Your Insureds’ Contractual Requirements

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Knowledge Knuggets for 2/10 and 2/17 contemplate the issues surrounding insureds’ contractual requirements.  The first installment addresses potential liability arising from placing insurance that may or may not meet the requirements.  The second addresses the reasonableness of various requirements.  I am posting these two Knuggets separately, as you may find them useful for different audiences.

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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.

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