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!

I’ve known forever that my personal “why” is to help, save, raise, love and care for as many animals as humanly possible.  But what is my business “why”?  Hmmm.  It only took a moment for that to bubble to the top of my mind:

To re-define the role and art of wholesale broking in professional liability.

Those of you who do business with me, whether carrier or agent, know what I’m talking about.  At the risk of sounding disrespectful to the majority of my colleagues, I won’t go into detail here.  Suffice it to say that I bring a rare combination of technical know-how, respect for the process, intervention and value-added services to the mix.  If you want more detail, please email me separately.  As of now, I’m only one little fish in a very large pond of “normal” brokers and their “normal” broking activity.

So what will it take to do this re-defining?  I believe it will take a process where I can train brokers how to do business my way, and grow them in this rare mold.  That can happen if my book at US Risk gets big enough that I can hire more staff and eventually have my own sub-group, but I see that as a long, slow route.  I’ve offered US Risk to allow me to be the practice leader and teach our dedicated PL brokers.  No dice there yet.   There could be other ways it can happen.  I’m open to suggestions and opportunities to effect this vision.

Just a reminder to everyone that this month, and this month only – environmental risks get an extra 2.5% commission.  Submit or bind in the month of August – new business – and you earn extra free money!

This counts for contractors pollution risks, site pollution, environmental contractors and consultants, and any executive lines coverage for any of these classes.    So even if we’re just writing EPL on a consultant you have whose E&O doesn’t come up till next February – you get 2.5% additional commission.

Send me the business!

Kidnap & Ransom — the Real “Executive Protection” coverage –  consolidated re-post of 2/25 – 3/11 Knowledge Knuggets 

A while back I posted on Twitter regarding my Executive Protection Checklist.  Interestingly, a couple days later I was being followed by an Executive Protection expert — a bodyguard firm.  I had never thought of “Executive Protection” that way, but certainly the purest form of Executive Protection is that of the Executive himself or herself against bodily harm.

One of the lines of business within any good Executive Protection program is Kidnap and Ransom coverage (sometimes also referred to as “Kidnap, Ransom & Extortion” coverage).

First thing to know is that K&R coverage is not nearly as mysterious as it initially appears.  It can be very cloak and dagger, but in its most straightforward incarnation, it is simply a reimbursement policy for ransom monies paid to kidnappers, or attempted to be delivered to kidnappers. 

Now, assuming that anyone who has enough money to attract kidnappers would also have enough money to pay them, this becomes merely balance sheet protection, and that in and of itself has a great deal of value.  Typical insureds for this would be bank executives, CEOs of large companies, and especially wealthy executives that travel to foreign lands.

However, a policy does more than just pay ransom or extortion monies.  Once an insured has a policy in-hand, they also get the benefit of having someone to lean on if and when the unimaginable happens.  All the major K&R carriers have contracts with companies that specialize in executive protection (bodily) and they have extensive experience in negotiations, extractions, repatriation, and delivery.

The four major coverage parts found in most policies include:  Kidnap, Extortion, Detention, and Hijack. 

Extortion can pertain to threats to do bodily harm, threats to impair property, and threats to harm data.  The harm done can include not only damage to the property or data, but also reputational harm evolving from the publicity about same.

Detention refers to circumstances where the insured person is detained by the authorities (or sometimes others) in a country due to an actual or alleged violation of some kind.  If the insured person truly is in the country illegally or engaged in illegal activities, the policy tends to exclude coverage.  However, if the insured was not blatantly violating laws, the policy would generally respond.

Hijacking refers to insureds being nabbed in their vehicles for a quick return on the kidnapper’s investment of time.  Small demands, ATM withdrawals, or just the taking of whatever valuable possessions or money the victim has on his or her person at the time may satisfy the kidnappers.

The types of expenses covered by these policies can be mind-boggling.  A short list includes:  ransom, of course; crisis management expenses, negotiators’ expenses, legal expenses, medical expenses, psychiatric aftercare, family travel expenses, the insured company’s travel expenses, salary of the victim, salary of a replacement worker for the victim, reward for informant, advertising costs, and legal liability should the insured company be sued by the victim or his or her estate.

Who can be insured under these policies?

The company, its executives, or even all employees, if desired.  Also included are family members, guests, domestic workers.  Some policies include all ancestors and all lineal descendants.  Others limit coverage to grandparents and grandchildren — no “greats” or “great-greats” included.  Coverage can be written on a scheduled basis, if desired, and some policies are purchased as individual or family policies without regard to any corporate entity.

One outlier of coverage is found in “child abduction” coverage.  This coverage is generally used for hospitals in case someone abducts an infant or toddler from the facility.  This is specialized coverage because these abductions frequently do not result in any ransom demand so otherwise would not trigger coverage.  Limits may be different from the main coverage part, so consider carefully what’s needed.  Ransom is not usually what will eat up the limit, but there are other expenses to contemplate.

So how do you identify who among your insureds should carry this coverage?  Think about:   

• Insureds with significant personal wealth
• Insureds working for very large, high-profile or controversial companies (banks, oil/gas developers, chemical plants, etc.)
• Insureds who travel abroad
• Insureds who live or work near the southern border
• Insureds with family that travels

We’ll kick off this year by discussing some quirks in PL placements, which become quickly apparent when an agent or insured expects the same responses from underwriters as they would enjoy from a GL carrier.

For this installment, we’ll review two specific quirks:  Additional Insureds and excess limits.

1.  Additional insureds

As you know, in the world of GL, if you want an Additional Insured added to coverage, you request it, identify the relationship, and you get an endorsement for x amount of money.  The carrier is then willing to notify the AI if coverage ceases and will defend claims against the AI.  Not so in the world of Professional Liability.

It’s rare for there to be Additional Insureds on a PL policy.  There are some exceptions, which I’ll save for a future Knugget.  Here are some reasons carriers will not provide Additional Insured status to Insureds’ clients.

a.  The policy exists to protect the professional — not his clients.
b.  An allegation of professional negligence is needed to trigger coverage, and the client is not the one rendering the covered professional service.  Therefore, tender of a claim against them would not trigger coverage under the insured’s policy.
c.  Defense is within the limits (generally) so providing defense to a third party would erode the insured’s limits.
d.  The Insured v. Insured exclusion in the policy will void coverage for any claim brought against the insured by the AI client.

An outgrowth of this overall reluctance to provide coverage to AIs is further demonstrated by the fact that even those carriers that will add an AI will absolutely decline to comply with an AI’s request to be notified of cancellation of a policy.

2.  Excess limits

In the world of GL, a 4mm xs 1mm limit is available broadly and for pennies on the dollar.  No one thinks twice about it, regardless of the size of the insured or why they want the higher limit.  It’s considered wise to always offer those additional limits to your insured.

In the PL world, carriers are more circumspect about putting up limits.  If you have an insured with, let’s say, 200k, or even 2mm in revenue, and you request a 5mm limit, you will not get it from most carriers.  If you place a 1mm limit, then seek a 4mm xs 1mm, you will likely not have much luck.  Here are some reasons carriers give for not putting up large limits:

a.  PL is a severity line, not a frequency line, so if a claim occurs, it may well exhaust the entire limit
b.  The carrier will not put up limits higher than the insured’s revenue
c.  The carrier will not put up limits higher than the insured’s assets
d.  The carrier cannot get enough rate for the limit
e.  The carrier does not want its policy to be the insured’s biggest asset
f.  There appears to be some correlation between limit availability and loss incurred, so carriers do not want a high limit to be an attraction to plaintiffs.
g.  The carrier will not provide an excess limit higher than the underlyer (i.e., if the primary is 1mm, the most they will put up is 1mm)

Pricing for PL excess limits is much heavier than that of GL.  For example, if a 1mm limit costs $10,000, a 5mm limit is likely to cost $24,000.  (5mm increased limit factors in PL often ranging from 2.30 to 2.45)  The 4mm xs 1mm costs an additional $14,400!   I’ve had agents fall out of their chairs with that kind of pricing because they were expecting a quote for a fraction of the 10k primary premium.  A 5mm xs 5mm limit will range from 40% – 70% of the underlying 5mm, depending on the line of business and the quality of the risk.

This pricing model, again, is largely driven by the fact that PL is a severity line.  In some lines with a tendency to more frequency and a lot of actuarial data, you might see the ratios come down a little.

There are some exceptions to the reluctance to provide higher limits, and in a future Knugget, I will touch on some tricks of the trade to persuading underwriters to put up the limits you need.
Chris Christian, CIC, RPLU
Vice President/Senior Broker
US Risk Brokers

760-415-4213 or for TN agents 615-273-3451

Knowledge Knuggets do not constitute legal advice, nor are they the opinion of US Risk.

Please feel free to suggest future Knowledge Knugget topics.

Visit www.pltidbits.com for archived Knowledge Knuggets and other Important Items regarding professional liability.

chrisc [at] usrisk [dot]com

I am accepting new agent appointments, so please give me a call or send submissions if you feel I can be of assistance with your complex risks.  Or, if you just like working with propellerheads – let’s chat.