The outcome of a legal dispute hinges on evidence. The side that has the strongest evidence is likeliest to win. That is why insurance agencies should keep thorough records of their interactions with clients and carriers alike. Those records might help an agency prevail in an errors and omissions claim.
A Pennsylvania agency was sued by one of its clients because of an uninsured directors and officers (D&O) liability loss. The client was a group of affiliated real estate companies primarily owned by the same individual. In 2002, the agency obtained a D&O insurance policy for them that included employment practices liability coverage. The claims-made policy provided a $2 million limit. The client renewed it twice.
At the time of the 2004 renewal, the client and the agency signed a contract under which the agency would provide various risk and claims management services. The client paid the agency $50,000 per year for services such as in-depth review of the insurance provisions in contracts the client was signing, claim processing, regular claims status meetings, and reviewing certificates of insurance. The client also believed that the contract obligated the agency to obtain coverage for all of the affiliated entities.
In 2002, one of the agency’s producers emailed the client’s chief financial officer. He advised that the policy as applied for would not provide coverage for all of the client’s entities. Coverage was available for an additional premium. The CFO replied that she would discuss it with the client’s principal owner.
The producer next pointed out that the policy automatically covered subsidiaries only if the named insured realty company had more than 50% ownership of each, but not if the principal owned more than 50%. He requested complete information on each entity and advised that the additional premium for covering them would be “significant.”
The CFO answered that, since the principal owned 100% of the named insured and 99% of the other entities (with the named insured owning 1%,) she didn’t think they needed coverage for the other entities.
In October 2005, several investors in a mall that the client had sold sued them, alleging that they sold the mall for less than fair value. The CFO, concluding that their insurance would not cover the suit, forwarded the complaint to the principal with no further action. She later admitted in an affidavit that she had not read the D&O policies.
Two months before the 2004-05 D&O policy expired, the CFO told the agency that they did not want to renew it. The agency replied with a document describing the types of claims the insurance covered, but the policy expired. The agency asked the client if they wished to activate the policy’s extended tail coverage, but they declined.
More than a year later, the CFO emailed the agency about the mall lawsuit and asked if it was covered. By then, the deadline for reporting claims under the expired policy was long past. The client ultimately paid more than $750,000 in defense costs and $1.45 million to settle the suit.
The client sued the agency, alleging that the agency had failed to educate them about the scope of D&O coverage and the need to report claims within a specific timeframe. They argued that the agency should have reviewed the client’s files for potential D&O actions and made sure all entities were named as insureds. The agency moved for the court to dismiss the complaint.
In 2015, the trial judge agreed with the agency. She pointed to the client’s failure to timely report the claim to either the agency or carrier. She also noted the email in which the agency described the types of claims D&O insurance covers and the exchange in which the CFO said they did not need coverage for the affiliated entities. The complaint was dismissed.
Clear communications about the policy’s limitations and retaining the records of those communications saved this agency from liability. This case is a perfect example of why agencies should communicate these messages in writing and save copies. Those emails saved the agency from a $2.2 million judgment.
What is a good record-keeping system worth? At least $2 million.