Agencies Face E&O Lawsuit from Client Who Expected 2M UIM Coverage
- September 04, 2018
An insurance agency in Arizona sold errors and omissions liability insurance to another agency, which cancelled the policy midway through the second term. The first agency’s failure to discuss “tail” coverage with the second one landed it in a court fight, one that a judge said a jury must sort out.
The cause of the dispute was a car accident involving one of the second agency’s clients. The other driver was both negligent and underinsured. Unfortunately, the client’s uninsured/underinsured motorist (UM/UIM) coverage limits did not completely cover the loss. The court opinion did not describe the amount of the loss, but it was probably at least six figures.
The client claimed that, at the time he purchased his auto insurance policy, he asked the agency’s producer to obtain UM/UIM coverage with limits equal to his $2 million bodily injury liability limits, At the time of the accident, however, he did not have those limits.
Two years later, he sued the agency for the amount of UIM coverage he would have had if his request had been honored. This was when the agency discovered that it had no E&O coverage for the suit.
It had purchased an E&O policy running from December 2012 to December 2013, and renewed it for the 2013-14 term before cancelling in October 2014. The agency that sold them the policy allegedly never discussed or recommended coverage for prior acts at the time of purchase or Extended Reporting Period (“tail”) coverage at the time of cancellation.
The client purchased the auto policy before December 2012, when the E&O policy took effect, and the car accident occurred in August 2013. The lawsuit was not filed until August 2015, ten months after the E&O policy cancelled. The policy provided coverage on a claims-made basis, it did not cover prior acts, and the agency had not purchased tail coverage. Consequently, there was no coverage for this claim.
The second agency assigned its rights to sue the first agency to its underinsured client. The client sued, alleging that the agency negligently failed to explain to the other agency why it needed and should purchase retroactive and tail coverages.
The two sides disagreed on whether the failure to recommend retroactive and tail coverages was a question of law or a question of fact. A judge can decide a question of law without a trial, but questions of fact have to be resolved by juries. The first agency argued that Arizona law held that insurance agents are required to obtain only the coverage the insured requested, and this was an argument about failure to make recommendations.
The client noted a state court decision holding that an agent owes a client a duty “to exercise reasonable care, skill and diligence in carrying out the agent's duties in procuring insurance." He argued that “whether an insurance agent must explain the need for or recommend retroactive or tail coverage in order to satisfy this duty is a question of fact …”
The court agreed with the client. It noted prior rulings that a legal duty exists when the two parties have a relationship "such that the defendant was under an obligation to use some care to avoid or prevent injury to the plaintiff." The client argued that the two agencies had such a relationship, and the first agency did not contest that claim. The court also cited a prior decision stating that, while the general rule was that agents are not obligated to make recommendations, a trier-of-fact (that is, a jury) must resolve questions of the appropriate standard of care on a case-by-case basis.
As of this writing, there was no record of further developments in the suit; the parties may have settled out of court.
The agency selling the E&O coverage could have presented the retroactive and tail coverages as options, along with the associated premiums, and an explanation of what each covered and what the absence of the coverages would mean. If the purchaser had rejected the options, the agency should have documented that decision in correspondence. In these ways, the agency could have protected itself. Instead, it must face a jury or negotiate a settlement.