Most state laws set a simple duty for insurance agents – to obtain the insurance the client has requested. Yet, whether through haste, carelessness or drive to close a sale, sometimes agents fail at this basic duty. Such was the case for two agencies working together on a single Pennsylvania account.
The situation involved a business and its lender. The business provided “vaulting services” to automatic teller machines (ATMs) in the New York City metro area. A vaulting service stocks ATMs with paper money for depositors to withdraw on demand. The lender made secured loans to the business with the “explicit” understanding that the business would use the proceeds only for the purpose of supplying ATMs with cash. They were not to be used to pay for overhead or other business expenses.
Less than a year later, the business’s owner asked for additional loans. This made the lender nervous. He was concerned that the owner might disappear with his money. As a precaution, he granted the loans on the condition that the business obtain insurance, including employee theft and dishonesty coverage that would cover any theft or dishonesty on the owner’s part. The insurance policy was to name the lender as loss payee. The owner asked a local insurance agency to obtain the coverage, and the lender worked directly with the agency to make clear what he wanted.
The agency sought the help of another agency to obtain the coverage. A producer for this second agency recommended a policy that he claimed would meet the ATM vaulting business’s needs. Specifically, he claimed that it would cover any thefts from the business by its owner. The first agency relied on this recommendation, advised the business to buy it, and the policy was issued. The agency “both orally and in writing, repeatedly assured (the lender) that the Policy protected and insured him against theft or dishonesty by (the business owner.)”
In fact, the policy did not name the lender as a loss payee until six months into the policy period. Ignorant of this, the lender made additional loans and asked for the limit of insurance to be increased to $2,250,000.
The month before he was named as a loss payee on the policy, the lender learned from the business owner that $900,000 had been used for purposes other than stocking ATMs, and $833,835 was gone for good. The lender notified the first agency, which assured him that he was covered. However, the insurer denied coverage for the loss because the policy did not cover theft or dishonesty committed by the business owner – it covered only acts of employees.
The lender subsequently learned that the producer for the first agency was selling insurance without a license, having lost it following a conviction for felony insurance fraud and perjury. The lender sued the agency, which then sued the second agency for recommending the faulty policy. The court did not let either of them off the hook, finding that the second agency owed a contribution to paying damages to the lender.
Two professional insurance agencies obtained this policy, and apparently no one at either firm actually read it. A simple reading of the policy at inception would have informed both that it did not cover dishonesty on the owner’s part. Had they known, they could have sought a replacement or at least advised their insured and the lender. Worse, the producing agency had an unlicensed producer working with clients. Both agencies were incompetent in this matter, and the only remaining question was how much each would have to pay to the lender.