Imagine the following chain of events:
- Agent gives client a quote for liability insurance with a very low premium
- Client buys the policy
- Client signs a contract for a construction project
- A fatal accident occurs during the project
- After the accident, agent delivers the policy to client
- Client finds out the policy does not cover the accident
From the agent’s standpoint, nothing good can come from this sequence. That is what a Pennsylvania agency found when it obtained inadequate coverage from a risk retention group and ran into an unsympathetic court.
A building contractor, in need of liability insurance, found the agency through an Internet search. The agency’s online advertisement claimed that the agency had expertise in placing coverage for building contractors. The contractor called the agency and spoke with an employee. This employee, who was not a Pennsylvania-licensed insurance producer, told him that the agency would be able to get him a policy.
The employee prepared applications for the contractor to join a trade association. Membership in the association would entitle him to apply for liability insurance through a risk retention group. The group offered different levels of coverage. The agency submitted the applications to the association and the RRG. However, the contractor later claimed that the description of his operations on the applications was incomplete and contrary to what he had told the agency. He said that he told the agency that he performed roofing work. However, the agency submitted his application for the program that provided less comprehensive coverage.
Worse, the applications contained signatures and initials that were supposed to be those of the contractor. The contractor later claimed that he never signed or initialed the applications, and he never authorized the agency to do it for him.
The agency obtained a policy with an annual premium just over $1,000. The contractor paid the premium in full. Around the same time, he signed a contract to renovate a building in Pittsburgh. Less than three months later, an independent contractor on the job site fell from a scaffold and died. The contractor had erected the scaffold.
Sometime after the accident and three months after the effective date, the agent delivered the contractor’s liability insurance policy to him. It contained exclusions that the membership application did not mention and that the agent never discussed with him. In particular, it excluded coverage for roofing operations.
The deceased worker’s estate sued the contractor and others. The RRG provided legal defense, but it also sought a court ruling that it had no obligation to cover the accident. The contractor’s work, it said, was roofing operations, and the policy excluded coverage for such work. While the RRG’s motion was pending, the contractor sued the agency. The agency asked the court to dismiss the case, arguing that the contractor failed to state a claim on which the court could grant relief.
The court rejected the agency’s motion. The agency argued that Pennsylvania law shielded it from allegations of professional negligence. The court, however, said that the law in fact holds agents to a standard of care requiring them to exercise skill and knowledge normally possessed by members of the trade. It noted that the contractor claimed negligence based on the agency submitting inaccurate applications, obtaining insurance without a license, and signing the applications on the contractor’s behalf without permission. Based on this, the court allowed the contractor’s lawsuit to go forward.
Insurance agencies can take several lessons from this story, regardless of whether they seek construction accounts:
- Always ask the client to carefully review all applications for accuracy.
- Review the client’s website to make sure you have a good description of the business.
- Always ask the client to personally sign all applications.
- Before recommending a specific insurance product to a client, become completely informed as to what that policy covers and excludes.
- Deliver policies as soon after the effective date as possible.
- Never handle an insurance transaction without the involvement of a licensed producer.
It appears that this agency may have focused too much on getting a low price for the client. As this agency found out, clients do not care about the price when they have uncovered claims.