As every E&O attorney knows, a sizeable number of E&O claims against agents arise from agents trying to do a favor for an insured. That 'favor’ often involves reading or reviewing contracts signed by the contractor, especially for agents who insure contractors. Mike Edwards discusses the importance of handling these favors properly and the consequences of not doing so.
Agents are caught in a Catch-22 when it comes to reviewing contracts signed by their insureds. To run from the task would call into question the agent’s professional service. On the other hand, to tackle the project with no written guidelines or disclaimers could be disastrous for the agent and agency.
The most common sense approach, and one that’s recommended by E&O attorneys, is to take the middle ground: Review the contracts, but with ample caveats. It’s essential to state in writing that the agent is only reviewing the insurance requirements of the contract, and not providing any sort of legal advice.
In addition, such a disclaimer should be provided at least annually to insureds for whom the agent frequently and routinely reviews contracts. For situations in which a contract review is done only infrequently, it’s wise to provide the disclaimer to the insured each time. Those who favor a conservative approach recommend using the written disclaimer each time a contract is reviewed, no matter how many contracts are reviewed for an insured each year.
Here’s a proposed disclaimer letter that could be used when reviewing contracts for insureds. Review this proposed letter with the agency’s legal counsel before using it with an insured.
Upon your request, our Agency has reviewed the contract indicated above. Specifically, we reviewed only the insurance requirements as contained in Section __, Page ___.
The scope of our review was to determine if the current insurance program that you have placed through our Agency addresses the types and amounts of insurance coverage referenced by the contract. We have identified the significant insurance obligations, and attached a summary of the changes required in your current program to meet the requirements of the contract. Upon your authorization, we will make the necessary changes in your insurance program.
We will also be available to discuss any insurance requirements of the contract with your attorney, if desired.
In performing this review, our Agency is not providing legal advice or a legal opinion concerning any portion of the contract. In addition, our Agency is not undertaking to identify all potential liabilities that may arise under this contract. This review is provided for your information, and should not be relied upon by third parties.
Any descriptions of the insurance coverages are subject to the terms, conditions, exclusions, and other provisions of the policies and any applicable regulations, rating rules, or plans.
For an example of how doing a favor for an insured by reading or reviewing a contract can quickly bring an agent to the verge of litigation, consider this incident:
The agent insures several large contractors, and reviews contracts for them on a regular basis. In an unfortunate oversight, the agent failed to notice that one construction contract his insured had signed required limits of $20 million. The insured carried $10 million limits. Two weeks after the job began, the risk manager for the building owner called the contractor to notify him that the Certificate of Insurance the agent had sent reflected inadequate limits, and that work must stop immediately until adequate limits could be obtained and verified.
The contractor immediately called the agent, who was totally embarrassed by the oversight. Later that same day, the agent was able to obtain the additional $10 million excess quote for approximately $8,000 premium.
The contractor was then angry that the additional premium was essentially going to have to come out of his profit on the job, since he hadn’t figured this additional cost into his bid. He told his agent that he should pay the additional premium, since it was the agent’s error.
Although this case hasn’t yet gone to trial, an E&O attorney advised the agent not to pay the additional premium, no matter how embarrassed he was by the oversight. If the agent paid the $8,000 additional premium, it could easily be construed as admitting fault, which violates one of the key provisions of all E&O policies. Here’s an excerpt from a typical policy:
General Terms & Conditions.
Reporting and Notice. Insured’s duties in the event of a claim or any potential claim:
The insured shall not, without our written consent, do any of the following:
1. Admit liability;
2. Participate in any settlement discussions nor enter into any settlement; or
3. Incur any costs or expense.
Since the job has been underway for two weeks, with a $10 million gap in limits, the agent could theoretically be liable for the 'missing’ $10 million, if an injury had already occurred. By paying the additional premium and thus probably admitting fault, the agent would be 'bare,’ with no E&O coverage at all.
The moral of the story: Doing 'favors’ for insureds can lead to bad results for the agency, if not handled just as carefully as any other 'regular’ task.
Moral #2: When reviewing contracts for insureds, use an appropriate disclaimer letter.