Author: Frederick Fisher, J.D, CCP
On December 29, 2023[1], Chip Merlin of the Merlin Law group pointed out in an article that insurance agents are far more knowledgeable than your server at Denny's. Yet, such is the reality of what courts consider the “order-taker standard of care” for insurance producers. In 37 states, insurance agents must only obtain the coverage that the client or customer requests, assuming that the customers know more about what their needs are or what is available from an insurer than the agent or broker selling it. Only 13 states do not follow this standard, and of those, only New Jersey has codified the concept that insurance producers should be held to the highest standard of care, commonly called a fiduciary standard of care.
While one may not be held liable for failure to advise because of being held to the same standard of care as your server at Denny's, that solves no problems. It creates them. Only attorneys benefit from such a standard of care because the insured will sue you regardless. And as we know, 80% to 90% of lawsuits settle, so what have you accomplished by trying to avoid liability that has not prevented you from being sued? Had you provided the guidance, documented that guidance and the customer’s response, you probably could have avoided lengthy litigation.
Giving advice based on the knowledge you already have thus presents an opportunity, and not a detriment as you will be able to take an account from those who will not advise the customer.
Why is that the case? Simple. Some of the largest brokerages in the country are told by their corporate counsel, both in-house, and external, that they cannot be held responsible if they give no advice. So, because most professional insurance agents and brokers have the knowledge to give advice, why not provide it? Your competitor won't. What will happen is simple. By giving advice, and pointing out coverage deficiencies you are aware of, you will get the order. More illustrative of the point is that the financial statements filed with the Securities and Exchange Commission by major publicly traded brokerage corporations show that many have error and omission expenses, and indemnity claim reserves in the hundreds of millions of dollars, given they are self-insured, often for the first $5 million of any E&O claim. So, how is the order taker standard of care working for them?
Document, document, document
The most important thing is to document the advice you give. That is the key, document the advice offered and whether your customer accepts or rejects that offer. With proper documentation, it makes it harder for that client to allege you committed a professional error. With proper documentation, the error is their own, because they made a knowledge-based decision. Using this approach, you will probably get more customers than you lose. Even those who may still present a claim will find they will have a tough time maintaining the suit.
Vague Language Increasing Including Vaguely Titled Endorsements
The title of this article says it all. Numerous insurance policies are intentionally filled with language allowing insurers to avoid paying a claim they normally would pay. Several different coverage-focused law firms have published articles suggesting that it behooves insurers to hire knowledgeable coverage counsel to help draft exclusions to avoid paying claims that formerly they would have paid, most of them usual and customary as opposed to something clearly excluded like an environmental liability claim paid under a CGL.
This article will focus on some of those gotcha’s, hence the title.
Over the past 15 years, more than 400 court decisions about policy language have been held enforceable under the fanatical belief that courts must enforce the sanctity of the written contract, when clear and ambiguous, doing away with some traditional maxims of insurance. These include the following traditional concepts which must now bow to the supremacy of the concept of “clear and unambiguous language.
Contracts of insurance are a “contract of adhesion” due to the unfair bargaining position between the insurer and the insured,
The reasonable expectations of an insured are that the policy will cover usual and customary hazards. Yet, absolute exclusions, using language such as "arising directly or indirectly from “fill in the blank" have allowed courts to ignore that age-old concept.
A court should broadly interpret insuring agreements and narrowly interpret exclusions. Absolute language has also impacted that too, as one federal court judge stated, “We are about to enforce a staggeringly broad contract exclusion.” (Note that there is no limitation that the exclusion is only limited to the actions of the insured and there is no carve back stating that the exclusion does not apply to an action when committed by someone else. Attorneys have authored articles extolling the use of such exclusions.
So, what are some of the common “gotchas,” as this article will not review all many decisions? We will cover only the most recent ones.
Absolute Exclusions
A court decision recently upheld a broad interpretation out of the language “arising out of goods and product liability.” The Court of Appeals held that a “goods and product” exclusion in a D&O policy precluded coverage for costs related to complying with government subpoenas.
There have been well over 30 such decisions throughout the United States since insurers started using absolute exclusions and are not limited to the actions of the insured. Enforcing such language is the result of the absolute language used being found clear and unambiguous. This includes an environmental liability exclusion for an architect and engineering firm that only did phase one pollution surveys.
Insurance agents should have a particular concern because many errors and omission policies for insurance agents and brokers may have up to 14 such exclusions for policies routinely sold by insurance agents and brokers. Unless the exclusion limits itself to only the actions of the insured or has a carve back that the exclusion will not apply where the insured is providing a service to a client, the exclusions may well be upheld should a customer make an E&O claim against the producer for selling them a policy that lacks coverage for actions where a third party makes a claim against the customer.
Thus, when selling environmental liability coverage, employment practice liability insurance (EPLI), prize-winning coverages, fiduciary liability and many other types of policies, there may be no coverage for an error and omission claim against the producer when the policy sold to a customer does not cover a claim they have submitted. The client may blame the producer for the denial of their coverage, giving rise to an E&O claim against the producer for not providing the correct coverage to the customer.
More disturbing, too, is a bodily injury and property damage absolute exclusion which was equally upheld by the court. Yet just about every casualty or property insurance policy sold by producers involves bodily injury or property damage. An absolute exclusion for bodily injury or property damage would render your E&O policy “illusory,” it appears. Yet, courts have ruled that such language does not render a policy illusory if the policy covers only one type of claim.
The case of the engineering firm mentioned above illustrates the problem of “illusory coverage.” The firm only offered pollution surveys yet ended up not having coverage because of an absolute exclusion from pollution. The court reasoned that they were an engineering firm, and had they provided any other engineering services, the policy probably would have covered them. Hence, the policy was not found to be illusory. Courts have ruled it takes only affirmative coverage for one type of claim to take the policy out of the illusory argument.
Commercial General Liability Policy Issues
Another trend is a commercial general liability policy’s “business description" or "class code" limiting coverage.
A CGL insurer can narrow otherwise broad bodily injury and property damage coverage by this activity. Insurers group activities that face a similar risk by using activity classification codes, which they may incorporate into the policy due to a class limitation endorsement. For instance, a policy issued to an individual for any business of which they are the sole owner could include an accounting class code and a class-limiting endorsement effectively narrowing coverage only to the insured’s accounting activities.
Courts routinely enforce such endorsements. Suppose that instead of the class limitation endorsement for accounting, the policies declaration page merely said business description accounting and “class code 7619-accounting. Now suppose the individual also conducts non-accounting business, such as providing software or retirement investment advice to a client. That business may well have no coverage for the other business operations.
Another disturbing trend is that more commercial general liability policies do not automatically include hired and no-owned auto coverage. This is significant, because increasingly, employees use their own cars for company business as opposed to being provided with a company-owned vehicle. Broker beware indeed!
Claims Made Trigger and Definitions of “Claim” Issues
There isn't room in this article to go over the numerous defenses to coverage because of claims-made trigger issues and definition of claim issues. Suffice it to say my recently published book goes into far more detail than this article will allow.
That said, one must be wary and knowledgeable as to what triggers a claims-made policy, as well as being knowledgeable of the definition of claim in the policy, which has a direct impact on many other provisions. Two examples of that are claim denials arising from the failure of the insured to report a claim consistent with policy requirements. This is usually found in the conditions section. It may be a requirement that a claim be made and reported to the company as soon as practicable without any inexcusable delay in reporting the claim to a specific address or third-party claim administrator.
One thing is certain. Including a new claim as part of the renewal process does not follow any such claim-reporting requirements and thus, there is no guarantee that the company will accept it in that fashion.
The definition of claim may also include a subpoena being served for production of records. Some policies have that language. This cannot be ignored, as again contracts of insurance will be strictly enforced with any language that is "clear and unambiguous."
Claims-made insurance policies are as dangerous as any policy can be with numerous provisions having a direct impact on whether the insurer will cover a claim or deny it.
Crime – Crypto and Cyber
These policies, while usually written on a standalone basis, are intertwined. Thus, such policies as surety bonds, crime policies, crypto exposures and cyber liability policies sometimes overlap, or fill voids other policies may not cover. This requires careful reviewing and sophistication to be able to cover all the bases. One thing is for certain: significant problems arise when the insured transfers money to a location that turns out to be fraudulent. This “mistaken-yet-voluntary transfer” occurs frequently and has the label of being a "social media fraud," for reasons often not well understood.
With over 500 cyber liability policies that exist today, how can anyone claim to be an expert who has the time to review all 500 with their optional endorsements? Each insurance company underwriting cyber insurance has different favored business types in mind when developing their products, in addition to whether they are small businesses, middle-market, or very large companies. Add to the equation the complexity of crime insurance, surety bonds and crypto currency frauds, the result is that you better know what you're doing if you are writing cyber.
Equally true is the fact that “crypto” rarely qualifies as a physical loss since there is nothing physical about the product. Thus, even a homeowner policy will not cover that as a valuable item since it did not exist physically.
Some tech policies cover electronic equipment, but that coverage may not cover ransom attacks where the attack on software has caused no physical harm to the equipment itself. This is true of viruses that take the system down. The hardware is working fine, but the software is not.
The definition of damages raises the question of whether the damages are a "consequential loss," raising a coverage issue in a computer system failure. This was a situation where thousands of canceled flights resulted from a hack, but was not directly attributable to a system failure that normally the carrier would have covered. Thus, the carrier successfully denied a $77 million claim.
Directors & Officers Coverages
Directors and officers policies are complicated. Many are now called management liability or management professional liability. Carriers designed director and officer liability coverage to cover officers and directors for their errors in their management of a business entity. Thus, it is business managers’ E&O insurance. That said, professional liability is generally excluded in a D&O policy. That is because the D&O policy is designed to cover the management of the entity by the officers and directors but does not generally cover any error and omission in the services that the business entity might provide to others. This requires a separate errors and omissions policy. This is especially true in the banking industry, as many large banks provide a number of professional services, whether escrow services, lending services, collection services etc.
There generally is an exclusion for professional services. As discussed in the many court decisions, such coverages are readily available. For instance, the financial services division of major insurance companies provides banks and financial institutions with directors and officers (D&O) liability coverage. They also have a bankers professional liability policy that covers the banks’ divisions that provide professional services to their customers. These are separate policies, and often the person underwriting the D&O policy is also the underwriter on the bankers professional. They are thus distinct. Any business providing services to others for a fee needs D&O but must also buy a professional liability policy for their professional services to others. Too many cases have upheld the professional services exclusion in the D&O policy. Broker beware indeed.
Employment Practices Liability
Employment practices liability insurance has been around for some time. Yet, as is true of most specialty line policies, there is no standardization. For instance, never assume there is coverage for someone who is not an employee yet claims they were discriminated against, for example a job candidate. Even if the declaration page may show the possibility of third-party coverage, often there is none unless a “box is checked” demonstrating that the option was procured. Do not take this for granted.
Even if the policy provides third-party coverage, one must look at the definition of what is called a third-party wrongful act. Is it as broad as dealing with anyone with whom the insured may interact, or is it more limited to the customers of the insured? There is also language now where the third-party extension only applies where there is vicarious liability involved i.e., an employee of the insured committing an act against someone who is not an employee. That may seem obvious, but it might surprise you how many carriers have excluded claims for a lack of vicarious liability if for no other reason than a member of management made the decision to harass somebody or discriminate against the third party.
In one instance, there was no third-party extension, and a patient claimed harassment and discrimination. The carrier denied the claim because the policy limited coverage only to the employees of the medical practitioner. Again, the definition of third-party wrongful act may directly impact coverage.
Another problem may be found in the definition of “damages.” In one policy, it did cover emotional distress under that section of the policy that dealt with employees of the insured. However, the policy did not include coverage for emotional distress in the third-party coverage definition and thus the carrier did not cover the claim. Most damages arising from an employment practice or harassment and discrimination claim are for emotional distress.
The exclusions section of the policy might also have a similar problem. Bodily injury and property damage are usually excluded in D&O and E&O policies. EPLI policies do as well, yet the exclusion for “bodily injury” should have a carve back for emotional distress for an employment wrongful act. Without it, the policy will not cover emotional distress damages. Determine whether there is also a carve back for a third-party wrongful act because without it, the insured would not have coverage for emotional distress suffered by a third party.
This is another "gotcha that’ll getch’ya."
Excess and Umbrella Coverage Gotchas
Producers may take for granted excess and umbrella coverages. Very few insurance producers request layers over $50 million. Yet, these coverages are equally complicated, and producers should not take them for granted. Another truth is finding a true umbrella policy. Once, umbrella policies might be broader than primary policies and hence had a drop-down cause subject to a deductible for events or losses that the primary policy did not cover. Those days are long gone. Umbrella policies now are more like excess policies simply because of that factor.
As for excess policies, producers may assume they are all "following form" policies. This, too, is disappearing. Now, even when the policy states it is a “following form,” there is often additional language that states “except where this policy language differs.” What does that mean?
That means one must compare every underlying policy to the current excess policy in place to see where "the policy language may differ." Any excess policy that provides no coverage may affect other excess policies over and above the one reviewed.
Such was the case in the Pharmacia decision[2]. In that decision, the sixth excess layer had language requiring the exhaustion of all underlying policy limits, and that the insurers admit liability. Since none of the underlying insurers had admitted liability, Hartford’s Twin City Fire Insurance Company declined coverage based on the requirement they do admit liability. The court upheld this language, and thus Pharmacia had to cover $47 million of a $207 million settlement because the Hartford policy did not have to provide coverage nor did the additional layers above them to the total of $207 million.
This is not the only problem with excess policies. Almost all excess policies require that the insured report all claims as soon as practicable, which means, without any unreasonable delay. Thus, even if there would have been coverage, if the excess carriers were not put on notice earlier would be grounds for a denial of coverage. This too is happening all too frequently, and thus it would behoove insurance producers to advise their clients that they need to report all claims to all involved carriers including excess insurers. While the insureds may claim their rates could go up because they reported the potential claim, reporting for record-only claims traditionally has not increased rates. Since insurers require that insureds report claims as soon as practicable, there is no penalty for doing so, especially if it never turns into a claim at any specific excess layer.
The same has been true of claims made and reported policies that also require that the insured report any potential claims. The idea that this will raise rates even though the reported matters never became a true claim is a fantasy and is not true. One large engineering firm reports more than 200 potential claims incidents every year without any increase in rates as 99.9% of them never became a “claim.”
Another hole in excess and umbrella policies is a situation where the primary coverage also has sublimits for certain types of losses. For instance, certain E&O policies, especially in the medical area, would not be uncommon for there to be only a $250,000 limit for anything involving sexual abuse. Thus, if the policy itself has a one-million-dollar limit except for those items involving a sublimit, there will be a gap in coverage between the sublimit and the main limit of the policy. It is almost impossible to get an insurer to be excess over the lower sublimit so there is going to be a gap. Policy holders need to be aware of this as well.
Take claim reporting to heart. Do not rely on the primary carrier to inform the excess insurer of problematic claims. Inform all potential carriers including excess carriers of any claim against the insured to preserve coverage should the underlying claim penetrate the excess layer.
Final Remarks
It is not an easy time for insurance producers. Whether or not you subscribe to the order-taker standard, one thing that is clear is your obligation to obtain the requested coverage. Many of the exclusions and gotcha’s detailed above might even fall under the order-taker standard, because the gotcha’s did not provide coverage to the insured where they would reasonably expect coverage.
While contract language is being strictly enforced as to what is clear and unambiguous, insurers are now excluding the usual and customary coverages we have seen in the past. Thus, from the policyholder standpoint, did they get what they reasonably expected or requested? The answer is no, and whether this is a violation of the order-taker standard would go to the jury.
Which is better, successfully defending a lawsuit or preventing a lawsuit? One should opt for the latter, as preventing litigation is always best. Even if a policyholder/client doesn't follow your advice, document it! This may require a note to the file and a confirming email, letter or properly drafted declination form preferably signed by the customer. The more documentation the better!
The choice is yours, because following the order taker standard and not giving any advice does not mean no one will sue you. Most cases settle, in which case, the only people benefiting from this activity are lawyers, who created the problem to begin with.
Agents, take heed.
About the Author
Frederick Fisher, J.D., CCP is a specialist in Professional Liability. He is a Member of the Editorial Board for Agents of America, an original Faculty Member of the Claims College, School of Professional Lines sponsored by the Claims & Litigation Management Association, Senior Technical Advisor for over 33 years for Professional Liability Insurance, published by the International Risk Management Institute, and is a past President and a founding member of the Professional Liability Underwriting Society (PLUS). He is the author of “Claims made Insurance- the Policy that Changed the Industry (June 2024),” published by the Insurance Journal, a Wells Publishing Co., and marketed through Amazon.
Fred’s expertise started with a 20-year career as a Professional Lines Claims Adjuster, which included qualitative claim auditing, risk management & loss control services, and acting as a TPA.
Fred founded ELM insurance Brokers and served as CEO for another 20 plus years. During his 49-year career, he has authored over 80 trade journal articles and two books. He remains a Subject Matter Expert for several PLUS RPLU courses. In 2019, he was the PLUS recipient of the Founders Award. He has taught or given over 170 CE classes, lectures and Webinars concerning specialty lines insurance issues and coverage. He is an A.M. Best’s recommended expert and has been testifying as an Expert witness for over 30 years.
[2] See Virtual University _ Comments on the Third Circuit Sustains D&O Policy’s Condition Precedent to Coverage, No Coverage for the Policyholder, March 29, 2024
[2024 Common law Copyright asserted by Fisher Consulting Group, Inc. All rights reserved. A Trademark and/or Service Mark application is currently pending for “The Gotcha’s that’ll Getch’ya ”
Originally Published: December 6, 2024
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