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.

Below you will find my recent Knowledge Knugget discussing the dangers of agents serving on boards.

I’m adding a new danger here, thanks to a discussion with one of my favorite agents in CA who noted a particular problem.

What happens if the agent has to make a claim against his insured, on whose board he sits?  There are not many circumstances under which this could happen, but it is a possibility.  How does he reconcile his duty of loyalty under those circumstances?  And I cannot imagine the befuddlement of the carrier that receives a claim on an insured where the agent who placed the business is the claimant.  And what if there’s no coverage, and the agent then gets sued by the client, yet he’s the claimant in the first place?  Theoretically, at that point, they would stop the insanity, consider the claims to be offsetting and dismiss the whole thing.  But maybe not.

The particular situation that brought this topic up had to do with a potential personal injury claim against an entity.   But I’ve also contemplated — what happens if an agent’s on the board of an entity, and the entity doesn’t pay its premium, and the agent needs to take action to recover the premium?  As you may know, defaults can be subject to a D&O policy if the Ds & Os knew they were misleading the creditor at the time credit was granted.

What if the agent director was kept in the dark and thus extended credit (ordering coverage bound, let’s say, on a policy with 25% minimum earned — like a non-standard condo HOA), and now is stuck with that 25% minimum earned because the insured’s check bounced.  How is he going to unravel that?  What if there’s an uncovered claim due to the policy being cancelled and they sue him, and he feels he must counter-claim against them to protect himself?  How do you explain that to the carriers you just bound the insured with, and your E&O carrier?  Weee, What a Predicament! (as John Travolta exclaims in Face-Off, one of my all time favorite movies).

Imagine how complex it could get if an agent sat on the board of the HOA where he lived and wrote all their coverages and had a property or GL claim.  Covered or uncovered.  Wow.

Anyway, chew on all that (yes, I know — I worry too much) while you read the below Knugget, and let me know your thoughts….

* * * * *

Twice last week I had occasion to discuss the topic of agents writing insurance for entities on whose boards they sit.  This is a common road to production for many agents, but let me share with you why it might not be an course of conduct in which you want to engage:

First problem –

If you’re sitting on a board, it is your duty to put loyalty to that entity above any loyalty to yourself.  If you are placing insurance for this entity, can you honestly say that you are doing the very best for this entity that can be done?  Do you have all the markets that are appropriate for its business?  Are you giving up your commission so as to procure the lowest possible pricing?  Are you doing what it takes to ensure the entity buys all needed insurance, even if you are not overly familiar with some lines of business?

Can you possibly ever avoid the inherent conflict of interest that comes with making money off of a service you provide the entity?

To complicate matters, what happens if you’re also on the board of your agency?  How can you reconcile those two entities’ needs?  You can’t.  You have to put loyalty to one above loyalty to the other, and therein lies the rub.

If the question ever arises as to whom you placed first, you will have very few defenses.

Solution?  Possibly, you could hand the account to someone else in your agency and act only as a referral resource.  Your agency would still make the revenue, and if you don’t profit personally from the placement, you will be at less risk.  Still, not completely free of risk because at the end of the day, your agency, and the coverages and pricing it can provide may not be deemed as the best possible for the entity.

Second problem –

Check your insurance agents E&O policy, and you may find that claims arising from your services rendered to any entity for which you are a director are excluded.  This is not an uncommon exclusion.  There is usually some form of exclusion that eliminates coverage at least for claims made by entities over which you exercise control (by ownership or by directorship), and sometimes the exclusion extends to all services rendered to, not just claims made by, those entities.  That means you may have no coverage even if a third party makes a claim against you, rare though that might be.

So if the worst case scenario occurs, and your entity has an uncovered claim, there will be no coverage simply because you sat on the board.  No coverage for you, and most of the time, no coverage for the agency.  How, then will you resolve that claim?  Out of your own pocket?  Scary stuff.  And again, what if you’re on the board of the agency?  How could you have exposed it to such financial harm?  Now you’ve violated your duty of loyalty and duty of care to the agency.  Not good.

My recommendation both from an agents E&O risk management perspective and from a D&O risk management perspective is that you should not place coverage for any entity on whose board you sit.

If sitting on boards is a large part of your networking and business-building process, use it for networking, and write every other board members’ coverage, and that of all their friends.  But when it comes to the entity’s coverage take the high road, and advise the board that you cannot write the entity’s coverage yourself without creating an inherent conflict and sacrificing the protection of your E&O policy, and refer them to another agent or three.  You’ll sleep better at night if you do.

Click on Knowledge Knuggets Archives and check out the 10/8/09 Knugget for the inside scoop on why this is not a corner that can properly be cut.

***I am accepting new agency appointments, so if you have D&O, E&O, EPL or other professional business and would like to take advantage of my unique approach, please contact me at chrisc [at] usrisk [dot] com. *****

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Au contraire, I advised the diligent commenters.  Contractual breaches are the bread and butter of miscellaneous E&O.

This is a huge difference between “professional liability” where liability arises from failure to adhere to the required standard of conduct, and “errors and omissions” where the obligation between client and insured creates the basis of liability.   The obligation that does exist is a matter of contract and expectation, and an error or omission that causes harm to the client can be covered, in spite of the fact that expectations and obligations were defined by contract.

The key thing to remember is that the client (or other third party) must incur damages, and those damages must have been caused by the error or omission of the insured.

The policy does not exist to pay for contractual disputes regarding payment, quality of work, etc., in a vacuum.  But if quality of work is lacking and the client is harmed because of it, then liability exists that the policy is expected to respond to.

Just as back in the days of the inception of EPL, people said “you can’t insure that — discrimination is an intentional act”, many insurance agents and pundits are still thinking of damages arising from the business relationship as being purely a business risk and uninsurable.  This is 1980′s thinking.  With the breadth of coverage available in today’s D&O and E&O policies, there are many causes of action which can be covered that were previously inconceivable.

I’ve been placing coverage for investment advisors, hedge fund managers, broker/dealers, and private equity managers for several years.  I receive many more inquiries than I do orders to bind.

Most frequently, unless they are being required by a client or vendor to carry coverage, the advisor or money manager chooses to forego coverage.  It seems that they perenially believe that nothing will go wrong with the investments into which they put their clients, and that if it does, well hey, they made all the required disclosures, so they can’t/won’t be held liable anyway.

I have two words to say to that:  “defense costs”.

Even if an advisor is blameless, if he or she is sued by irate clientele a defense must be mounted against that suit.  Any disclaimers, all disclosures, and all details about advice given will be dragged into court to determine whether or not they were proper, sufficient, and therefore render the professional blameless in the matter.  Even a successful motion for a summary judgment dismissal can cost thousands and thousands of dollars in legal fees.

When it comes to something like Madoff’s situation, there is no amount of disclosure or disclaimer that will excuse any advisor from pointing his or her client in that direction.  Now, in retrospect, the blatant lack of legitimacy is glaringly apparent.  What possible excuse can an advisor propose for how he or she did not see through the smoke and mirrors?

The good news (for my agents and me) is that some advisors have been sensitized by the recent trials and tribulations in the marketplace and are more aware of the need for coverage.  My hope is that they will come looking for it and will choose to buy now.

Others may feel that with the insurance and financial industry being topsy-turvy they will not be able to get coverage anyway, so why should they try.  They would be incorrect.  Coverage is still available.  It is being more carefully underwritten.  Some classes of business have contracted significantly (can you say “hedge fund”?), and some retentions or premiums will be higher.  The larger the account, the more easily we can find coverage.

So all you advisors and money managers, Come on Down!  We have coverage for you, and perhaps now you can see why you need it.

The exclusion applied to claims arising from an agent’s inability to pay.

The policy was written for an MGU/Wholesaler, so this wording probably would not be in a retail agent’s policy.  Still, it’s quite troubling to me.

Imagine this scenario:

You’re an MGU/Wholesaler, and you have an agent that has financial troubles.  They cannot pay certain invoices.  Maybe they collected money from the insured; maybe they did not.  But still — no money comes to you.  So you allow the policy to cancel, or effect cancellation if you had underwritten it.

The uncovered insured later sues not only the agent, but you for his lack of coverage.

You have done nothing wrong.  Why would the policy not extend coverage?  I find it incredible that the policy excludes that cause of loss.  I don’t believe I’ve ever seen it before.  Could the next step be an exclusion in a retail agent’s form if the insured is unable to pay?  Horror!

Knowledge Knuggets for 10/16 – 11/6 have been about real estate classes of business. I previously posted one regarding inspectors and have combined both these topics into one over-arching post regarding real estate exposures and market status. Happy reading:

The Wild and Woolly World of Real Estate…..

Almost every real estate-related profession has seen quite the roller coaster in the last couple of years, and the end is nowhere in sight.

Two of the higher profile classes of business — mortgage brokers and real estate agents — are in a state of high turmoil. We have seen consolidations and closures of businesses, and insureds dropping their coverage because they don’t anticipate continuing in the field, or cannot produce sufficient business.

The flip side of the coin is on the carrier side, where many, many markets that used to write these lines of business quite readily are no longer in play. There are a few carriers that are still willing and able to write, although they are taking a conservative approach.

The real estate classes of business which you will run into, and which may be more difficult to place are:

Real estate agents and brokers
Mortgage brokers and bankers
Title agents
Escrow companies
Appraisers
Home (and other) Inspectors

In the world of real estate, agents are differentiated from brokers with regard to legal scope and services rendered. Generally speaking coverage is available only for brokers, or for firms with a licensed broker. As a practical matter, this does not pose a problem, because agents need to affiliated with a broker in order to perform services, so you will not (one would hope) ever face a situation where you need to insure an agent who is not working with a broker.

In some states, professional liability coverage is required to meet licensing standards, and in those states, there is frequently an “approved” program. The state-endorsed programs I have reviewed tend to cover only the individual agents and brokers, not the real estate agency (entity) itself. To the extent the agency holds no assets, it may not need protection, as it has “nothing to lose”, but unless the owner is willing to fold the entity should a claim be made against it, declare bankruptcy, and open up another agency (all of which might create heartburn with the regulatory bodies) it’s a good idea to contemplate a separate or excess policy for the entity.

Be aware that some carriers are very good at insuring pure real estate agents/brokers, but falter when mortgage broking, property management, escrow, or other related services are provided. Carriers’ approach to real estate agents conducting transactions on owned properties also varies widely. Most carriers also require a minimum number of years experience (usually three to five) before a new firm will qualify for coverage.

Common causes of loss for real estate agents and brokers include failure to disclose (problems in a property or conflicts of interest such as dual agency), and discrimination. Discrimination is frequently excluded in a typical policy, but it could be picked up by third party coverage on an EPL policy, if the EPL underwriter is willing. Personal injury (libel, slander, etc.) is a good coverage to keep an eye out for, and most real estate professionals have a strong privacy liability exposure which is generally not covered by a typical E&O policy. A privacy liability policy that includes loss of paper documents would be key to address this exposure.

Next on the list is mortgage bankers and brokers.

This is such a rich and complex topic, I could spend two or three weeks, or a book, on just these opportunities and exposures. But I’ll spare you for now, and perhaps put together a white paper, which I will later post on the blog. (www.professionalliabilitytidbits.blogspot.com)

First thing to know is that “mortgage banker” and “mortgage broker” are not interchangeable terms. Sometimes it doesn’t seem that way, because insureds will say they’re a “mortgage company”, and they’re not specific about what they do. Also, many carriers will say they cover “mortgage brokers/bankers” when in fact they don’t provide coverage to mortgage bankers at all, or they do so on a very limited basis.

Here’s the basic difference between the two:

A mortgage broker simply originates loans. They work as an intermediary between the lender (or many lenders) and the borrower. Not unlike an insurance agent.

A mortgage banker may originate loans, but most importantly, they actually fund the loans. They can do this with their own funds, or through what’s called a “warehouse line of credit” where the money is supplied by investors or other lenders. After they fund enough loans, they resell them, replenish their coffers (or their credit line), and fund more loans.

Both types of entities can service loans (collect payments, manage hazard/tax escrow accounts, etc.), but that is a separate service in which they may or may not engage. More mortgage bankers do at least a little servicing, because they need to manage their loan portfolio until they can sell the loans to the secondary market. They can do the servicing themselves, or they can outsource it.

In many states, mortgage brokers must be licensed. Some states do not have a specific mortgage broking license, and the mortgage broker operates under a real estate agent’s or broker’s license. Licensing is one way you can tell the difference between a mortgage broker and a mortgage banker. Another way is a look at the company’s balance sheet. A mortgage banker will have money somewhere. If you suspect an entity is a mortgage banker, and they don’t have money on their balance sheet, the next question is “do you have a warehouse line of credit?”

Major exposures:
• Lack of disclosure of loan terms or fees
• Violations of RESPA (a real estate regulation)
• Discrimination
• Conflicts of interest
• Inappropriate underwriting or submissions

Some, but not all, of these exposures can be covered by E&O policies.

A lot of markets who were writing mortgage brokers have stopped, or are only writing retro inception now. Many who were writing mortgage bankers have stopped. Most markets are excluding subprime loans and have added other exclusions. Since many of your potential insureds have a retroactive pool of subprime activities, beware of this exclusion and try to get subprime coverage at least on the past acts, so you can avoid a gap.

Home (and Other) Inspectors:

There are several types of inspectors for whom E&O can be written. Some — usually home inspectors — are required to carry coverage by law in certain jurisdictions.

As a rule of thumb, most carriers want to cover those inspectors that only carry a clipboard, not a toolbox. So if an inspector also offers repair services, he or she becomes virtually uninsurable.

A quick summary of the types of inspectors:

Home Inspectors — checking for habitability on behalf of the purchaser, generally pre-purchase
Commercial Building Inspectors — pre-purchase inspections, or construction-completion inspections
Building Code Inspectors — inspect for code compliance
Environmental Inspectors — check for mold, radon, clean air, water potability, etc.

Home inspectors are the most common of these, and there are several programs for them, and some association programs. GL is frequently offered in combination with the PL. Contingent BI/PD, or lack of a BI/PD exclusion altogether, is a must for this class, as well as for all inspectors.

Some of the home inspector markets will write commercial building inspectors as well.

Code compliance inspectors are probably the most difficult class to write, but there are a few carriers who will entertain them, and a bare handful that will provide contingent BI/PD.

Environmental Inspectors are easier to write than one might think, but only if you’re using the right markets. Most home inspector markets, and indeed most E&O markets, do not have an appetite for the pollution hazard and catastrophic contingent BI/PD exposure presented by environmental inspectors. Environmental markets, however, view this class favorably, and provide broad coverage and attractive pricing.

One thing to note — the word “environmental” sometimes can refer to matters of industrial hygiene (the “environment” in which the workers perform their tasks). If the insured is involved in inspecting industrial plants and recommending modifications to ergonomics or processes, they are more along the lines of a safety consultant than a true “inspector”, although the terms are somewhat interchangeable.

So after exploring real estate agents/brokers, mortgage brokers/bankers, and all manner of inspectors, your might ask “What else is there?”

It just so happens I have an answer for you.

Title agents, escrow agents, appraisers, foreclosure services, mortgage field reps, debt negotiators, property managers, leasing agents, as well as real estate investors and investments.

The first three classes mentioned above have seen an increasingly shrinking marketplace. Used to be they could be written for pennies on the dollar, and had many association programs that offered broad coverages on the cheap. However, with the downturn in the housing marketplace, and homeowners scrambling to find any way they can to hold onto their houses, there are increasing claims against these professionals.

Also, appraisers have been deemed to be in cahoots with real estate agents and mortgage brokers in supporting inflated home values that justified suspect loans, and now they are viewed with quite a bit of distrust by the carriers.

Several carriers have just outright stopped insuring these classes, and others are more closely underwriting and are increasing pricing and retentions.

Mortgage field reps are those people who will go out to a foreclosure property to make sure it’s there, take a few pictures from the outside, and report back to the mortgagee. An interesting class without a huge exposure, they are frequently required by the mortgagee to carry coverage. One must be very careful to distinguish them from “home inspectors” because the risk is not at all the same, and only certain niche carriers do a good job with home inspectors, while other carriers altogether can do a good job with field reps.

Debt negotiators are all the rage. They will intervene with lenders on behalf of borrowers (or sometime at the behest of real estate agents or mortgage brokers looking to get some deals done) and facilitate the borrower and lender reaching a mutually beneficial agreement about how a loan can be structured. If the debt negotiator actually goes to the extent of proposing refinancing and/or shopping a refinance deal, they are actually a mortgage broker and must be insured as such.

Property managers and leasing agents haven’t seen too much of an upset in this real estate market yet. Perhaps because rental properties are only more valuable and needed in this time where people are having to leave their homes, or where home sales have diminished. Commercial risks are not as easy to insure as residential, for the obvious reason that there is a lot more at stake in each transaction. Tenant discrimination coverage is generally provided separately from E&O. It can be written on the same policy, or in concert with the E&O, but it is a separate underwriting process, separate app or supplemental (or segment of the app).

Real estate investors and investments include all manner of private equity firms, REITs, 1031 exchanges, and any other type of person or firm that purchases, holds, manages, or sells property with investment funds for any reason other than to occupy it themselves. Most of these firms execute deals on behalf of third parties on at least one-half of the transaction (i.e. a third party buyer, or a third party owner), they may be completely arms-length facilitators with both buyer and seller being third parties, or they may be executing transactions for the benefit of investors. This private equity exposure has become more difficult to insure as the profit prospect of this line of investment has become more questionable. However, coverage is still available at a price, especially for insureds who have a track record of success and who provide proper disclosures to investors.

One interesting thing regarding real estate investment-related firms — the D&O and E&O exposures are frequently indistinguishable and should generally be written together on one policy, or at least with one carrier. You can imagine the difficulty in trying to sort out whether the sale or management of a property gone bad is an affront to the investors as a fiduciary issue of proper caretaking of corporate assets, or whether the investors got rooked into a deal where the so-called professionals couldn’t tell La Jolla from a hole in the ground and were incompetent to perform the services of evaluating, buying, managing or selling properties. Does the claim arise from the professional service rendered? Or does it arise from the breach of fiduciary duty as a D or O of the company? Much safer to insure both whenever possible.