An uninsured $3.5 million loss is the wrong way to find out that an insurance policy was issued with mistakes in it.
In the winter of 2009, a non-profit organization in Illinois contacted a local insurance agency for liability coverage. Among the organization’s operations, it contracts with the Illinois Department of Children and Family Services (DCFS) to provide foster care and child welfare services. The organization supervised foster families and children who are wards of the state. Some of these children were abuse victims.
The organization’s representatives told the insurance agents about their operations, including the contract work for the DCFS. They gave the agents a brochure advertising their services and their child welfare work. The agents used this information to apply for and obtain liability coverage from a surplus lines insurer.
The policy included a supplemental declarations page and a “sexual and/or physical liability coverage form”. Both of them mistakenly described the organization as a “halfway house.” An endorsement covered sexual and physical abuse acts, but only those committed by the organization’s employees. The policy renewed the following year with the same errors.
In the fall of 2006, an Illinois mother lost custody of her two children after authorities discovered multiple physical injuries to her infant son. A court ruled that the children were abused and neglected, declared them to be wards of the state, appointed DCFS as their guardian, and placed them in foster care with their grandmother. DCFS asked the non-profit organization to monitor the children and family and provide needed services.
Two years later, the woman gave birth to a daughter. The girl was immediately placed with her grandmother and siblings out of concern for her safety. When she was 20 months old, a court allowed the mother overnight visits with the children in her home. Six months later, they were spending six days a week with their mother, who was now dating a convicted murderer. The court forbid him to be present during the visits. It also ordered the non-profit to visit the home unannounced to check on the children’s condition.
One morning, the mother reported to one of the non-profit’s caseworkers that the little girl had a bruise on her stomach and had been crying overnight. The caseworker took no actions in response. Two days later, the mother reported that she had found her daughter dead. An autopsy showed the cause of death as multiple internal injuries from blunt force trauma. The mother and her boyfriend were charged with murder and lesser crimes.
A year and a half after the child’s death, the independent administrator of her estate sued the mother, boyfriend and the non-profit for wrongful death. The non-profit made an insurance claim, but the insurer quickly denied it and successfully obtained a court declaration that it owed no coverage.
Before settling with the administrator for $3.5 million, the organization sued the insurance agency for failing to obtain proper coverage. The agency argued that the two-year statute of limitations for suing an insurance producer had lapsed, and also that the organization had not met its duty to request a copy of the policy for review when it was first issued.
A trial court sided with the agency, but an appellate court overruled. It held that the two-year period began when the organization discovered that it had been harmed, not when the harm actually occurred. Also, “(e)ven if representatives from (the organization) had read the policy,” the judges wrote, “they would not know in advance that a claim involving the murder of a child in DCFS custody was not covered until the claim was denied.” That, the court concluded, was unreasonable.
The agency tried to escape responsibility for this situation by arguing that the insured did not read the policy, even though the agency did not read it, either. A quality check when it was first issued might have caught the problem. The agency could then have asked the surplus lines broker for corrections.
There is no guarantee that an insured’s duty to read a policy will defeat an E&O claim. All agencies need procedures for checking policies for correctness. They may not prevent all claims, but they will make claims less likely.