Every page of commercial general liability and umbrella policies should be scrutinized to ensure that the client has purchased the insurance coverage they want. If an agent skips that process, an important coverage exclusion or condition may be missed until it is too late.
The insured was an oyster farmer that was place by a broker located in Louisiana. Its largest customer was a seafood distributor in Alabama. The two parties signed a contract in 2007, requiring the farmer to hold the distributor harmless from any lawsuits that could result if the oysters made someone sick. It also required the farmer to carry product liability insurance that named the distributor as an additional insured, using the Insurance Services Office’s endorsement for insuring vendors.
The farmer arranged with a local insurance agent to obtain the required coverage. The agent obtained a liability insurance policy; the insured purchased it and renewed it with identical terms the next year.
In 2008, a man in Colorado died of a bacterial infection after eating a raw oyster at a buffet. It was later determined that the oyster may have carried a bacteria that is harmless to healthy people but can be fatal to those with underlying health conditions. The deceased man had such conditions. An investigation traced the oyster to the Alabama distributor and the Louisiana farmer. A year after the death, the estate filed a product liability lawsuit against them.
However, the insurer denied coverage for both, citing an endorsement that had apparently gone unnoticed: An exclusion for injuries arising out of the existence in the insured’s product of a bacteria with toxic qualities. Faced with demands that it indemnify the distributor, the farmer sued the agent, its producer, and its errors and omissions liability insurer. This dispute would remain in litigation for the next eight years.
It was more than five years later that a trial court ruled in the insured’s favor as a matter of law with no facts in dispute. Almost two years after that, a jury trial was held to determine the amount of damages. The court awarded the insured more than $900,000 plus interest, court costs, and expert witness fees. The agent appealed, arguing that the court made several errors. The insured argued that the appeal was frivolous and asked the appeals court to assess more damages.
The appeals court did not go that far, but it did uphold the lower court’s decision. They ruled that:
- The exclusion in the endorsement was not ambiguous.
- The agent knew what coverage the insured was requesting. The producer admitted in a deposition that if he had read the exclusion, he would have “cancelled the policy and … notified (the insured) that we had to buy a new policy immediately.”
- The trial court was correct in the decisions it made about evidence, including the losses included in the damages.
More than 10 years after the fatal accident, the court affirmed that the agent owed the $900,000 damages.
This agency never should have been caught unaware of the bacteria exclusion. The court’s opinion cited the specific endorsement number. The exclusion was likely on pages of the policy separate from the coverage form. In addition to bacteria, it listed mold, fungi, contaminants and other substances that can make food poisonous. For an insured in the business of selling raw seafood, which by its nature must be handled and cooked carefully, such an exclusion presented a major coverage shortfall. The producer admitted as much. It was sloppy work for the agency to miss the endorsement.
Knowing a policy’s flaws and informing the client of them are crucial to avoiding E&O claims. This is true for all clients, but especially for those in businesses where mistakes can cause serious injury or death.