Sometimes, the best defense against an errors and omissions liability claim is the most direct evidence: The text of a delivered insurance policy. This was the experience of a Mississippi insurance agency.
The case began with a lawsuit filed in late 2013. A physician sued an orthopedic and sports medicine practice and its chief executive officer for alleged racial discrimination. The suit alleged that the CEO refused to work with the physician when both were members of the staff of a medical center.
The orthopedic practice and CEO were insured under a Businessowners policy and an Employment Practices Liability Insurance policy, both obtained through a local insurance agency. They submitted claims for defense and indemnity under both policies. The insurers, which were part of the same group, denied both claims, finding that they fell outside the terms of the policies’ language.
The physician, the practice and the CEO eventually settled the lawsuit for $4 million. They subsequently agreed that the physician would not execute the settlement, in return for which the practice and CEO assigned to him their claims against the insurers and the agency.
In early 2016, the physician sued the insurers and the agency, alleging breach of contract and bad faith on the insurers’ parts, and negligent procurement of coverage on the agency’s part. The insurers and agency, in turn, asked the court to rule in their favor based on the law. The court agreed and granted judgment in their favor.
The judge’s opinion quoted the EPLI policy’s insuring agreement which stated that it applied to “covered employment claims brought ‘by or on behalf of a natural person who is an `employee’ or applicant for employment.’” He then cited the EPLI and BOP policies’ definition of the term “employee” and noted that the definition “specifically excludes independent contractors.”
The physician “never alleged” that he was an employee of either the orthopedic practice or its CEO. Rather, he stated that he was a contract employee of the medical center. “(I)t appears,” he wrote, “that Plaintiff and (CEO) were both staff physicians at (the medical center) and were merely assigned to work together.” In fact, all parties confirmed that he had never been an employee of either the orthopedic practice or its CEO.
Because he had never been their employee, the court upheld the insurers’ decision to deny coverage for his suit. It also found that the CEO’s alleged derogatory comments about him did “not amount to slander or false light invasion of privacy,” which the BOP might have covered. Accordingly, the judge agreed that there was no coverage.
Regarding the allegation against the agency, the judge ruled that a simple reading of the policy before the loss would have informed the insured about the coverage. “Under Mississippi law,” he wrote, “if a reading of the insurance policy would make it clear that a denied claim was not covered, and if the plaintiff had fair notice of the policy terms, an insurance agent is not liable for a negligent failure to procure claim. … (T)he policy itself constitutes notice of its included terms and that silent acceptance of an insurance policy binds the insured to the clear policy terms. … A reading of the policies would have shown that employment claims brought by non-employees were not covered.”
While it is unfortunate that the insured had no coverage for a $4 million loss, it appears that the agency did its job by:
- Obtaining the requested coverage, and
- Delivering the policy to the insured promptly.
The only thing the agency might have done differently would have been to offer Third Party Liability Coverage as an option under the EPLI policy. The judge’s opinion does not mention whether the insured ever requested or the agent offered that coverage. Most states hold that agents do not have a duty to advise insureds on proper coverage, but that coverage might have offset part of the loss.
Insurance agents can protect themselves from E&O claims by:
- Documenting that they delivered a policy, and
- Suggesting that the insured review it and ask questions.
An insured facing a large uninsured loss may still sue, but the agency will have a strong defense at the ready.