IIABNY members who place business through wholesale brokers know the drill. Client writes check to retail broker; retail broker deposits check and writes a new check to wholesale broker; wholesale broker deposits check and writes a new one to insurance carrier; carrier deposits check and issues policy; everyone lives happily ever after.
Unless, of course, one of those checks gets lost. A New York broker found out last year that the cost of a check mailed to the wrong address can be steep.
An executive recruiting firm retained the broker to obtain errors and omissions coverage. The broker obtained coverage from Liberty Surplus Insurance Corp. via a wholesale broker that acted as Liberty’s program administrator. One week before the end of the first policy term, the broker sent the insured a renewal application. The insured completed the application and sent it back to the broker. Twelve days after the renewal date, the broker forwarded the application to the program administrator and requested a quote for the new term. The wholesaler immediately asked Liberty for a quote and permission to backdate coverage. Liberty issued a quote the same day and gave the administrator permission to issue the renewal upon receipt of the premium payment.
Four days later (16 days after the renewal date,) the insured received an invoice from the retail broker for the full annual premium plus broker fees and taxes. The insured sent a check for the full amount to the broker five days later, and the broker deposited the check in its premium account six days after that. Finally, two days later (nearly a month after the renewal date,) the broker’s bookkeeper mailed a check for the premium and taxes. She thought it was going to the administrator’s address. It wasn’t.
What the bookkeeper didn’t know was that the administrator had closed the office to which she mailed the check. Worse, the post office did not return the mailing to the broker. According to the court, “In fact, to date, no one knows what happened to the check.” No one ever cashed it. And, since the administrator did not receive the premium payment, and Liberty had instructed the administrator to issue the renewal only when it received payment, no renewal policy was issued.
In the mean time, the recruiting firm had signed multiple contracts to solicit job candidates for J.P. Morgan Chase Bank. Those contracts prohibited the firm from recruiting certain types of J.P. Morgan Chase employees to leave the company. In August 2008, J.P. Morgan Chase informed the search firm that it believed the firm had violated the contracts by inducing the bank’s employees to take positions with a competitor. Two months later, J.P. Morgan Chase sued the firm for $1 million (it later increased the demanded damages to $55 million.)
Liberty, somehow unaware that it had never issued a 2007-08 renewal policy, initially appointed and paid defense counsel for the recruiting firm. The insurer also notified the firm that it was reserving its rights to later deny coverage and recover its defense costs if it found that the insurance did not apply to the J.P. Morgan Chase claim. However, five days after the bank hiked its demand for damages to $55 million, Liberty denied coverage altogether because it had never received payment for the 2007-08 renewal policy. The bank and the firm subsequently negotiated a confidential out-of-court settlement. The firm then sued the retail broker, the administrator and Liberty. Five of the 12 complaints were against the retail broker for breach of contract; negligence; breach of fiduciary duty; fraud, constructive fraud, and negligent misrepresentation.
Though the insured filed the initial suit in December 2009 and amended it two months later, the trial court in Manhattan rendered its decision only last April. The decision was a mixed bag for the broker. First, it said that the broker’s failure to obtain a renewal policy for the recruiting firm was “clearly a breach of contract.” The court also ruled that the broker’s handling of the missing check affair was negligent:
“A reasonable broker would have taken one of myriad steps to ensure that coverage was in effect, including confirming receipt of the check with American, reviewing its bank records to see that the check was never deposited, and taking corrective measures in April 2008, approximately six months before the JPMorgan action was commenced, when (the insured) had serious concerns … that a 2007/2008 policy was never issued. Instead, (the broker) did nothing.”
The court said that the broker was liable to the extent that the Liberty policy would have covered the settlement and attorney’s fees. On the positive side for the broker, the court ruled that:
- A trial is necessary to resolve questions of whether or not coverage would have applied
- The purchase of an insurance policy from a broker does not create a fiduciary relationship
- Because there was no fiduciary relationship, the claims for negligent misrepresentation or constructive fraud were not valid
- The fraud claim was not valid because the broker never told the firm that a renewal policy was issued.
The takeaways for all insurance producers:
- Monitor the status of all new and renewal policies, from application to issuance. No news is not necessarily good news. When confirmation of coverage does not arrive, it is vital for someone to follow up. Even in the 21st century, checks get lost in the mail. The wrong time to find that out is when the insured receives a legal complaint.
- Documentation of all follow-ups is vital.
What happened to the retail broker here could happen to any insurance agency in business today. Agencies that take E&O loss prevention seriously will minimize the chances that it will happen to them.
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