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Agency Wins in Court with the Help of Documenting a Coverage Gap

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Documentation to protect an insurance agency against errors and omissions liability losses does not have to be elaborate. Often, just a couple of sentences in an email or a cover letter are all that is necessary. A recent case involving an agency in New York proved the point.

The loss involved a property purchased by an individual and his associated limited liability company. At the time of purchase, the individual phoned the president of a local insurance agency, told him about the transaction and said he planned to renovate the property. He asked the agency to obtain a commercial general liability insurance policy to cover the property and the project.

New York has a law, the last of its kind in the country, that holds owners, contractors and their agents absolutely liable for injuries to construction workers that result from a violation of the law. If a construction worker can prove that his injury resulted from a violation, the owner and contractor have no legal defenses in court and must pay damages. These losses frequently run to seven figures or more. Consequently, many liability insurance policies sold to property owners and contractors in the state exclude coverage for injuries to construction workers.

The agency president obtained a quote for CGL coverage based on his conversation with the insured. He forwarded the quote with a letter in which he specifically pointed out that the policy would exclude coverage for construction worker injuries. In addition, the letter said that this coverage could be obtained for an additional $5,000 premium. He advised the insured to require the contractor for the project to sign an agreement holding him harmless from any losses and naming him as an additional insured on the contractor’s CGL policy.

The insured subsequently completed and returned an application for insurance but did not request the construction worker coverage. He later testified that he erroneously believed the contractor he hired would provide the coverage. A policy was obtained from U.S. Liability Insurance Group (USLI).

During the renovation project, a painter fell off a ladder and suffered serious injuries. The property owner submitted a claim to USLI, which denied coverage because of the construction worker injury exclusion. The injured worker then sued multiple parties, including the individual and LLC that owned the building. A jury awarded him $6.1 million, and the building owner assigned to him any recoveries he might be entitled to win from the insurance carrier and agency in court.

The injured worker sued the carrier, the insurance agency, and the wholesale brokerage that obtained the policy for the agency, claiming negligence, breach of contract, fraud and material misrepresentation. The court first dismissed the allegations against USLI. With regard to the agency and wholesaler, the court determined that the building owner was presumed to know what his insurance policy said, and therefore there could not be any negligence or breach of contract. The court also found no evidence of fraud or material misrepresentation, so it dismissed the suit. The worker appealed the decision.

The appeals court upheld the trial court’s decision, pointing to the letter in which the insurance agent informed the insured of both the coverage gap and the opportunity to purchase additional coverage. The judges also noted that the insured testified that he was aware of the exclusion. They found the worker’s counter arguments weak. “At best,
plaintiff established that (the insured) made a generalized request for liability coverage,” they wrote, “and it is well-settled that such a generalized request is insufficient to satisfy the requirement that a specific request for a particular type of coverage be made …”

This is an example of an insurance agency using sound loss control practices. The agency: 

  • Pointed out a significant coverage gap
  • Offered a solution to that gap, including its cost
  • Put both of these points in writing

All it took was a few sentences in a cover letter accompanying a quote to win the case for the agency.

An insured who suffers a large uninsured loss can be expected to take legal action. An agency that can submit evidence that it did the right thing, as this agency did, will always improve its chances of winning that action.

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