E&O Caveat No. 1: Never Assume!

Here’s a recent question submitted to our 'Ask an Expert' service:

'We insured a manufacturing company with an effective date of July 1, 2001. The applications were sent to the underwriter prior to binding/quoting and they quoted the particular line in question 'installation floater.’ The rating work sheets said nothing about the coinsurance percentage. The ACORD application didn’t ask for a coinsurance limit or an agreed amount.

'We assumed that this was the agreed amount as that’s the coverage we had with the prior carrier at a $100,000 limit. We had the insurer issue the coverage at $500,000. In October, we were notified by the manufacturer that they needed quotes on $5 million, $10 million, and $15 million installation coverages for a job they were doing. We went to every market we could find but couldn’t get quotes on that limit. Along comes the claim on January 10, 2002. The claim will be for a total of $900,000, part of it (probably half) in the installation portion of the policy.

'The insurer invoked an 80% coinsurance clause, which is what they’d issued it at. The CSR didn’t check the policy when it came in; however, the underwriter never called to ask what coinsurance percentage we wanted. They also never asked if we wanted 'agreed amount’ on the policy since nothing at all was requested on the application. The underwriter was aware of the need for higher limits because he was the one that we’d gone to for a price on increased limits and they’d turned it down.

'Of the $450,000 installation loss, the 80% coinsurance clause has only allowed $25,000 of the claim to be paid. Our insured obviously isn’t happy. We’ve made every effort to get the insurance company to stand by the coverage we wanted and the coverage we bound on July 1, 2001.

'We’re in the process of having the insured file a declaratory action against the insurer with a couple of affidavits from our agency about what we’d requested and bound. Any suggestions?'

I ran this by our faculty, who agreed that the first step is to get your E&O carrier involved. Although it might not look like the agency is a candidate for a lawsuit, don’t be surprised if the insured is advised by counsel to include the agency in any suit against the carrier, and/or to sue the agency if any suit against the carrier is unsuccessful.

In addition, if you’re assisting the insured in filing a declaratory action against the insurer, a suit from the carrier might not be out of the realm of possibility. Your E&O insurer probably has experience with these types of situations and might be able to head off any adverse legal proceedings. Here are some observations from our faculty:

FACULTY RESPONSE 1
Installation floaters are almost universally written with a 100% coinsurance clause, not on an agreed amount basis. That’s probably why the underwriter didn’t ask.

FACULTY RESPONSE 2
First, I think the declaratory action against the insurer might be a mistake for the agent. They should contact their E&O carrier immediately before assisting the client in any legal action against the carrier. Laws vary by state, but usually in these types of actions, for better or worse, the agent will sit on the defense side of the table. If the affidavit says they wanted one thing and got another and let that stand for nearly a year, they could be prejudicing the E&O carrier’s defense and might void coverage of this claim. It depends on the policy trigger.

The agent has a responsibility to review the policy issued compared to the application. The responsibility and liability often shifts from insurer to agent as time elapses. Generally after 90 days of having the policy with different conditions than requested, most of the liability might be shifted to the agent; thus they need to get the expertise of their E&O carrier.

In the area of Inland Marine coverage, so many policy forms exist that agents should never assume that a condition or coverage exists. I’ve seen installation floaters that are hard printed at 80%, 90%, and 100% coinsurance clause, and some with variable coinsurance clauses. I’ve never seen one at the agreed amount,’ not to say that one doesn’t exist.

Again, my biggest concern is that the agent’s involvement in the insured’s declaratory action might come back to haunt them. It’s time to let the E&O experts take over before the agent jeopardizes coverage.

The E&O carrier should be alerted primarily because most installation floaters are written at 100% coinsurance, not the agreed amount.’ The agent indicated that they didn’t alert the carrier about deleting the coinsurance clause. On the surface, it appears that the agent might have a greater exposure to liability than the insurer. If the declaratory action fails, you can pretty much bank on the insured’s attorney coming after the agency or at least enjoining it in the suit until accountability can be established.