Insurance agencies are the link between the insurer and insured, and they perform transactions on behalf of both. It is very important that they understand what they are insuring and what each has authorized them to do. Making assumptions can land an agency in trouble, as a Pennsylvania agency had the misfortune of discovering.
The agency obtained property coverage for a county-owned ski resort. The policy covered numerous structures on the property, including an amphitheater, under a blanket limit. A few months after the effective date, the county sold the property to a private company but retained ownership of the amphitheater. After the closing, the insurance agent asked the insurer to cancel the policy.
The policy included an endorsement to conform the conditions to Pennsylvania law. That endorsement stated that the first named insured could cancel the policy by writing or giving notice of cancellation. It also explained the insurer’s obligations, including its obligation to provide a written notice, if it chose to cancel.
In response to the agent’s request, the insurer issued an endorsement to show the policy as cancelled. Almost two months later, the insurer sent the agent another copy of the cancellation endorsement, a check for the return premium, and an invoice for the agent’s return commission. The agent paid the invoice and forwarded the check to the county.
While this was occurring, a severe snowstorm hit the area, causing the amphitheater’s roof to collapse. The value of the damage was more than $1.6 million. The county filed an insurance claim, and the insurer denied coverage because the agent had cancelled the policy on the county’s behalf.
The insurer filed suit against the county, the agency and others, seeking a declaration that it had no obligation to provide coverage for the collapsed roof. The county filed a bad faith suit against the insurer, its insurance coordinator and the agency, arguing that the agent acted without authorization and therefore the insurer was required to provide a cancellation notice. The county’s attorney, a former commissioner, and its risk manager all testified that they never instructed the agent to cancel the policy.
The trial court ruled in the insurer’s favor, and the county appealed. The appellate court ruled that the agent had implied authority from the county to act on its behalf. While the judges agreed that authority to cancel a policy does not necessarily follow authority to obtain it, they found that “substantial evidence supports (the) finding that implied authority was conveyed to (the agent).” The agent submitted the insurance specifications, obtained a quote, procured the policy, and obtained a certificate of insurance and copies of the policy. According to the insurance coordinator, the agent “was in charge” of the property policy.
While the county argued that it had not given the agent a broker of record letter, the court ruled that the history showed that broker of record status was implied. At least one commissioner testified that the agent “was authorized to … cancel the insurance policies for which he served as agent of record.”
It appears that the agent was uninformed about key details regarding the transaction. The court’s opinion reported that he gave contradictory testimony. While he testified that he needed approval from the insurance coordinator to bind coverage (a claim the coordinator disputed), he also said he did not require authority from anyone at the county to select an insurer, accept a quote or procure a policy. He denied binding coverage and could not remember whether he received copies of the policy. He admitted that he did not know which which properties the county transferred when it sold the ski resort. He could not remember specifics of his conversations with the coordinator about the policy after the sale. He denied even knowing that the policy he procured covered the amphitheater.
This risk had significant values. The roof collapse cost $1.6 million. The agent’s ignorance about the details and lack of clarity as to his authority placed him at high risk of an errors and omissions claim.
Insurance producers must know what they are insuring and what they have authority to do. Without this information, they place themselves at great risk, as this agent found out.