Workers’ Compensation can be a tricky line of coverage for insurance agents. The laws can vary greatly from one state to another. The insurance does not necessarily travel with an employer from state to state. Problems can arise when an agent forgets this fact.
A producer for a Michigan agency first met with the owner of construction company about its insurance program in 1998. The owner told the producer he was seeking Commercial General Liability and Workers’ Compensation coverage for the company’s projects, including work outside the state of Michigan. The producer obtained policies from a mutual insurer, and the insured stayed with that insurer for the next ten years.
In June 2008, a company employee working on a job in Florida fell off a ladder and died. When the owner filed the claim with his insurer, he learned that the Workers’ Compensation policy applied only to injuries occurring in the state of Michigan. The insurer denied the claim because the injury occurred during a job in Florida.
Six months after the accident, the worker’s widow and his estate sued his employer in Florida. Nearly two years after that, the two sides settled the case for $5,000,000. The company’s owner assigned to the estate his right of recovery against the insurance agency and insurer, in return for the estate’s promise not to seek collection against him.
The estate sued the agency and the producer in Michigan court in May 2011, alleging that the agency was negligent, had a special relationship with the contractor, and was vicariously liable for the acts of its producer. It accused the agency of misrepresenting the terms of the contractor’s coverage, and that the contractor relied on that representation. The agency, it said, failed to make sufficient inquiries to make sure that it had obtained the proper types of coverage.
The agency argued that the estate was too late in filing its action. In its view, the estate was accusing it of malpractice, and Michigan law sets a two-year limitation on filing malpractice actions. Even if the estate was not alleging malpractice, the agency said, a three-year limit applied, and that limit was reached three years after the effective date of the last renewal policy before the accident.
Although the trial court sided with the agency, the appellate court ruled otherwise. Since Michigan law did not define the meaning of “malpractice,” the court cited a previous decision holding that the term applies only to those professions subject to common-law malpractice liability when the law was enacted in 1915 – physicians, attorneys, surgeons and dentists. The court also noted that the relatively limited educational and licensing requirements for insurance agents are not comparable to those of these other professions. Consequently, the court refused to apply the malpractice statute of limitations to an insurance agent. Instead, it applied the three-year limit.
Further, it looked to the elements of negligence – a duty of care owed by one to another; a breach of the duty; actual harm caused to the second person by the first person’s breach – and concluded that all the elements were in place only when the insurer denied coverage. “Today,” the court wrote, “we hold that a negligent-procurement or -advice claim accrues when the insurer denies the insured’s claim. On that date any speculative injury becomes certain, and the elements of the negligence action are complete.”
The court ruled that the three-year period began on the date of the coverage denial; thus, the estate filed its action before the deadline. The case was returned to trial court for further proceedings.
This story illustrates two dangers. First, not knowing exactly what a policy covers can lead to unexpected coverage denials. The agent did not know that the Workers’ Compensation policy applied only in Michigan, and the result was disastrous. Second, it appears that no one reviewed the insured’s coverage during the ten years the agency provided it. An annual coverage review might have caught this gap years before the fatal accident. It didn’t happen, and the agency was faced with a potential $5,000,000 judgment.
Clients rely on their insurance agents for knowledge and expertise. For this agent, failure to provide them carried a very large cost.