In today’s price-focused insurance markets, it can be easy for an insurance agent to forget some fundamentals: What does the policy say? Have you told the insured what it says? Have you documented that?
An Ohio insurance agency obtained a Real Estate Agents Errors and Omissions Liability Insurance Policy for a real estate agency, known as LGR, with a policy term of May 12, 2010 to May 12, 2011. The policy contained an endorsement excluding all coverage for claims made against the insured by a specific company, Plaza Properties.
During the policy term, Plaza Properties made a claim for damages against LGR. The agency in turn sought coverage from its insurance carrier, which denied coverage on April 26, 2011. LGR spent $420,000 of its own funds on attorneys’ fees and related expenses to defend itself in the litigation.
On April 17, 2015, just nine days before the four-year anniversary of the coverage denial, LGR sued the insurance agency. LGR alleged that the agency had negligently obtained an inappropriate professional liability insurance policy for them, and subsequently misrepresented the policy’s coverage.
The agency asked the court to dismiss the suit, not on the merits of LGR’s argument, but on time limits. Ohio has a four-year statute of limitations for lawsuits that are not covered by other sections of state law. The agent argued the injury to LGR occurred on May 12, 2010, the date the policy took effect. This meant that the deadline for filing the lawsuit was May 12, 2014, almost a year before the suit was filed.
LGR counterargued that the injury actually occurred on the date of the coverage denial, April 26, 2011. This would mean that LGR had until April 26, 2015 to sue, and they filed their suit on April 17.
Both sides cited Ohio court decisions to support their arguments, but the trial court sided with the insurance agency, ruling that LGR’s lawsuit was filed too late. LGR appealed, and the appellate court concluded that the trial court was mistaken. It interpreted the earlier decisions in a way that applied what was called “the delayed damage rule.”
This rule holds that, when a wrongful act does not immediately cause harm, there is no cause to file a suit until “actual damage occurs.” Since the damage to LGR occurred on the date the insurance company denied coverage, the appeals court said the lawsuit against the agency was timely.
The insurance agency appealed to the state’s supreme court, which agreed with the trial court and dismissed the case against the agency. The court found that the start of the statute of limitations period could be delayed only where the injured party’s opportunity to sue would pass before it became aware of the injury. “Those narrow circumstances,” the court said, “do not exist here.”
The insurance agency won only because of LGR’s bad timing. Liability insurance policies include many exclusions. It is unreasonable to expect an insurance agent to point out and explain every one of them to an insured. However, an exclusion that explicitly applies to claims made by a specific entity is not typical.
The court’s opinion does not mention why the exclusion was in the policy. It seems logical to assume that LGR had a history with this particular company, and the underwriter didn’t want to assume that exposure. If so, then that was a significant coverage gap, one that the agency should have communicated to the insured loud and clear. If the agent had attempted to do so, that argument certainly would have been raised in its motion to dismiss the suit. Yet there is no mention of such an argument.
It appears that LGR was unaware of the exclusion, and it’s reasonable to wonder if the agent even knew about it. If not, he or she certainly should have.
There are two things the agency could have done to prevent this situation:
- Thoroughly reviewed the policy
- Notified the insured in writing of all significant exclusions, particularly the Plaza Properties exclusion
Coverage knowledge, communication and documentation are the keys to errors and omissions loss control for insurance agents. In this case, all three would have made it easier to get the lawsuit dismissed.