An insurance agent is often a client’s coverage advisor. In most states, agents have a legal obligation to obtain the coverage a client requests. However, clients’ insurance needs change over time. Do agents have a duty to monitor those changes and obtain additional coverage for them?
An agency in Maryland placed coverage for a security firm that provided guards and related services for government entities in the Washington, D.C. area. They started with a Commercial General Liability policy with a $1,000,000 per occurrence limit. Two years later, they added an Umbrella policy. The insureds completed renewal applications annually based on information the comptroller obtained from department heads and the chief operating officer regarding payrolls to be assigned to each CGL classification code.
The insureds entered “N/A” on the original CGL application for the “Burglar/Fire Alarms” classification and left that field blank on subsequent applications. Based on this, the insurer added an exclusion of alarm sales, service, installation and related activities to the policy. The original Umbrella included a similar exclusion. The second Umbrella renewal, issued by another insurer in the same group, added alarm monitoring to the list of excluded activities.
The next renewal contained the same exclusion. In his cover letter to the insureds with the GL and Umbrella policies, the agent specifically mentioned exclusions pertaining to canines and alarms and advised them to contact the agency if this was a concern. Both the comptroller and the COO testified later that they were unconcerned at the time.
However, just five months later the insured’s guards failed to follow proper procedures when a heat sensor alarm activated at a Defense Department facility. Unknown to both the comptroller and the insurance agent, the guards were responsible for monitoring the facility’s alarm system. The Defense Department sought reimbursement for $3.6 million in damage to specialized computer equipment.
The insureds sought coverage under the CGL and Umbrella policies. The CGL insurer provided a defense and sold the insured alarm monitoring coverage retroactively for an additional premium. However, the Umbrella claim was denied because of the alarm monitoring exclusion, leaving the insured uncovered for at least $2.6 million.
The Defense Department threatened to withhold payments to the insured because of the loss. In addition, the insureds owed the Internal Revenue Service a substantial tax debt. Unable to meet payroll and pay off their tax bill, the insureds went out of business.
Their trustee, the insurer and the department eventually settled the loss for $500,000. The trustee also sued the insurance agency for failing to warn the insureds of the differences in the alarm exclusions between the CGL and Umbrella policies. That failure, he argued, left the insureds unable to resolve the Defense Department’s claim against them, forcing them out of business. The agency argued that they owed no duty to provide the insureds with a policy that covered alarm monitoring.
The judge agreed with the agency. Based on what the agent knew, the judge said, the alarm monitoring exclusion was not significant: “Before the incident at DOD’s Fort Washington facility. Defendants had no way of knowing that the addition of the word ‘monitoring’ to the Umbrella Policy’s alarm exclusion would be a significant change to DTM’s policy. Indeed, it is only with the benefit of hindsight that anyone, including the DTM employees responsible for completing DTM’s insurance applications, became aware that exclusion of coverage for any alarm-related activity might pose a problem for DTM.” He noted the insureds’ lack of response to the letter informing them of the exclusion.
The agent’s handling of this account is a good example for others to follow. He wrote a cover letter accompanying the renewal policies, specifically mentioned the exclusions, and invited the insureds to contact him if the exclusions were a problem. When they didn’t, he assumed they were happy with the policies they had. Agents are not expected to badger their clients about coverage gaps. The client had a chance to close the gap and failed to take advantage.
Appropriate communications and documentation can be the most effective defenses against E&O claims. Agencies that use them will usually stand a good chance of winning in court.