If an insurer denies coverage for a loss after the insured took years to report it, is that the insurance agent’s fault? An Illinois company argued that it was.
The client was a construction contractor that specialized in telecommunications industry work. The agent was a large multi state insurance brokerage. The agency obtained for the client primary automobile liability coverage with a $1 million limit and an excess policy with a $10 million limit.
In January 2008, one of the client’s employees had an auto accident that injured an occupant of another vehicle. Litigation over this accident would continue through 2019.
The injured person sued the contractor and its employee, who in turn sought coverage under the primary auto policy. The primary carrier believed that the lawsuit was meritless. Apparently believing that the primary policy’s limits were sufficient to cover the loss, neither the insured, the agency nor the primary carrier notified the excess carrier. The primary carrier hired defense counsel, and he too did not notify the excess carrier.
Pre-trial court proceedings lasted five years. In April 2013, the claimant demanded $1.25 million in damages. The primary carrier responded with an offer of $75,000. Failing to reach an agreement, the parties headed for a court trial commencing in early 2015.
In December 2014, the agency finally notified the excess liability carrier of the loss. Perplexed at the sudden notice about an accident that had occurred nearly seven years prior, the carrier issued a letter to the agency reserving its rights to deny coverage. Its own adjuster evaluated that the claim had a settlement value of between $500,000 and $750,000, placing it well within the primary policy’s limits. However, to keep the claim open on its computer system, the carrier assigned a $1 reserve.
Meanwhile, the case went to trial, and settlement negotiations resumed. The parties reached an outline of a settlement in which the carrier would guarantee at least a minimum amount of damages and possibly pay as much as the $1 million limit, depending on the jury’s decision. However, they couldn’t agree on the minimum number, with the carrier wanting $100,000 and the claimant wanting $175,000.
Before the carrier could counteroffer, the jury returned with an award to the claimant of $2.3 million. The excess carrier then sought a court declaration that it did not owe coverage to either of them because of the late notice of the loss and lawsuit. The two then sued the primary carrier, their lawyer, the law firm, and the agency, claiming that the agency had a fiduciary duty to notify the excess carrier of the loss in a timely manner.
The judge rejected all of the insured’s and employee’s arguments. He cited Illinois law that makes insurance brokers (the term used in the law) liable only for negligence and mishandling of certain funds. He also found no basis for a claim of negligence: “(The insured) has identified no Illinois cases establishing that insurance brokers have a duty to deliver notice of claims on behalf of an insured, and so its negligence claim fails.”
One thing the agency could have done to avoid this lawsuit would have been to notify the excess carrier as soon as the claimant demanded $1.25 million. This would have given the carrier weaker grounds on which to deny coverage. The insureds would have had the security of excess coverage even if it wasn’t needed.
As the court ruled, the agency was not obligated to notify the carrier of the loss. However, doing so proactively might have saved it some trouble.