Some insurance agencies may sign contracts with their clients. The contract obligates the agency to perform certain services for the client, in exchange for client fees. When a contract exists, it is very important that each party knows what the other expects. If the contract language and the understandings are not clear, the agency could be liable for the client’s mistakes.
A Texas agency had a contract with a petroleum products supplier under which the agency was to provide “insurance brokerage services.” The contract defined that term as including policy reviews, providing insurance summaries, and “educating (the client’s) employees as needed.” The agency obtained a primary Employment Practices Liability Insurance policy from an admitted carrier and a Commercial Umbrella policy from a surplus lines carrier. The EPLI policy was written on a claims-made form; the umbrella was an occurrence policy.
One December day, two of the client’s truck drivers discovered that they had both been assigned to drive the same truck. A disagreement about which driver would get the truck followed, and it was resolved by one driver stabbing the other in the neck. The employer fired both employees. The stabbing victim filed complaints with the Texas state government and the federal Equal Employment Opportunity Commission. When he lost there, he sued his former employer for wrongful termination and defamation. The case went to arbitration, where the employee was awarded almost $5.1 million.The employer paid out of pocket, then sought recovery from its insurers six days after the arbitrator made its award.
Both carriers denied coverage on the grounds that the insured’s notice to them was too late to comply with the policies’ terms. The client sued the carriers, the agency, and another agency that had since obtained a broker of record letter, replacing the original agency. The lawsuit against the original agency alleged that the agency failed to inform the client that the EPLI policy was claims-made; failed to deliver all insurance policies in a timely fashion; failed to instruct the client’s employees on the terms of the claims-made policy; and failed to notify the client of the material terms and conditions of all policies. The agency counter-argued that it had been replaced by the new agency at the time of the fight; that it had provided the client with summaries of the policies; and that any alleged breach of the contract did not cause the client harm.
The trial court sided with the carriers and the agencies, and the client appealed.
The appellate court dismissed the client’s claim that the agency did not tell it about the claims-made policy, noting that the summary the agency provided stated in large bold font at the top of each page, “This is a Claims-Made Policy.” The court also reviewed the written contract between the agency and the client, and it found nothing in it that required the agency to deliver policies within a set period of time. That allegation was accordingly also dismissed.
However, the court said the client might have a point about the last allegation. Pointing out that the agency had a contractual obligation to educate the client’s employees about the policies’ terms, they said that the mere fact that the agency made copies of the policies available did not mean that it met this obligation. It was reasonably foreseeable, the court said, that failing to advise the client’s employees might cause them to file claims late. Lastly, it said that posting “This is a Claims-Made Policy” on the coverage summary did not properly educate the employees because it did not describe the notice requirements.
The “educate” provision in the contract required the agency to do more than deliver copies of the policies with a summary. It required the agency to ensure that the client had a clear understanding of the notice requirements. In-person meetings followed by written documentation might have prevented the late notice. At the least, they would have given the agency a better defense against the lawsuit.
In any contract between an agency and a client, the agency will be considered the expert with the responsibility to guide the client. If each party understands what that responsibility means to the other, situations like this can be avoided.