When a retail agent seeks the help of a wholesale broker in obtaining insurance for a client, there are four parties involved – client, agent, wholesaler and insurer. This means communications at different times between multiple actors. Misunderstandings, intentional or not, can occur.
An agency in Brooklyn, New York ran into just such a situation. It started on a Wednesday, when the principal member of a limited liability company (LLC) contacted the agency to request a quote for coverage on a building the LLC was buying. The following sequence of events occurred:
- Wednesday, 4:04 pm: The agency principal emails an underwriter at a wholesaler with whom the agency had a contract. He requests a quote, telling her that a binder is needed that night, if possible, for a closing the next morning.
- 4:28 pm: The principal tells the client that he will have a binder by 9:00 am the next day.
- 4:55 pm: The underwriter emails a quote for basic form coverage to the agency, advising that special form coverage may be available if the client provides information about renovations.
- Thursday, 1:10 pm: The client tells the agency that the binder is urgently needed.
- 2:51 pm: The agency emails the information about renovations to the underwriter. The underwriter provides the quote for special form coverage.
- 3:40 pm: The agency principal emails a binder and a paid receipt to the client in the amount of the basic form quote. The closing occurs with the binder as evidence of insurance.
- Friday, 11:02 am: The principal emails the client that special form coverage is available for a higher premium, He attaches a new binder, showing the effective date as Thursday, and a paid receipt for the higher amount. The client pays the premium.
- 12:48 pm: The principal emails an application and a copy of the quote to the client, asking him to sign the application and return it. The client does so.
- 1:35 pm: The principal forwards the application to the underwriter and asks for coverage to be bound effective on Thursday.
- 3:35 pm: The underwriter replies that she is unsure whether the insurer will backdate coverage to Thursday.
- 3:37 pm: The principal replies, “try for yesterday, [if] not approved let it be today.”
- 4:32 pm: The underwriter emails that the insurer will backdate if it receives a no-loss letter for the period of Thursday to “the present date.” She asks the principal to confirm that it is okay to bind and informs him that her office is closing for the weekend at 5:00 pm.
- 5:41 pm: The principal replies, telling her to bind and that he will forward the no-loss letter on Monday.
- Sunday: The building suffers extensive fire damage.
- Monday: The underwriter, unaware of the loss, informs the principal that the no-loss letter must cover the period of Thursday to Monday.
The insured could not provide such a no-loss letter, and the insurer denied coverage for the fire damage. The insured sued the retailer, wholesaler, and the insurer, but the judge dismissed the cases against the wholesaler and insurer.
However, the judge ruled that the agent had failed to obtain requested insurance within a reasonable time and had not informed the insured of the inability to obtain it. He also found that the agent had failed to exercise reasonable care in the transaction and had falsely informed the insured that coverage had been obtained. He rejected the agency’s claims that the binders were not actual evidence of coverage, and ruled in the insured’s favor.
A separate hearing was to be held to determine damages. The building cost the insured $447,500, so the loss was likely more than $100,000.
The agency issued an unauthorized binder on which his client and their lender relied, almost a full day before he actually requested that coverage be bound. He failed to promptly communicate with both the wholesaler and the client. For all of these poor decisions, a court has found him liable for damages. The lesson is clear: In the rush to service a client, agencies must stay within their authority and always provide accurate information to the client.