Every state limits how long an injured party has to sue another party that it feels is to blame. When an insurance agency sells a policy with an exclusion (which is always,) when does the clock start – when the policy takes effect or when a claim is denied? An Ohio agency found out.
The agency obtained a real estate agents’ errors and omissions liability policy for a real estate company that handled commercial leases. The policy included a very specific exclusion – coverage did not apply to claims brought by a certain apartment rental company.
During the policy term, the insured notified the carrier of a claim involving that rental company. The carrier denied coverage, citing the exclusion. Consequently, the real estate agency paid $420,000 out of its own funds for defense costs.
Four years later, and almost five years after the policy’s inception date, the insured sued the insurance agency. They claimed that the agency had been negligent in obtaining the policy and had misrepresented the coverage it provided.
Interestingly, the insured’s complaint papers included a copy of the policy. The court’s opinion specifically noted that the policy contained the endorsement excluding coverage brought by that one rental company. However, the agency did not defend itself by pointing out the insured’s duty to read the policy. This implies that there was an extenuating circumstance the court’s opinion did not address.
Instead, the agency relied on a technicality – that, under Ohio’s statute of limitations, the insured had four years from the policy’s inception date to sue the agency and missed the deadline.
The insured counter-argued that Ohio’s “delayed damage rule” applied. This rule holds that the statute of limitations clock starts on the date the injured party actually suffers an injury. The insured argued that it suffered the injury on the date the carrier denied coverage. They filed their lawsuit nine days short of the four-year anniversary of the claim denial. Under this theory, their lawsuit was timely.
The agency won the trial, but the insured appealed and won. The agency then appealed to the Ohio Supreme Court.
The Supreme Court rejected the delayed damage rule argument. “If, as (the insured) argues,” the majority of justices wrote, “it was injured by the insurance policy containing the specific-entity-exclusion provision provided by (the agency), then (the insured) was damaged the moment it entered into the contract and became obligated to pay a premium for a professional-liability insurance policy that was less than the coverage that it believed it would receive. Therefore, the harm to (the insured) was complete when (the agency) issued the insurance contract setting forth the specific-entity-exclusion provision.”
Two of the seven justices disagreed, saying that until a discernible injury has occurred, the insured has no grounds to sue and therefore the time limit on suing has not started. However, the other five ruled otherwise, and the judgment against the agency was reversed.
We don’t know what the communications were between agency and insured here. An endorsement excluding coverage for claims brought by one specific entity is a pretty significant limitation. If the agency did not alert the insured to this endorsement, it certainly should have done so. Of course, it is possible that the agency told the insured about the exclusion and the insured sued as a desperation measure.
Communications with a client are always key to preventing errors and omissions claims. If the agency had documentation that it told the insured about the exclusion, this sut would never have reached Ohio’s highest court. It is always a best practice to inform a client in writing about coverage holes.