Agency that provided misinformation about policy could be charged with Fraud
- February 08, 2016
Insurance is a business built on trust. Giving people bad information destroys that trust. Insurance agents know: Misinforming anyone – client, underwriter, claims handler, regulators – will lead only to trouble. Look no further than the story of a New York agency for an example.
A couple who owned a home hired a contractor to renovate it. During the course of the work, something went very wrong. Two months after they signed the contract, they had to have the house demolished. They claimed that the contractor's poor work made demolition necessary.
At the time they signed the contract, the contractor gave the homeowners a certificate of insurance. It showed that he had commercial general liability insurance. However, the certificate, signed by his insurance agency's president, showed a policy expiration date that had passed two months before. Actually, the policy had renewed and had 10 months left in its term.
Two months after the house came down, the homeowners sued their contractor. They and their attorney started calling the insurance agency to find out whether the contractor's CGL policy had been renewed. Every time they called, an agency staff member or the agency president told them that the policy had expired before the project began. There would be no insurance to cover the loss of their home.
During the discovery phase of their lawsuit against the contractor, the homeowners learned that the policy actually had been renewed before they hired him. Although it eventually cancelled for non-payment of premium, it had still been in force at the time of their loss.
They sent copies of their lawsuit to the contractor's insurer with a request that it cover the loss. Citing the long delay in reporting the loss and policy exclusions, the insurer denied coverage. Eventually, the homeowners obtained a court judgment awarding them damages. The contractor did not pay the damages.
Three years after the first lawsuit, the couple sued the insurer, the agency and the agency's president. They claimed that the agency committed fraud and negligent misrepresentation when it told them the contractor's policy was not in effect. They demanded the amount of the unsatisfied judgment against the contractor.
The agency and its president moved to have the case dismissed. They argued that the agency had no “privity of contract” with the homeowners, meaning that they did not have a contractual relationship with them. Consequently, they could not be liable for any alleged misconduct. The trial court agreed and dismissed the complaint. The homeowners filed an appeal.
The appellate court agreed that the agency and its president did not have privity of contract with the homeowners. For this reason, it dismissed the negligent misrepresentation complaint. That's where the good news ended for the agency. The court also said that, even without a contractual relationship, the homeowners could still recover if the agency committed fraud. It reinstated the fraud complaint and sent the case back to the trial court for further action.
The court's opinion does not explain why the agency kept telling the homeowners that an in-force policy had expired. The fact that multiple individuals in the agency relayed false information indicates that the agency's records were incorrect. Presumably, though, the agency was receiving commission income from the policy, which makes the insistence that the policy had expired puzzling.
The clear lesson from this case is that an agency should strive to always provide accurate information to anyone with a right to it. The homeowners had a valid claim against their contractor and were attempting to pursue it. They certainly had an interest in the contractor's liability insurance. The agency should have given them the correct information.
Further, the agency should not have issued an incorrect certificate of insurance. The renewal policy was two months into its term when the agency issued the certificate. The agency should have known what the correct effective and expiration dates were. Certificates are a leading cause of errors and omissions claims. Agencies should issue them with care.
Mistakes can happen. However, agencies must protect themselves by taking every reasonable step to keep them from occurring. An angry claimant will not hesitate to hold them responsible.