Clients may sue their insurance agents when they don’t receive payment for a loss. Often, that is when the insurance coverage does not apply, but sometimes an insurer fails to pay a claim even when the loss is covered. That can also lead to a lawsuit against an agent.
An elderly woman in rural upstate New York fell outside a restaurant and suffered injuries. The court opinion did not state the extent of the injuries or the amount of damages she sought. However, the lengthy legal process indicates that the damages were significant, possibly six figures.
The woman sued the restaurant, which in turn sought liability insurance coverage from its insurer, a risk retention group. However, they discovered that insurance regulators had filed a petition to liquidate the insurer two months before the accident. A court had subsequently declared the insurer to be insolvent. An ordinary slip-and-fall loss was uninsured because the insurer had gone broke.
The restaurant sued its insurance agency, the president of the agency as an individual, and the wholesale insurance brokerage that helped the agency obtain the policy. They accused all of the insurance professionals of breach of contract, negligence, negligent misrepresentation and breach of fiduciary duty. The trial court granted the insurance professionals’ motions to dismiss the suits, and the restaurant appealed.
The appellate court upheld the dismissal of the allegations against the agency president, finding that he was acting within the scope of his employment. It also dismissed the negligence, negligent misrepresentation and breach of fiduciary duty allegations, saying that they duplicated the breach of contract allegation.
The breach of contract allegation against the agency was another matter. The restaurant argued that they and the agency “entered into an oral broker’s agreement whereby (agency) agreed that it would obtain a viable insurance policy and that, if defendant paid the insurance premiums on time, (agency) would process any claims on defendant’s behalf in a timely and efficient manner and would promptly notify defendant of ‘any changes’ impacting the policy.” They noted that they had submitted another injury claim to the agency three months before the accident, and the agency did not process it in a “timely and efficient manner.” Had they done so, the restaurant said, the restaurant would have learned much earlier of the insurer’s financial trouble and looked for new coverage. The appellate court agreed with the restaurant, finding that the agency breached its contract by failing to notify the restaurant of the insurer’s condition.
The court dismissed the allegations against the wholesale brokerage, ruling that there was no evidence of a contract between them and the restaurant. However, it issued a judgement against the agency for breach of contract.
Insurance clients rely on their agents to obtain coverage from financially solid insurers. If the insurer is so weak that it is unable to pay claims, it should not be a surprise when the insured sues the agent. State guaranty funds can step in when an admitted carrier is unable to pay, but they might not cover losses of insolvent risk retention groups. The state guaranty fund did not cover this loss.
Particularly when placing coverage with a non-admitted insurer or a risk retention group, agents must ask for assurances that the insurer is financially sound. Many non-admitted insurers are subsidiaries of large national groups with comfortable levels of surplus. When the insurer is not one of these, agents should use them only with enough information to verify their soundness.
Insurance is only as good as the company’s ability to pay. Agents should take care to place coverage only with financially sound companies.