evidence or arguments that, even had notice been given on a timely basis, there would have been no coverage and, therefore, it was "no harm, no foul." Instead, the court insisted on assuming the current policy would have provided coverage had the claim been reported in 2003.
Results And Lessons Learned
At trial, the court concluded the failure of Acquiring Agency to put the prior carrier on notice was negligence, but that this was not the proximate cause of the loss and dismissed the claim. In addition, the court found Acquiring Agency was not negligent in failing to notify the EPLI insurer selected by Competing Agency of the claim.
While this case had a successful outcome from Acquiring Agency's standpoint, it demonstrates the potential pitfalls of undertaking to assist a client ~ even on what may appear to be a voluntary basis — with coverage under a policy the assisting agency did not procure. The court's judgment turned on a lack of negligence on the part of Acquiring Agency, but implicit in that decision (and in the court's ruling on the summary judgment motion) was that the court believed there was some duty.
In essence, the court's articulated decision was based on the inability of Acquiring Agency to know which was the proper carrier to notify, a decidedly fact-sensitive issue. It seems clear (at least based upon this case) that after notice of a potential claim is provided by a client to an agency which did not write the applicable policy, courts can conclude that there is some duty to make sure the claim gets reported.
When policies do not provide coverage because they have expired, the prudent producer must not only advise a client of the inapplicability of the expired policies, but also take reasonable steps to advise the client that he/ she is not the current agent and that the client should contact the agent who now provides coverage. Of course, all of this should be documented as well.
In this situation, Acquiring Agency should have told the Client that, since this is claims-made coverage, the policy which should respond was the one with Competing Agency. In addition, the Client should have been told to contact the Producer who sold the replacement coverage. The failure to do so exposed Acquiring Agency to a significant E&O claim.
While the court's written decision does not specifically address the question, it is our belief that the Client's involvement of its own counsel in deciding where to report the underlying claim and in the defense of the underlying lawsuit were significant. The counsel's choice not to pursue coverage under Competing Agency's policy played a subtle, but large, part in the EPLI claim's resolution. The court's refusal to permit the introduction of other reasons for denying the claim was frustrating to the defense of the matter. However, it is likely the court considered the Client's “manipulation” of the reason for denial by the later carrier to be a factor in its decision in favor of Acquiring Agency.
Kenneth Rothschild, Esq. /David D. Blake, Esq.
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