There are occasions when an independent insurance agency must consider obtaining coverage for a client from the non-admitted market. When used appropriately and within the boundaries of state laws, the non-admitted market is a valuable source of coverage. When its use is questionable, the outcome may include litigation. One Massachusetts agency found itself in court fights with a competitor and with its own errors and omissions liability insurance carrier over the issue.
Among other areas of specialization, the agency specialized in writing real estate professional liability coverage. According to its website, they “provide[d] Professional Liability and Errors & Omissions Insurance for … professionals throughout the United States.”
This dispute arose from its practices in California. The agency wrote real estate professional coverage there with non-admitted carriers. A Los Angeles based agency also wrote this coverage, but they used admitted carriers. Like many state laws, California law requires agents and brokers to perform a diligent search of the admitted market before obtaining coverage from a non-admitted carrier.
The Los Angeles agency sued the one from Massachusetts over its business practices. Claiming that “admitted insurers generally charge higher premiums than surplus insurers,” the L.A. agency alleged “that (the Massachusetts agency) improperly offered surplus insurers’ policies despite the adequacy of the admitted market.” They accused the Massachusetts agency of unfair competition and failing to use reasonable care in soliciting and placing policies.
The parties eventually settled the suit on terms that were not disclosed.
In the meantime, the agency was fighting with its E&O carrier over defense of the claim. The insurer asked a federal court to declare that it had no obligation to provide defense, despite the competing agency’s allegation of negligent conduct.
The alleged injury, the insurer argued, arose from its insured’s business practices, not its professional services. The policy covered only errors and omissions arising from “rendering or failing to render professional services.” The agency argued that its act could be both a business practice and a professional service.
The carrier also cited an exclusion that applied to “unfair competition of any type.” The agency argued that Massachusetts law considers “unfair competition” to mean conduct that misleads consumers, but this dispute did not involve a consumer. It also argued that the exclusion did not apply to negligent performance of professional services, even if that negligence also harmed a competitor.
The trial court sided with the agency and ordered the carrier to defend the claim. The carrier appealed.
The appellate court rejected the carrier’s argument that there was a difference between business and professional practices, saying that soliciting and placing insurance coverage is an activity unique to insurance agents that requires professional expertise: “(T)he provision of insurance is both a profession and a business.” Since the alleged injury would not have occurred had the agency not been providing professional services, the court held that the insuring agreement applied to the suit.
The court also found that Massachusetts law had defined unfair competition as “conduct that causes confusion on the part of consumers.” The underlying lawsuit did not allege consumer confusion. Therefore, the court ruled that the exclusion did not apply and defense must be provided. The carrier was required to pay $82,000 in legal costs.
The record does not indicate whether the Massachusetts agency had access to any admitted carriers who would offer real estate professional coverage in California. Given that surplus lines policies generally leave the retail agent with less commission than do admitted policies, it seems likely that the agency did not. That did not prevent a competitor from trying to eliminate competition through the courts.
This case also shows the importance of carefully reviewing policy terms and conditions. The carrier lost, but almost one and one-half years separated the trial and appellate court decisions. If alternative insurance agents’ E&O policies were available without an unfair competition exclusion, they might have saved the agency from a long legal battle.
There are still lessons to be learned here. Always place admitted if that option is available regardless of the premium. Never replace an admitted policy that is being renewed with another agency with a non-admitted policy in your agency. Trying to beat rates where it doesn’t make sense will cost the agency more than it’s worth. The best option is to explain the issues to the client or prospect and if they refuse to understand, then it’s smart to walk away from a problematic business like this.