From the standpoint of an insurance customer, the most important time for an insurance agent and carrier to perform is when there is a claim. Everything leading up to that point is secondary. When an agency drops the ball at claim time, it can find itself in a mess.
In 1999, a snowmobile collided with a passenger vehicle parked in the traveled portion of a county road. The snowmobile’s occupant was injured, and he sued the car’s owners three years later. The same day that the car owners received the legal complaint, they notified their insurance agent. The agency, however, failed to notify the insurance carrier.
Since the carrier was unaware of the suit, it did not provide its insureds with a legal defense. Five months later, after the defendants failed to appear in court, the judge granted judgment by default to the injured snowmobiler. Because separate litigation was ongoing against the operator of the car, the court deferred the damage award.
After the other litigation concluded six years later, the court awarded the plaintiff $1.2 million. The insurer denied his request for payment. The car owners then assigned their claims against the insurance agent and the insurer to the plaintiff. One year later, he sued both the agent and insurer for negligence and breach of contract.
The defendants argued in court that any alleged offenses occurred in 2002 when the plaintiff filed his lawsuit against the insureds. Noting the three-year statute of limitations, they argued that by 2009 it was too late for him to take legal action against them.
The trial court disagreed. It found that all of the plaintiff’s claims were based on the breach of the insurer’s duty to defend its insureds. It also held that the duty to defend continued throughout the plaintiff’s litigation against the car owners and ended only when the damages were awarded in 2008. Consequently, the statute of limitations would not expire until 2011, making a lawsuit filed in 2009 timely.
The agent argued that it was not the insurer and had no duty to defend the insureds. Its breach of duty occurred in 2002, it said, and therefore the statute of limitations ran out in 2005. The court rejected this argument. Both the insurer and the agent appealed.
They lost the appeal. The judges pointed to a previous decision by another state appellate court. This held that the period to take legal action begins at the time of the injury, not at the time of the breach of duty. They also noted their own precedent about the period for suing an agency for failing to obtain requested coverage. The period began when an injury occurred and the existing coverage proved to be inadequate, not at the time the agency failed to obtain the right coverage.
“The injury underlying plaintiff’s claim against (the agent) was not sustained at the time of (the agent’s) alleged breach,” the judges said, “but when that breach later caused harm, in the form of the judgment entered against (the insureds).” Since the judgment did not occur until 2008, the judges ruled that a 2009 lawsuit was timely.
None of this would have been necessary had the agency reported the claim when the insureds told it of the lawsuit. Here is how other agencies can avoid this fate:
– Assign at least two individuals in the agency to report incoming claims to insurers. One person should have primary responsibility for claim reporting. At least one other, cross-trained on the procedures, should act as a backup in the first person’s absence.
– Develop and enforce standard agency procedures for recording information about incoming claims and forwarding it to the appropriate insurers.
– Report claims to all insurers who may become involved. For example, some Workers’ Compensation claims become General Liability claims because the injured worker sues a third party who is an additional insured under the GL policy.
– Develop and enforce guidelines for deciding when claims should be reported to insurers providing excess or umbrella coverage.
Claim time is when an insurance agency proves its worth to its clients. By taking these steps, an agency can take care of its clients, earn their loyalty, and avoid legal trouble.