Although much of the content is driven by publicly-traded D&O issues, most of them extrapolate to privately-held business, or trickle down over time.  Learning about these current issues is certainly a way to get ahead of the curve.  I wish the Symposium were longer so they could have more sessions!

Below are highlights from some of the sessions:

Since different constituencies will have different priorities and opinions, determining that any action was fair to all could be impossible.  Some chilling examples were given, and there is a lot of rear view mirror driving going on in these cases.

2.  Insolvent/bankrupt companies.  I learned that when a company becomes insolvent, the duties of the Ds & Os shifts.  Normally the number one duty is to the shareholders.  Second is the creditors,  Third would be the remainder of the constituencies.  But once a company is deemed insolvent, the creditors jump to the number one spot, and the shareholders become number two.  How many of your insureds know that, do you think? 

Then came the definition of “insolvent”.  It can be as simple as the breach of any debt covenant.  But more importantly, there is a trend for experts to be brought in by the bankruptcy court to determine the date of insolvency.  They may well fix a date that was far in the past compared to when the owners of the company felt it became insolvent.  This will generally happen due to the recognition of good will, which the court may disregard.  There could also be decisions made that lead to the downfall of the company that in retrospect will be fixed as the time the company became insolvent.  If the Ds & Os couldn’t even tell the company was insolvent, what are the odds they were executing their number one duty to the creditors?

There is a general trend in the bankruptcy courts to look at the Ds & Os from the creditors’ perspective.  I’m sure any erosion of the business judgment rule here does not bode well, either.

I assume that if underwriters and agents understood the intricacies of organizational forms, dbas, and corporate relationships, they would want to place and issue policies correctly.  But the underwriter who shared Example #2 with me has a more cynical outlook.

Roll back to the PLUS D&O Symposium a couple of weeks ago –

I was on that most hallowed of all insurance ground (in a bar) discussing some policy language subtleties with an underwriter, and he commented that his company was currently embroiled in an unexpected claim because a policy issuer had typed up the Named Insured exactly as it was shown on the application, not as it was quoted, and didn’t recognize that red flags were being raised by what was on the application.  The quote was for Acme Corp., and the application showed the Named Insured as “Acme Corp. and related entities.” (emphasis added)

So, in spite of the fact that the “related entities” had not been identified, scheduled, underwritten or rated for, they ended up on the policy.  Sure enough, one of those related entities had a claim, and the carrier is on it. 

I floated the idea of basic business law training to the underwriter as a concept that would establish a baseline of knowledge for staff, even from the policy and endorsement issuers’ level. 

First, he said that would be way too expensive.  I’m thinking — not really.  Something like three to six one-hour sessions in-house would do the trick.  And that would be a lot less expensive company-wide than this claim alone!  If the employer doesn’t have the in-house expertise, heck, they could call me, and I’d put on webinars for a small but reasonable fee.  They could even subscribe to refresher archives at a low monthly rate.

His second objection was that I was placing too much confidence in the staff by assuming that they would be capable of learning these concepts, or even motivated to do so.

Okay.  That shut me up.  On the outside, anyway. 

What kind of industry are we in when a somewhat senior person in a well-known carrier has that attitude toward training, the importance of building blocks of knowledge, and that little faith in the people in his company and in the industry?  Who does he think is going to be running the joint in 10 or 20 years?  And shouldn’t he be identifying at least a handful of them that he feels are worth mentoring? 

Does he think no one wants to learn?  Does he have a way different definition of doing ones job right than I do?  Does he think it’s okay to have staff that understands their work only from a transactional and superficial level with no knowledge of the “why” behind any given action or process?  Does he not want them to grow into their work to where they can exercise some judgment?  Does he think the staff will just take the information and run?  (Maybe that is a distinct possibility, but in large part employers have only themselves to blame for that kind of culture.  It doesn’t take much to cultivate loyalty in ones workforce.  That would be a whole other series of posts.)

I am beyond disappointed to hear this attitude, but there you have it.  This gentleman is probably not unique, which is a sad commentary.  Other than that, the play was fine. <sigh>

I am now adding to my list of Things to Do to Change the Insurance Industry the development of a baseline of business law knowledge, and instruction on same, including how it applies to everyday professional liability insurance situations, and a way to deliver that content to anyone and everyone in the industry who wants it.  Because you know what?  If underwriters and agents can’t depend upon their employers or existing training courses to give them what they need to do their jobs right, then by golly they can depend on me to do it.   It’s the least I can do.

I’ve got a few other things I need to publish first, but this will be pretty high up on the list.  I may even make some online videos about it – on-demand and affordable — in case the learner prefers videos to text.  Gotta love technology.

If business law concepts that should  be included in such a course of learning occur to you, let me know, and I’ll do my best to incorporate them.

And if you think of some other area that needs a similar treatment, please feel free to share your thoughts.  When I see a common or persistent thread, I’ll create a solution.

It seems to me that there is no in-house or out-house training in this subject matter, and no oversight to be sure the employee has grasped the concepts and is applying them correctly.  Sure, there are the CPCU and CIC curricula.  But other than a couple of Ruble Seminar advanced topics with CIC, I’ve not seen more than a passing treatment of these types of legal concepts.

Could it be that the employers themselves are ignorant of what is needed?Could it be they assume everyone already knows the basics of business law and knows how to apply them?  Maybe they assume their employees will pick it up by osmosis.  Maybe they haven’t thought through the types of problems that are caused by the mistakes and inaccuracies that arise from the lack of knowledge.

Here are two examples of such problems:

I have at least twice had insureds who put their DBA on the application where the “Applicant” or “Named Insured” or whatever the carrier may call it was supposed to go.  This was unbeknownst to the agent in both cases.  In one, a claim was brought against the actual entity, and turned in to us.  It took three weeks of arguing with the carrier to get them to accept the claim, because they knew nothing of the actual entity and had only the DBA in file.  In the more recent case, the insured advised the agent 10 months into the policy period that he was no longer using the DBA, and he wanted his policy changed to reflect the legal entity name. 

It took several rounds of negotiation and several explanations to get that name changed.  The underwriters wanted to put the “new entity” on the policy retro inception.  It was not a new entity!  It was the entity that should have been the insured all along.  We just didn’t know it.  It did not help that the insured kept referring to this as a “name change”.  It was not a name change.  It was the correction needed to recognize the legal entity that is and was intended to be insured, and which should have been reflected on the policy initially.

I have seen some applications that ask for the “legal entity” to be insured, and that can avoid these issues.  But if the application submitted doesn’t use the “legal entity” terminology, how can we be assured that the information provided is accurate?  Well, here’s a tidbit for you.   The lack of a “Inc.”, “LLC” or other organizational form indicator in the name of the insured is a big clue that the name being provided is a DBA.  If the insured is presenting as “Acme Industries”, it is probably Acme Corp, Acme, LLC; Acme, Inc., or some other organizational form, DBA “Acme Industries”.  It could be an individual DBA Acme Industries as well. 

By law a business must display its organizational form in its business name, unless it is using a “dba”.  And the indicator must accurately reflect the form.  So if you receive an application that says Acme, Inc. DBA: Acme, LLC, that would be a red flag.  A corporation cannot “do business as” an LLC.  Think about it for a while, and you’ll come up with several reasons why not.

If you receive an application that says John Smith DBA: Acme, LLC, that would also be a red flag.  John cannot do business as an LLC unless he has formed one, and then the business IS the LLC.  The LLC is not a “dba”.  

In many, many jurisdictions, DBAs are filed with the State or County with some exceptions to the filing requirement.  In California, for example, one needn’t file a DBA if one is a sole proprietor and the chosen business name includes your last name.  So if I had a business that I wanted to call Chris Christian’s Fitness Center, I would not need to register that as a dba, or “fictitious business name”.  If I wanted to call it The Best Fitness Center, I would need to register it.

In some other jurisdictions, there is no need to register dbas at all.  But the lack of that organizational form indicator is a dead giveaway that the name you’ve been provided is exactly that — a name.  It is not an entity.  A name cannot be insured.  Only an entity or person can be.  A name cannot be the proper subject of a lawsuit.  Only an entity or person can be.  A name cannot own property, incur debts or make a contract.  Only an entity or person can.   Therefore, a name should not be the Named Insured.  One would think that getting this right would be very basic, but it is constantly and consistently missed.

I can’t help but think that if my colleagues in the industry understood these things, they would of course want to get them right.  But maybe my outlook is too optimistic, at least according to the main character in example number two, which will be the topic of my next post.

There are also people (probably the majority) who are not as curious or voracious who get to a certain level of knowledge and stop there.  Most people are average, of course, so that would be expected.   

But there seems to be an overabundance of  underwriters, agents and brokers that are either ignoring or are ignorant of concepts that I would categorize as absolutely essential for safe functioning in the insurance world.  These include concepts such as:

What is the difference between a subsidiary and an affiliate?

What is the difference between a DBA, a corporation, a partnership, and an LLC?

What is a joint venture?

 The list could be endless, but the two areas I think are absolutely critical to understand are Who is the Insured, and What is Covered. 

If an underwriter or broker does not have a firm grasp on these issues, not only can an insured or carrier find itself completely disadvantaged by a mis-placement, but clerical errors can throw coverage under the bus, and the staff which processes requested changes can and will completely miss the red flags that should be raised by such things as name change or additional insured requests.  

I was venting about my frustrations regarding this issue to one of my underwriters not long ago, and he made an intriguing comment.  He said the sloppiness I was noting is because the underwriters don’t have basic knowledge of business law.

That surprised me, but I have to say he is most likely spot on.  I often forget that I’ve had quite a bit more exposure to legal concepts than is the norm.  After 6 years in JAG, paralegal training, business law courses, and reading case law, regulations, and legal newsletters for hours (for fun — yes, I’m odd) and hours upon hours of research and reading to develop forms, respond to regulators, etc., I have a baseline that to me seems normal, but probably is not, statistically speaking. 

So if we take as a given the premise that a basic grounding in Business Law 101 is necessary to master and apply the concepts necessary to the correct underwriting or placing of insurance, the next question is:

Why is it that so many people working in positions where such knowledge is needed don’t have it?

Tune in to my next post for answers….

Feel free to offer you own, in the meanwhile.  Inquiring minds want to know…

I can’t help but think that the economy is largely responsible for these increased claims, but other than insureds going bankrupt and incurring D&O claims due to such bankruptcy, or EPL claims when laying off a substantial number of employees,  the connection may not be all that apparent.

I put on my noodling hat the other night and came up with the following thoughts, mostly pertaining to E&O:

How is the economy causing claims for our insureds?

Financial pressures, cost-cutting measures and layoffs can cause disruption in previously well-managed processes.  I can’t tell you how many times I’ve seen a reduction in staff where all the work just gets parsed out to the remaining employees.  Many of those employees have never done that work before, they don’t receive proper training, and the work is piled on top of an already-full desk with no incentive to put on the afterburners other than fear that their job is next if they don’t make themselves indispensible.    Is this conducive to quality output?  I think not.

For most businesses, the downturn in revenue occurs before the fall-off in demand, so it’s almost impossible to service an account throughout its lifecycle if payment is loaded up front and recognized immediately.  When I was on the retail side, one of our accountants asked why we didn’t earn our revenue over the 12 month policy period, versus recognizing it when bound.  The insurance folk guffawed at the accountant – “Why, that’s never done!” they said.  True, but why not?  Because policies rarely cancel mid-term?  Not so in many lines.  Because the work attendant upon that piece of business is completed at the time the account is invoiced?  Also not the case.  Because we assume nothing will ever go wrong, and we plan for constant growth?  Yeah, that’s the ticket.

The folly of this optimistic belief system hit me hard when one of my prior employers lost an underwriting program due to the carrier going into receivership.  Revenue ground to a complete halt in one month, but we had to service hundreds of policies for the remainder of the policy year.  We went from seven or eight people working on that program to one person pulling loss runs and trying to manage the endorsements and another trying to re-market and salvage what we could.  It was not a pretty picture on many levels, but it was particularly painful because it could easily have been avoided.  What if we had recognized the income on that program as it was earned and staffed accordingly?    We would have had a slow, predictable step-down in revenue corresponding with the step-down in servicing demands.

All that being attractive from a stress and humanitarian perspective, the E&O-related question here is – what is the likelihood that errors were made during that run-off period with the staffing stresses that existed, versus if we had taken a more conservative approach to recognizing our income and kept a more suitable staffing level throughout run-off?

It also occurs to me that while our insureds may be suffering from financial stresses that could lead to claims, at least we can ferret that out by looking at financials and asking for information if any red flags are raised.  But what about the financial condition of their clients?  If your insured is providing services of an advisory nature, or services that roll up into a larger deliverable for the client’s customers, you can bet your bottom dollar that if something goes wrong, the client will be looking under every stone for someone to blame so he can recover money for the loss.  Either he’s trying to avoid being sued, or he already has been and figures he’s not going down alone. 

Back in the day, circa 2005 and earlier, if there was any kind of relationship between your insured and his client, a mistake that damaged the client in some way would not necessarily result in a claim.  A lot of times the insured could make it good.  If not, the relationship tempered a client’s desire to make a claim against the insured.  But now…The insured doesn’t have the resources to fix a problem, and the client doesn’t have the resources to absorb the problem or honor the relationship and work through the issues.  It’s all about keeping your head above water, and a kinder, gentler response to a perceived wrong is not long considered, if at all.

How can you tell if the insured’s clients are under financial strain?  You can sort of assume that they are these days, but clearly that is not helpful, unless you choose to stop insuring anyone at all until the economy turns around.   It used to be that E&O apps asked the insured if he ran a credit check and/or background check on prospective clients.  This was to ferret out payment/credit problems and any history of litigation.  I haven’t seen that question in a long time (except maybe on an LPL or APL app), but agents and their insureds would do well to resurrect that process.

And of course, a client’s financial stress will cause them to cut corners and have more errors in their own services – but they will still try to pin the causation on someone else so they can get reimbursed for their troubles.

Where does this leave us?  In a fine pickle.

We find ourselves with cost-cutting/cost-saving measures, requirements to be ever more productive with less staff and fewer resources, cutting corners on best practices because we’re doing the work of 2, 3, or 4 people.  We have unmotivated staff, untrained support people (or producers/underwriters), and are looking over our shoulders wondering what’s coming after us next, and how bad it is really going to get.

Our clients are in exactly the same place, unless they’re a debt collection company or something similar, with a contrarian prime time for maximum profitability.  Our clients’ customers have the same problems and are looking for the best value and scrutinizing everything they pay for.   If one cut corner or under-staffed error in the insurance program intersects with one mistake made by the client – you’ve got an uncovered claim with a very high likelihood that it will roll uphill to become your E&O problem.

What can we do to address these issues?

As agents, we can and should take a closer look at who we bring on as clients.  I know it’s hard to second guess a potential account at any time, let alone when you’re scraping and clawing for every penny of revenue.  But failing to vet your potential clients can result in unpaid accounts receivable, an overabundance of servicing issues, an insured that doesn’t have time to provide sufficient and accurate information regarding their exposures, and in the end anything that goes wrong will be your fault and your commission income has been frittered down the drain with the handling costs of that account.

How can you evaluate potential clients?  It’s probably wise and reasonable to run a credit check, and research any Better Business Bureau  or similar complaints.  Knowing the potential client through the community or associations is always a good way to gather background information.  Requesting a copy of financials can be helpful, if the insured is willing to share them, and if the type of insurance you’re placing generally requires the financials.  The downside to the financials is that they are always  retrospective, and you are most likely to get ’09 year-end financials this early in the 2011 year.  A lot could have changed.  I’d say year-end financials and the most current interims would provide an adequate picture.

It may also be prudent to execute a contract with your client that defines the rights, duties and obligations of each party.  The insured must provide thorough and accurate answers to all questions in the information-gathering process, must notify you of any changes, and must pay premiums.  You would offer whatever services detail your level of engagement.  My philosophy here is that if the insured goes off the rails and doesn’t inform you of what’s going on, you can trot that contract out to reinforce your defense that you only had an obligation to respond to the needs of which you were informed.  If the insured engaged in shenanigans you didn’t know about and therefore didn’t insure or didn’t explain the exclusion applicable thereto, the contract will again bolster your defense.

The fact that we provide so many services for free and without contracts is a constant source of amazement to me, but that’s a topic for another day.

For the underwriters out there, I believe a return to some good old-fashioned questions would be helpful.  Perhaps the creation of an “Economic Conditions Impact Questionnaire” would be suitable.  Over the last many years, questions about financial condition and how the insured relates to its clients have slowly faded away. 

Certainly, one of the growing drivers of claims is a client retaliating against our insured alleging unsatisfactory rendering of services in response to the insured attempting to collect monies owed.  This is a tried and true way to get the wolf to back away from the door, and the less liquid the insured’s client is, the more likely the response will be particularly venomous.

The following questions could help identify an insured that is sliding into a profile of higher potential for claims:

1. Do you check the litigation history of your potential clients?
2. What is the average length of your relationship with your clients?
3. Are clients allowed to pay in arrears for your services?  If yes:
   1. Do you run credit checks on your clients before extending terms?
   2. Does your contract for services document billing rates and payment terms?
   3. What percentage of your accounts are over 90 days past due?
   4. What actions do you take to recover monies for aged receivables?
   5. Do you turn past due accounts over to a collection service?
   6. Have you filed or threatened suit against any clients in the last 24 months in order to collect monies owed to you?
   7. Do you anticipate taking action against any clients in the next 12 months in order to collect monies owed to you?
   8. Does your contract for services include a provision for you to return fees to the client, if the client is dissatisfied with your services?

I believe these questions, and similar ones you might cook up on your own, can be very helpful in identifying incipient problems.

I’ve also noticed in a few policies an exclusion for countersuits brought in response to a suit for fees brought against a client by the insured.  That approach would certainly insulate the carrier from these retaliatory claims by disgruntled (or broke) clients.   I’m not sure that any particular carrier would want to be the first to jump wholly into that pool, and the exclusion might be a deterrent to the purchase of that carrier’s policies, all other things being equal.   However, excluding these countersuits on an action-specific basis could be a brilliant solution.  This is similar to the “seek counsel” warranty exclusions in some older London EPL policies.

To implement this scenario, the carrier would add an endorsement to the policy that binds the insured to conferring with qualified counsel prior to filing a suit for fees.    Such counsel could be a risk management/mitigation person at the carrier, or it could be an approved panel counsel.  If the insured does not confer with qualified counsel there would be no coverage for any countersuit arising from their action against the client.  If the insured does confer with qualified counsel, there would be coverage.   Reasonable, wise, risk-management oriented, and tremendously helpful in getting the insured through the minefield of collecting debts without generating an attack on itself.

 Bottom line, if the microcosm I’m observing does exist in a broader form, we are either experiencing an anomaly that will correct itself soon enough, or we are experiencing the beginning of a new “normal” which is not all that attractive.  Taking a more considered approach to accepting any given insured as a client, both at the agency level, and at the carrier level, could be the cure for many ills.  It’s time to look at more than the insured’s likelihood of a claim arising from their operations, and add the contemplation of the likelihood of a claim or other unpleasantness arising from their financial condition.

Gazing into my crystal ball over the last few years, I have anticipated an ever-expanding theory of liability, that will result in a well-established standard regarding insurance agents duty not only to the insured, but also to those people who rely upon the insured having the correct coverage in place as they have required the insured to do.

Because of restrictions on liability, such as the privity of contract requirement in many cases, this trend has been exceedingly slow in developing  I provided an example of liability to a third-party a couple of weeks ago, but it was newsworthy.  However, I’m happy to say that the February edition of Goldberg Segalla’s Professional Liability Monthly newsletter [here], has as its feature article a review of the evolution of liability to third parties as it pertains to attorneys.  Some of the circumstances detailed are only a stone’s throw away from the scenarios of reliance upon work product in which agents often find themselves.  I note that the February edition is not posted on the Goldberg Segalla website as of this printing.   If you would like a copy, please e-mail me at ChrisC [at] usrisk [dot] com, and I’ll forward it to you. 

One of the most interesting things I noticed in this article was that for many years the courts found that the defendant had no liability to the third-party claimant not because there was a lack of proximate cause, or lack of damages, but rather because they did not want to dismiss the privity of contract requirement out of a concern that a looser standard would result in a flood of claims against all manner of defendants for all manner of reasons.  I find that more than a little disturbing on several levels.

The other observation worthy of note is that my philosophy that the plaintiff bar never, ever gives up is borne out in this review.  Time and time again, without regard to previous decisions, multiple precedents and many, many past failures, the plaintiff bar has been creative, persistent, and dogged in its determination to press on and find ways for the aggrieved parties to be made whole, even in the absence of privity of contract.

Speaking of being made whole, one of the landmark cases was decided in favor of the plaintiff specifically because there was no other place from which the plaintiff could recover.  The court felt it would be unfair to enforce the privity of contract requirement to the detriment of an innocent party who had no other hope of recovery.

I think it is wise for us to take lessons from the deterioration of the privity requirement in the lawyers professional liability world.  Agents’ liability will not be far behind.  It may be one year, it may be 10 years, but it will be.

The insured is an architect firm, and the agent sent me the contract for a potential job to make sure our existing coverage met the limits requirements and there were no problems with the indemnification wording. 

However, the very first thing I noticed about the contract when I started to look it over is that it requires the following:  “The policy shall include without limitation contractual liability coverage to the maximum extent possible for the indemnification obligations…”

I feel like this is one of those pictures where you pick out how many things are wrong:

How many policies have you ever seen that included coverage “without limitation”?  How many policies cover contractual liability coverage (and contractual damages)?  How can you have coverage “without limitation” and “to the maximum extent possible” at the same time? “Possible” meaning – as circumscribed by policy language?  Or “possible” meaning — that which is provided by the broadest coverage available in the world?

The indemnification wording combined with the requirement quoted above work to create sort of an Additional Insured situation where the client is looking for an agreement that the carrier will fund the insured’s defense and indemnification of them in the case of a loss arising from the insured’s negligence.  Yet they did not ask to be named as an Additional Insured (which I don’t encourage anyway). 

Interestingly, the drafter of this contract knows enough about claims-made coverage to require that if the policy is claims-made the retro date must pre-date work done under the contract.  But the contract does not require that coverage, or an Extended Reporting Period, be kept in place for a period of time after the work is done.

Last, but not least, and a tip of the hat to one of my loyal readers who shared a similar situation with me after last week’s Knugget, the contract requires a 2mm “per Occurrance” (sic) limit.  Notwithstanding the mis-spelling, have you ever seen a per-occurrence limit on a professional liability policy?  If it happens at all, I suspect it’s extremely rare.  Our policy limits are put up on a “per claim” basis, with the exception of some specialty lines which focus on line-specific language.   I don’t think I’ve ever seen the word “occurrence” on the dec.  So if one were to be exceedingly particular, virtually no policy would ever be able to meet that requirement.  Could there be a situation where this difference in terminology could result in an unexpected difference between what the client wanted and what the policy provided?

The important thing to deal with here is that the professional liability policy is not a contractual coverage.  It’s a negligence policy with exclusions, conditions and other limitations.  If a client is damaged by the insured’s errors or omissions, the policy will respond accordingly, and that’s what the client should be looking for when wanting proof of coverage.  If the insured does anything that triggers a contractual obligation, and the client seeks compensation under the contract — no dice.  So we generally cannot provide coverage that would meet a contractual liability requirement.

And I wonder if any client has ever withheld payment due to lack of an insurance policy that meets the contractual requirements.  Hmmmm.

You could drive yourself (or your insured) crazy analyzing contract requirements to the nth degree, and advising when disconnects like the above occur so the insured can go back to the client and attempt to resolve the problems with the contract wording.  And it’s always problematic for an insured to be relying upon the advice of his agent to bring up contract wording problems while the client is relying upon the advice of his attorney — who may know a lot about transfer of risk and contracts, but not much at all about insurance.  I think it’s worth it in the long run to fight the good fight.  Eventually, the clients will get enough of the same feedback and mend their ways.

 * * * * * *

Some interesting things have come up lately regarding insureds’ contractual requirements, and whether they’re attainable or whether they’re being covered by the insurance purchased.  I’m sure you’ve seen the same issue in GL as we have in PL where a contract requires something that just plain is not available, or doesn’t even exist. 

Notwithstanding the potential breach of contract problem the insured is getting into by allowing such wording to stay in a contract and putting his head in the sand, the situation is pretty straightforward if the coverage sought doesn’t exist, or is so rare as to be nearly impossible to find or afford.

But what if the insurance required is easily available and is priced to sell — but the insured still doesn’t comply with the contract because his agent provides the wrong policy?

Sometimes jargon is the problem.  The insured’s client may be using language that is not what we’re used to.  Kind of like when lawyers say “personal injury” when they mean what we call “bodily injury”, or “public liability” when we use “general liability.” 

There is a relatively high-profile case from 2006 where a surplus lines broker was found to have a duty to a third party for not providing the insurance required by the third party.  This was a 9th circuit decision, and some believe it is bad law and will not be the precedent referenced in other jurisdictions. I believe that liability is ever-expanding with rare exception, but time will tell, either way.  In this case, the court found that the insured’s client was the “intended beneficiary” of the insurance, and so the placing broker had a duty to place coverage that would fulfill the needs as expressed.  This is similar to the theory that creates liability for an accountant when the audited financials he prepared are used to fraudulently secure a loan, and the lender is harmed.  The lender has a cause of action against the accountant, even in the absence of a contractual relationship because the accountant had reason to believe that his work product would be used by third parties, and those third parties have a right to rely upon the validity of that work product.  You can imagine how lack of confidence in audited financials would grind the machine to a complete halt.

In this case, the insured had operations in India and was doing programming for a US client.  The US client wanted to be sure coverage would be in place in case the tech company did not deliver the product appropriately, so they required coverage be placed for the India company’s technology E&O.  When the claim occurred, the client sued the insured, and lo and behold!  no coverage.  The policy that had been placed specifically excluded all work done in India.  And this was even in light of the specific request that coverage be provided for work done in India.

I have long heard the theory that in the absence of a “special relationship” agents’ duties (and to an even lesser extent wholesalers’ duties) are to provide a policy generally in the same line of coverage as the insured requests.  i.e., “I want a general liability policy” so you place a general liability policy.  And if your insured is a roofer, and roofing is excluded, what the hay!  You got him a GL policy.  I know that NONE of my agents (especially the ones whose own E&O I write) conduct business like this.  But there are agents who are just that slap-dash, or who will cut any corner to get the cheapest price, and these half-baked policies are often the result.  

I would propose that there is a growing trend to hold agents and brokers to a somewhat higher standard.  We are not required to be prescient and to figure out exposures the insured cannot even recognize.  But when an insured comes to us and says “I need coverage to fulfill this contract’s requirements”, gives us the contract, and then we provide 75% of what’s needed without ever addressing the shortfall, would that not be cause for the insured (or in some cases his client!) to come back against us for failing to perform in the manner in which all parties were relying upon us to do?  

I would hope that liability could only possibly occur if the placing agent were aware of the contractual requirement.  I’ve been shocked sometimes when I see a contract late in the game (or god forbid after binding) and just then discover what provisions the insured was needing to have in their policy.  Up until that point, I was unaware, and in many cases the retailer is not familiar enough with the policies or the terminology to know whether what is being requested is normal, unusual, available, included in a regular policy, or anything else.

This has made me contemplate requiring the insureds’ contracts prior to quoting, but at the end of the day, there could be dozens of them, and I couldn’t possibly have the time to go through them all and ensure that the policies meet them, or disclose when they don’t.  If you have a sophisticated insured, they might be able to determine if the coverage matches the contract requirements.  But most of the time, I would imagine the insureds rely upon you to figure out that very thing.  So the best we can do is be aware that this issue lurks, and help each other avoid it as much as time, energy, awareness and courtesy allow.  But don’t let it keep you up at night.  Yet.

I feel like I’ve just deplaned from Mr. Toad’s wild ride.  I’m darned near caught up from the backlog caused by that travel.  Although each and every trip was quite beneficial and productive, I’m happy to say that I’ll be off the road for most of the remainder of the year.  I will be vacationing in Vegas for a few days in early December.

PLUS was a great convention.  Many good sessions, one of which I saw nearly in its entirety – regarding Real Estate E&O exposures.  Condoleeza Rice was the keynote speaker on Wednesday, and Steve Wozniak the luncheon speaker on Thursday.  I attended both speeches, paid rapt attention and learned many things.   My rounds of meetings began Tuesday morning with the board meeting, and went non-stop (except for a few hours of desk-time, and a few hours of sleep nightly) until 2:30 Friday, when I left for the airport.  Wow.

Now that I’ll be relatively stationary for a while, I will endeavor to turn my attention to regular blogging content and will post some Knuggets for your reading pleasure.  I also owe Rick Bortnick a guest post at www.cyberinquirer.com, and will most likely post at a few other blogs as soon as possible.  At the same time, I need to finish my CE for my personal trainer certification renewal, which is due at year end.  Wish me luck with getting through all that. 

For this post, in addition to the travelogue and status update above, I did want to report on the results of some of my meetings:

Admiral has rolled out a new form that combines E&O with a modicum of privacy liability and supplementary payments pertinent thereto.  It is not a robust form, lacking several of the amenities we enjoy with monoline forms.  But — the coverage is automatically included along with the E&O at no cost, so it you get a little bit more than you’re paying for.  There were one or two things in the privacy liability coverage that I found so onerous as to be really discouraged from wanting to use that form (and the creator of the form said he would not be willing to amend those things).  But then I have to remind myself that it will only be a problem for an insured that actually wants privacy liability coverage, and most are not yet there.  The challenge is that we must be careful not to sell it as a form that can compete against the standalone forms.  They’re certainly not fungible!

OneBeacon has expanded its tech/media offerings.  They used to just own First Media, who could not do any hybrid risks.  First Media has been rolled into OneBeacon proper, Rob Bowers, formerly of Axis/MediaPro, has joined, along with Dave Molitano, formerly of Beazley.  In addition, OneBeacon has fleshed out a dedicated tech department that will do property/casualty coverages, tech E&O and privacy liability/network security for tech and non-tech classes.

I also had a good meeting with AJG (formerly First City – London brokers) regarding their line slips and some of the open market products, especially privacy liability/network security facilities. 

I’m delighted to say that I met with a few senior underwriters or managers from various market that agreed to take a second look at risks that had been declined, and I received terms from the markets this last week.  Prospects of binding these terms, snatched from the jaws of defeat, look pretty good.

Overall, I’m seeing continued expansion of markets and products – in part because as one carrier cuts back, the people who leave go start new facilities, so programs are reproducing like tribbles.  I am also seeing just a wee bit more underwriting discipline or discernment although it is sometimes applied in a knee-jerk fashion.  It may be that the free-fall in pricing is coming to a halt, but there always seems to be one or two carriers underneath a stone that will quote at 30% off the market rate.  It’s frequently not feasible to hunt down those couple of markets and burn the other 15, and they rarely also offer the best coverage.  But they are out there, so we need to be aware of them.

All executive and professional lines of coverage qualify:  D&O, EPL, Fiduciary, Crime, Privacy Liability/Network Security, and of course, Professional Liability.

Send in your real estate risks today!