Claims Examples

Alpine Risk Management


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In our opinion and experience, this cause is one of the most prevalent and the most serious. Unfortunately, far too often agency principals, producers and other staff members fail to document phone conversations or personal discussions with their insureds. In our reviews of insureds files when we find a definite lack of documentation and question the individual, we seem to get a standard answer: “I talked to the insured and he/she understands there is no coverage for the exposure.”

Unfortunately, when a loss occurs for one reason or another, the insured plaintiff suffers memory fails. And, when this loss occurs, the agency or brokerage firm has no defense, for it can’t produce any admissible written or automated evidence of their discussions with the insured to contradict and discredit the plaintiff’s claims.

A. Agent called on insured and recommended a certain type of coverage to protect him against suits by employees and other third parties. The insured told him he didn’t worry about any such suits, plus he didn’t want to pay any additional premium. A subsequent loss occurred and a suit was filed by an employee on behalf of his stepson. The insured swore under oath the agent never mentioned that coverage to him. Agent had no record in his files of any conversation, nor did he document the
file by sending the insured a letter confirming the conversation. Claim was $1,000,000.

Had the agent documented the conversation and then confirmed it in writing, the suit would never have gone to trial as agent would have had a legitimate defense.

B. An agent wrote all the insurance for a large building development contractor. The contractor started construction on a very substantial development. Construction Costs were forecast at $4,750,000. Financing was to be arranged through a bank. The bank want some kind of guarantee the job would be completed and that all labor and materials would be paid.

One of the parties in the development was a foreign firm. The foreign firm agreed to a financial guarantee to the bank to satisfy the banks’ interest. The contractor outlined this to his agent and asked the agent if he needed to write a faithful performance and labor and materials contract bond. The agent alleges he told the contractor it would be advisable to have the bond and quoted the premium. According to the agent, the contractor declined to accept the bond due to the premium and told the agent he still had this financial guarantee from the foreign company. The agent had no written record of the conversation between him and the contractor.

As the job progressed, the costs exceeded the contractors estimates and he ran out of money. The bank refused to loan him any more money and, in fact, made a demand for payment on the loan outstanding. The contractor turned to the foreign company and requested they honor their guarantee. They said No! The contractor now turns to the agent and files an action against him for failure to advise him to obtain a surety bond and alleging the agent said he didn’t need a bond because of the financial guarantee.

Unfortunately the agent had no written record of the conversation, so it came down to against the contractor. The jury held for the contractor and awarded $1,450,000 in damages. Agent’s deductible: $25,000.

C. At renewal of a Homeowners policy the company eliminated coverage for occasional domestic in-servants. The CSR in the agent’s office called the insured to inform him of the restriction in coverage. Insured was not home, so she left the message on the insured’s answering machine. Subsequently, a domestic servant of the insured was injured while working in the house.

Insured submitted claim to the company who denied it. Insured then sued agent, alleging he was never notified of the coverage restriction. Agent had no record of the phone call made by the CSR.

Agency had not made any notation of the phone call on a message pad nor in their automated system. With no evidence they had made the call, the plaintiff was awarded $25,000.

Agent carried a $15,000 deductible.



In these cases, there has been the allegation of lack of coverage, inadequate limits of liability or failure by the agent or broker to place proper or adequate insurance for the risk to be insured. In some instances the agent has won the case, but the defense costs have been substantial.

A. An agent was found negligent when he obtained a replacement primary liability policy on a boat. The limits of liability on the replacement policy were lower than the prior policy. Agent failed to inform the insured of the difference in limits. He also did not notify the insured that his excess liability policy required him to maintain limits higher than were on the replacement policy. There was a loss and the agent was held responsible for $150,000 of the $200,000 between the primary and excess policy.

B. The insured stated he had been assured over the telephone by his agent that his crops were immediately covered. The day after the phone conversation, the crops were destroyed by a hail storm. That same day the insured received a certified letter from the agent stating that a signed application was necessary to bind coverage. The agent denied ever giving a binder over the phone. The insurance company refused to pay the loss. The insured sued his agent for negligent misrepresentations, breach of fiduciary duty and deceit by non-disclosure of facts. The case went to a jury, who believed the insured, awarded not only for the damage to the crops but also for loss of profits.

C. An agent in Oklahoma placed a piece of business with a surplus line broker. The surplus line broker made an error in ordering and issuing the policy. A loss occurred.

It determined it was the sole fault of the surplus lines broker. The SLB’s E & O policy paid up to its limit of $500,000. The insured then went after the agent to have his E & O carrier pick up the excess over $500,000. The jury was looking for a “deep pocket”. So, the agent’s E & O carrier paid a substantial sum above the agent’s deductible of $5,000.

D. Agent wrote Worker’s Compensation on a roofing contractor. Company sent notice of non-renewal due to loss frequency. CSR set notice aside on her desk, planning to remarket risk. Notice got lost on her desk. One month after expiration of policy an employee of contractor fell off roof. Medical and loss of earnings $45,000. Agent carried a $50,000 deductible.

E. Agent wrote Homeowners and Umbrella policy for his insured. Auto was with a direct writer. Umbrella carrier required minimum underlying limits of $300,000. Insured told agent he carried $300,000. Agent did not obtain copy of underlying policy. Insured was involved in an at-fault auto accident with multiple injuries. One injured party received $250,000. At time of loss it developed he was only carrying limits of
$100,000/300,000. Umbrella carrier dropped down to pick up the difference between $100,000 and the amount of the award. Turned around and sued agent for negligence. Case went to arbitration. Ruling in favor of agent, but his deductible of $25,000 was used up in legal expense.

F. A producer in the agent’s office sold a crematorium a liability policy and told the insured it also covered his professional liability exposure. When the policy came back from the company, professional liability was excluded under the basic contract. As soon as the agency realized the error, they wrote a letter to the insured telling him
that the liability policy did not include professional liability, but they had found a market for the coverage, named the company and quoted a premium. Insured did not respond.

Subsequently the agency made a call on the insured, the owner was out so they gave a copy of the letter to the secretary and made a note on their office copy. A few months later, the secretary misplaced the ashes of a deceased person.
The relatives filed suit against the crematorium. A large judgment was entered against the crematorium. The owner turned around and sued the agent for failure to provide coverage. On the witness stand, the insured testified he never received the letter and he didn’t think the agent ever mailed it. The agent had nothing in his file to show the letter had, in fact, been mailed. The jury believed the plaintiff and awarded $256,000. in damages. While it would have been nice to have mailed the letter with a Return Receipt Requested, a notation on the agency copy of the letter or in the automated system that the letter had been posted on a specific date and time, it could have saved the case.

G. The defendant agent specialized in writing Jeweler’s Block policies. One of the producers in the agency conducted regular seminars for their insured jewelers – both wholesale and retail – on how to safeguard their merchandise. The seminars also covered in detail both the coverages and exclusions in the Jeweler’s Block policies. A salesman for an insured jeweler was traveling in the Midwest with a sample case full of jewelry valued at $600,000. When stopping over in one town he met a young lady in a bar at a hotel. After a friendly drink or two, she invited him up to her room for further “discussions”. As they walked past the front desk, the salesman handed the sample case to the desk clerk and told him to put it in the safe. The hotel did not have a safe, so the clerk placed it in a back room. Later, when the salesman came down to reclaim his sample case, the clerk showed him where the back room was and told him to go retrieve it. The suitcase had disappeared. A claim was submitted to the insurance company.

The company denied coverage based upon the “Hotel-Motel” exclusion. The irony here is, had the salesman taken the sample case up to the young lady’s room and then had it stolen, the policy would have covered the loss.
When the coverage was denied, the insured sued the agent for negligence in failing to provide coverage for the stolen jewelry. The jury found for the defendant agent, but the agent’s deductible of $25,000. was used up in defense costs.

H. The insured called his agent to obtain hull coverage on his boat for $35,000.. The agent did not have binding authority, so went to a broker to attempt to place the coverage. The insured failed to provide the agent with a description of the boat, including the serial number. Both the agent and the boat owner thought the other would follow up to provide the necessary description. The boat was destroyed by lightning. The agent failed to keep adequate records of the transactions. The boat owner alleged the agent had led him to believe the boat would be covered. The court ruled that both parties were at fault. The agent carried a $10,000. deductible on his E & O policy.

I. A broker sold insured a Worker’s Compensation policy. Coverage was placed in a non-admitted carrier. An employee of the insured was injured in the course of employment. The Worker’s Compensation carrier had become insolvent. Since it was a non-admitted carrier, there was no coverage available under the State Insurance Guaranty Fund. The employee brought an action against the broker for negligence in obtaining worker’s compensation insurance in a non-admitted carrier that subsequently became insolvent. In this case the court stated: “the broker’s negligence here was just as detrimental to the third party as to the insured.

We believe that the duty of the broker or insurer, which is incurred in the procurement or issuance of an insurance policy, runs not only to those who contracted for the insurance policy, but also ‘runs directly to the class of potential victims of the insured’”

.J. Agent wrote the automobile coverage for a 40 year old CPA who was a partner in a major accounting firm. Insured was married with two children. Auto policy limits were $500,00 CSL. However, agent only recommended UM and UIM limits of $25,000. Insured was an intoxicated minor crossed the median strip and hit him head on. Insured was killed. Minor was insured in the Assigned Risk Plan. Widow collect policy from the minor’s insurance carrier and $25,000 from husband’s policy under the UIM.
She sued agent for $475,000. She wa awarded $750,000: $475,000 in compensatory damages and $475,000 in Punitive Damages. Agent carried a $50,000 deductible in his E & O policy. Punitive Damages in that state were uninsurable.


Through either failure to properly explain the policy provisions or to unintentionally or intentionally make mistakes in completing the application for insurance, the agent can get sued for misrepresentation. In the majority of cases we have reviewed, the misrepresentation has been “alleged”, but there was no actual evidence of purposeful misrepresentation. However, the agent was sued under the allegation of misrepresenting coverages or lack of coverage under the policy. Also, your editor has reviewed many cases where there was definitely intentional misrepresentation on the part of the agent. In the majority of these cases, the agent was found not only liable in civil court, but also found guilty of fraud and subsequently stripped of his license to sell insurance. In some occasions, criminal charges were also filed against the agent by the district attorney’s office.

A. The agent completed an application for a property policy and showed the wrong address. The company, feeling there was an error, instructed the agent to cancel the policy. Agent did not ask company reason for cancellation nor did he discover his initial error on completing the application. In preparing the cancellation notice, he backdated it after having the insured sign it in blank. The company was unaware of the agent’s backdating and sent a renewal billing notice. The insured thought he was still covered. A fire destroyed the property. The company denied the claim on the basis that it had canceled the policy. Through mediation it agreed to settle the claim for the $250,000. insurance amount and $800,000 in special damages for failure to pay the claim in a timely fashion. The company filed a claim against the agency. The court ordered the agent to indemnify the insurer for the total amount of the damages due to his negligence in completing the application and his failure to determine the problem with the application and misrepresenting the date of cancellation.

B. A producer in an agency was told by the insured that he had been involved in an at-fault auto accident. However, the producer showed on the application that the insured had no prior accidents. Based on the information in the application, the company issued a policy. Subsequently, the insured was involved in another at-fault accident. On investigation of the latest claim, the company learned of the prior accident. They paid the claim, then filed suit against the agency for misrepresentation, fraud and violation of their agency agreement. The court held for the company stating that but for the producer’s misrepresentation the company would have declined to write the risk. Damages: $150,000.

C. Agent sold a $500,000 life insurance policy, accepted the first month’s premium and gave the insured a conditional receipt. However, the agent did not explain to the insured of the policy provisions or the insurer’s reserved option to limit coverage to $100,000. Before the insurer was able to determine the insured’s eligibility for coverage, the insured was killed in an accident. The insurer paid $100,000. The court ruled the insured’s beneficiary was entitled to the full $500,000 because he had no notice of the limitation and was not bound by it. In rendering his opinion the judge offered the following reasoning: “Laypersons who pay their premium at the time an application for insurance is filed are justified in assuming the payment will bring immediate protection…. an insurer (agent) who wishes to avoid liability must not only use clear, unequivocal language evidencing its intent to limit temporary coverage, but it must also call such limiting conditions to the attention of the applicant.”

D. An insured relied upon her agent’s representations that her barns were covered under her homeowner’s policy even thought she had failed to read the policy which contained a specific exclusion for structures formerly used for farming. The buildings burned. After the company denied coverage based upon the specific exclusion. She sued her agent. Court found for the plaintiff stating the agent was guilty of negligent misrepresentation because of his explanation of the policy’s coverages.

E. The insured had carried a life insurance policy with a company for several years with a face amount of $200,000. The agent convinced the insured to change life insurance policies but within the same company. The insured made the change.
Shortly thereafter, the insured committed suicide. The suicide was beyond the suicide exclusion in the original policy, but was within the suicide exclusion of the second policy. The named beneficiary sued the agent after the company denied coverage.
The court ruled that based upon the insured’s reliance upon the agent due to the past relationship of conduct the agent had a positive duty to advise the insured the company would invoke the two year suicide exclusion from the date of issuance of the new policy.

F. An agent advised his insured the auto coverage was to take effect at the beginning of April 2, but notified the company the coverage was to be effective on April 3. The agent was held liable for a loss incurred on an April 2 auto trip. Award was $45,000. Agent carried a $10,000 deductible.

G. A producer in an agency was told by the insured that he had been involved in an at-fault auto accident. However, the producer showed on the application that the insured had no prior accidents. Based on the information in the application, the company issued a policy. Subsequently, the insured was involved in another at-fault accident. On investigation of the latest claim, the company learned of the prior
accident. They paid the claim, then filed suit against the agency for misrepresentation and violation of their agency agreement. The court held for the company stating that but for the employee’s misrepresentation the company would have declined to write the risk.


The allegations in these classes of claims are that the agent or broker failed to live up to the acceptable and recognizable standard of care that is a generally accepted practice within the industry. Unfortunately, since the agency and brokerage business is not legally classified as a “profession”, there are not established rules for professional conduct as are established for the medical, dental or other professions.
For example the California Insurance Code contain a section that states: “The purpose of this chapter is to protect the public by requiring and maintaining professional standards on the part of all persons licensed hereunder”. However, they do not define what they mean by “Professional Standards”, nor do they outline any set of standards. Unfortunately, this leaves the courts to make decisions on “Standard of Care” based upon what the judge and jury might feel at the time, with no guidelines to follow as there are in the Medical, Dental and Legal professions.

A. A contractor hired a sub-contractor to design a fire protection system. The subcontractor was required to provide a certificate of insurance for errors and omissions insurance. The subcontractor procured a certificate of errors and omissions insurance from his insurance agent and delivered it to the contractor. The subcontractor really had no such coverage and an employee of the agent erroneously issued the certificate. There was no evidence of the subcontractor ordering or paying for the E & O insurance. The court ruled that despite the fact the agent issued an erroneous certificate in favor of both the subcontractor as the insured and the contractor did not create a “contract” binding the agent to procure the insurance and also rejected the claim for negligent failure to procure insurance on the grounds that the issuance of the certificate did not create a “duty” to procure coverage at a later date.

However the agent was found liable under the theory of “General Negligence” because of his inadequate supervision of a new employee and the failure to follow established internal office procedures that would have caught the error. Agent carried a $10,000. deductible on his E&O policy.

B. The defendant agent took over the insured’s account in April 1989. Insured inquired of agent if the coverage limits on his home were adequate. Agent informed insured that the coverage limits on his property were adequate to reconstruct the house. The house was destroyed by fire in October, 1989. The insured later discovered that property values and reconstruction costs had substantially increased in the ten years since the original policy was issued and that the $141,000 policy
limit was insufficient to replace his home. The reconstruction cost of the home at the time of loss was $375,000. The court said: “The plaintiff had two methods by which he could have achieved his goal. (1). Requested a guaranteed replacement cost endorsement as a part of his home-owners policy, or (2) could have had the value of the building determined and a specific valuation named. The defendant apprised him of neither option. Rather he assured the plaintiff his coverage was sufficient. Under the circumstances, the defendant must be deemed to have assumed additional duties, which, if breached, could subject them to liability.” The court found for the plaintiff under the doctrine of general negligence. By stating the coverage limits were accurate, the agent assumed a special duty to give accurate information and failed to perform within the acceptable standard of care.

C. A New York agent took an application for insurance and issued a temporary New York State Insurance Card to his insured. He failed to forward the application to the company within a reasonable time. Before the company received the application, the insured was involved in an accident.

The company denied coverage on the grounds it had never received notice of the application. Insured sued and the court held for the insured. The company paid the claim then turned around and sued the agent for negligence. The Company prevailed. The court ruled: “An agent who undertakes to obtain a policy for a client may be liable for his own negligence even when acting for a disclosed principal.”

D. When an insured applied for medical insurance, the agent helped her complete the application. They filled out the application together, but were inconsistent in their answers. The insured answered “No” to a question concerning back disorders. The agent, however, filled in another question showing that the insured had spinal disk surgery several years prior. The application was submitted to the company and a
policy issued. Some time after the policy was in force the insured underwent additional back surgery. The company commenced an action to rescind the policy on the grounds of misrepresentation. The insured sued her agent for damages. The court held for the insured in a ruling that once the agent undertook to help her complete the application, he breached his duty of “reasonable care” by his failure to tell her of the risks involved with the inconsistent answers on an application and also permitting her to submit the application to the company.


We classify all other causes as losses in “L” Syndrome. As mentioned earlier, we refer to this as the “Lack of” cause. Example: Lack of Attention, Lack of Consistency. Lack of Concern, Lack of Contact, lack of knowledge, lack of action, etc. Listed below are some examples of claims we classify into the “L” Syndrome.

A. Lack of Attention: An agent wrote the auto and liability insurance for a transit mix company. The producer sold the policy on the basis of a $2500 deductible per occurrence on Auto PD. His instructions to the CSR were to order the policy with a $2,500 deductible per occurrence on Auto PD. However, when making out the appli-cation he erroneously checked a box on the application that imposd a $250. per claim deductible on the Auto PD instead of a $2500 per occurrence deductible. The agency quality control procedures required every application be reviewed by three persons prior to submission to the underwriting company. As a result of the apparent need to rush the application, the policy was sent to the company to be issued without the required internal review. Subsequently, one of the transit mix trucks overturned
on a busy freeway and spilled wet cement all over the highway. The State Highway department posted a large sign, after the mess was cleaned up, telling the motorists to call the agency if their car was on the freeway at the time of the accident. The agency was swamped with calls from motorists who wanted to be repaid for having their cars cleaned up. The insurance company denied coverage since each phone call was deemed an individual claim. The agent carried a $250,000 S.I.R. To date they have had to pay out $189,000 due to that error. This loss possibly could have been avoided had established internal quality control procedures been followed.

B. Lack of Knowledge: Agent wrote hull coverage on a fleet of Tuna Boats in a non-admitted, unrated carrier. One of the boats sunk with an insured value of $650,000. When the owner sought to recover the value of the hull and loss of use for the boat, he found that the carrier was insolvent. The State Insolvency Fund was unavailable for any relief. Owner filed suit against the agent for $650,00 for the hull and $200,000. for loss of income. Court awarded the total of both pleas.

C. Lack of Knowledge: Agent took over a farm risk on an agent of record letter. By his own admission, he knew nothing about farming operations. He did not read the policy and ordered it renewed “as is”. The policy contained an exclusion for any damage to property due to spraying from aircraft. The insured had contracted to plant a crop for the owner of the land. Under the terms of the contract, the insured assumed liability for any damage to the crop from causes other than natural causes.
A contract crop duster was spraying an adjacent field to kill broad leaf weeds. The wind shifted and the spray from the aircraft drifted onto the field worked by the insured. The crop was destroyed. The damages exceeded the amount of liability insurance carried by the crop duster, who declared bankruptcy. The landowner looked to the insured for restitution. The insurance carrier denied coverage citing the contract exclusion. Agency was held liable for breach of duty and negligence per se. The court ruled that his ignorance of the terms and conditions of the contract of insurance he was selling constituted a negligent act. Damages awarded to plaintiff $125,000. Agent carried a $10,000. deductible in his E & O policy.

D. Lack of Knowledge: Agent purchased another agency without a written agreement between the two restricting the former agency’s activities in insurance. Unknown to the acquiring agent, the former agent operated his new own agency on the side and obtained an appointment from one of the acquiring agent’s companies. The former agent, without prior approval bound a Worker’s Compensation risk in violation of his and the principal agent’s binding authority. He collected a deposit premium and sent the money and the binder to the company. Company declined the risk, returned binder and money to former principal. He kept the money and binder in his desk for 20 days.

A loss occurred during the interim period. Principal agent paid the claim under his $25,000 E & O deductible.

E. Lack of Concern: Agent received a summons and complaint on a Friday afternoon for a claim against an insured. Claims manager was in a hurry to go skiing so she locked it in her desk rather than taking the time to mail it to the company that same afternoon. Broke her leg skiing. Was off work for two months. Statute of limitations ran on summons and complaint. Judgment against agent $100,000. Agent carried a $40,000. deductible.

F. Lack of Action: The agent insured a piece of property for $175,000 on which there was a mortgage. The policy expired and was non-renewed. The property burned. The mortgagee sued the agent stating the agent had a duty to notify the mortgagee of the non-renewal. In this case the mortgagee paid the premium and assumed the responsibility of notification to the named insured about expiration and non-renewal. The agent was also aware the mortgagee paid the premium. The court held for the mortgagee stating the agent had a duty to keep the mortgagee informed. Agent had a $25,000 deductible in his E&O policy.

G. Lack of Action: Insured requested agent to write $450,000 property insurance on a specified piece of property in an unprotected area. Agent issued binder for full amount without personally inspecting the property, or checking the address or adjacent exposures. Both the binder and subsequent application he submitted to the company improperly described the address. In addition, the risk was under-insured by 50%. When the building burned to the ground, the company initially denied coverage, stating they would not have written the risk had they known of the location and the adjacent exposures. In addition, the company charged the agent had violated his binding authority by issuing a binder for the risk due to location, type of risk and amount of insurance. To avoid a suit by the insured, the company paid the claim, but turned around and sued the agent for writing an improper and unacceptable risk. Judgement for company. Agent’s E & O policy excluded liability assumed under contract.

H. Lack of Attention: Agent wrote a Worker’s Compensation policy on a roofer. Due to high loss frequency, company sent notice of non-renewal. CSR handling the account received notice and set to aside on her desk to re-market it at a later date. Notice got buried in the papers on her desk and the expiration date passed. A month after the policy had expired an employee of the roofer fell from a ladder and was seriously injured. Medical and indemnity damages came to $45,000. Agent carried a $10,000 deductible on his E&O policy. I. Lack of Control: An employee of an agency was having trouble with her husband, from whom she had separated. He had been cited twice for driving under the influence of alcohol. She did not want her children to be driven by him. She used the agency facilities to order an MVR on him which she gave to her attorney and then went to court to obtain a restraining order.

On the MVR that was introduced as evidence was the name of the agency. The husband sued the agency for invasion of privacy and obtaining confidential information without his permission in violation of the FCRA. Damages: $250,000.



#By: Edgar H. Lion, BS, MS, JD, President & C.E.O. – Alpine Risk Management Corporation, LLC.

How many of you order Motor Vehicle Records for your insureds and/or for employees of your commercial insureds? From our observation, this appears to be a common practice for an agent to order MVR’s on their insureds or prospective insured drivers of personal automobiles and also commercial automobiles. But, when you order that Motor Vehicle Record are you in compliance with the Fair Credit reporting Act of 1970?

The Fair Credit Reporting Act of 1970 requires that when a consumer report is ordered on an individual, they must be made aware of it and give their permission. The objective of the act is to protect the privacy of an individual and protect his or her reputation.

Failure on the part of the person or company to do so can subject them to fines up to $2,500. per violation plus punitive damages, attorneys fees and court costs.

The law applies not only to the consumer reporting companies, but also to the persons using them. The act defines a consumer report as not only including information about an individual’s credit history, but also driving records. This would apply to insurance agents ordering a Motor Vehicle Record on an insured or an employee of an insured.

In our discussions and interviews with agents we have found that not only had none of them had complied with the requirements of the F C R A, but that they were completely unaware of the existence of the act. Since this act requires that the agency requesting the information must have the prior permission of the individual before ordering the MVR and having failed to do so, the agency could be in trouble. In the case of a commercial insured, the agency must obtain permission not only from the insured employer but also obtain an indication that the employer had notified the employee in writing that a MVR will be ordered and had their permission. In the event the employee was terminated or not hired as a result of the information in the MVR and had not been notified in writing by the employer and/or agency, the agent could be sued as a third party for failure to comply with the law. Another claim that could be brought against the agent for failure to comply with the notification requirements would be the allegation of invasion of privacy. The damages that could be awarded in such a case would include not only compensatory, but pain and suffering and punitive damages!

All individuals must be notified in advance. With your commercial insureds, put them on notice, in writing, that you will be ordering MVR’s on their drivers and it is their responsibility to notify all drivers of that fact. If they fail to do so, that is their responsibility, but you have put yourself on record by your letter to the employer. Don’t put yourself in the position of a possible suit for breach of duty. Another potential danger of your failure to notify your commercial insured of the provisions of the FCRA could constitute a breach of fiduciary duty in the event the employee sued the employer under the act and then the employer sued you for your failure to notify him.


By: Edgar H. Lion, – President and C.E.O., Alpine Risk Management Corporation, LLC.

Any time a risk is not eligible for an admitted market, agents will turn to a Surplus Line Broker to place the risk in a non-admitted carrier. Although this is a common practice, by doing this, they can be assuming a possible increased risk of incurring an errors and omissions claim. HOW? What kind of a due diligence study has the agent done to determine the financial strength of the non-admitted carrier?

As you know, business placed in non-admitted markets is not protected under the various state’s insurance guaranty fund in the event of the company’s insolvency. Also, many E & O policies exclude coverage for the insolvency of a non-admitted carrier.

Our company has found that very few agents ever go through the process of conducting a due diligence study of the surplus line broker and its various markets prior to placing business through that surplus line broker. The conduct of such a study should be a standard procedure within the agency and strictly observed by all personnel. It cannot be just a one time study, but must be updated at least annually. Failure on the part of agencies to adopt such risk management procedures can result in an errors and omissions claims against them that otherwise could have been avoided. Failure on the part of the agent to develop and implement these basic risk management procedures increases their susceptibility to an E & O claim. The high frequency of this type of claim could be significantly reduced through a better understanding on the part of the placing agent of the differences between placements in an admitted market and non-admitted market and the inherent risks involved when dealing with surplus line brokers and non-admitted markets.

Alpine’s studies have shown the underlying cause of the losses are a direct result of the agency following the same procedures for the placement of surplus lines business as they use for placing business in an admitted market. This is a Mistake! The difference between the two is so great that separate written procedures must be developed and implemented that specifically detail the place-ment of business through a surplus lines broker.

A specific due diligence procedure for the placement of risks with a surplus line broker must be developed and utilized on a regular basis so management can determine consistent adherence to these established procedures by all personnel. Some of the more important areas that must be spelled out are:

1. Qualifying a surplus line broker:

  • a. Length of time in business.
  • b. Experience of management and staff in handling the class of business submitted.
  • c. Reputation in the industry and with the state Department of Insurance.
  • d. Errors and omissions insurer.
  • e. Limits of liability.
  • f. Errors and omissions loss history.
  • g. Markets accessed.

2. The procedures must define the steps to be taken to determine the financial rating or stability of the non-admitted carrier.

3. The procedures must outline the steps necessary for compliance with the various state regulations regarding the placement of business with a non-admitted carrier, such as documented declinations from the required number of admitted carriers in order to place the risk in a non-admitted carrier.

4. There must also be a standard letter of acknowledgement, including a waiver and disclaimer to be signed by the insured.

5. A procedure must be established and followed consistently to notify every client by means of a standard form letter advising them of the financial rating of the company. Failure to do so in this case can give rise to a cause of action against the agent for breach of fiduciary duty for failure to disclose known information about the insurance company.

6. The written procedures must also outline in detail how to set up and document the client’s file when the business is placed through a surplus line broker and/or in a non-admitted market. These procedures must be periodically reviewed and updated to keep up with changes in the laws affecting surplus line brokers and non-admitted carriers.

Claims Examples:

Here are some examples of recent claims in excess of $100,000 that have occurred because the agent failed to do the following:

1. Failed to obtain the written consent and acknowledgement of the insured that the business was placed in a non-admitted insurer that subsequently became insolvent.

2. Placed the business directly with the non-admitted carrier out of state without having a surplus line license or going through a surplus line broker.

3. Failed to determine the financial stability of the non-admitted carrier prior to placing the risk and then placing it in a financially insolvent company.

4. Placing the business through a surplus line broker who became insolvent and did not carry E & O insurance.

5. Failed to determine the limits of liability the surplus line broker carried and was held liable for the loss in excess of the E & O carriers $500,000 maximum limit per claim.

Contractual Agreements: When writing business through a surplus line broker and there is a written agreement between the agent and the surplus line broker, watch out for a hold harmless agreement where the agent agrees to indemnify and hold the surplus line broker harmless for any acts, errors or omissions on the part of the surplus line broker. This should be totally unacceptable to the agent for two reasons:

1. The surplus line broker is attempting pass off his errors to another party and relieve himself and his E & O carrier of any liability. Why assume the responsibility for some other party’s mistakes?

2. Some Errors and Omissions carriers will exclude liability assumed under contract where an agent or broker places substantial business in non-admitted carriers. In the event of a loss, the agent would not have coverage afforded by his/her E & O policy.

The adoption of and consistent adherence to sound written procedures will save an agency a tremendous amount of potential trouble and help to avoid that unnecessary and costly errors and omissions claim.
Establishing written or automated procedures as a part of the agency’s overall errors and omissions loss prevention and risk management program are vital.


For more information:
Alpine Risk Management