The Relationship Between Insurance Agents & Brokers, Defense Counsel & Claims Handlers  

By: Sandy Goffstein

This is an excerpt of a presentation by Sanford (Sandy) Goffstein, J.D., to E&O insurance professionals in May 2015 in St. Louis, Missouri. Mr. Goffstein has represented Missouri Swiss Re Corporate Solutions’ insured insurance agents in errors and omissions matters for more than 30 years. A graduate of Washington University Law School, Mr. Goffstein, along with his partner, Lori R. Koch, and his law firm of Goffstein, Raskas, Pomerantz, Kraus & Sherman, LLC, are actively involved in protecting the interests of insurance agents in Missouri and southern Illinois.

How Defense Counsel Works with Your E&O Insurance Company’s Claims Department 

When it becomes necessary for defense counsel to become involved in an insurance agent’s errors and omissions claim, from the time defense counsel is selected, there is an ongoing discussion between the claims handler, the defense counsel, and the agent regarding the issues of liability and damages. It is important to note that although the insurer selects the defense counsel, the attorney selected represents the agent and not the insurance carrier. 

Defense counsel will provide the agent and claims handler with an assessment of liability within a reasonable time after receiving the file. The assessment of liability will be based on: 

1. The interview with the agent (for purposes of this outline, “agent” refers to both agents and brokers) and any other employees or witnesses with knowledge of the events alleged in the lawsuit
2. Documents reviewed by defense counsel 
3. The case law or statutes that may be pertinent to the case
4. The venue where the case is pending
5. The ability of the adverse attorney
6. The background of the plaintiff who has sued the agent. 

Defense counsel will also provide an analysis of plaintiff’s damages based on a review of the documents received either directly from the plaintiff or obtained by subpoena from a third party. Defense counsel will also, at the proper time, advise the claims handler of the chances of a successful defense in percentages, as well as a dollar range of a potential verdict against the agent, if liability is determined against the agent. 

This same information will also be discussed with the agent, and the agent will be kept fully informed by defense counsel. If required by the court or if the parties and the claims handler agree to attempt to settle a case, the case will be sent to mediation. If the case will be mediated, the claims handler will discuss the mediation strategy with defense counsel prior to attending the mediation to determine the range of settlement; the agent may also be consulted with respect to mediation strategy. 

If the case is not resolved at mediation and the case is set for trial, defense counsel will prepare a detailed report for the claims handler which outlines all the facts, legal issues, damages claimed by plaintiff, and chances of successfully defending the case with a potential verdict range in the case. The claims handler and defense counsel work together for the benefit of the agent from the start to the completion of each lawsuit. 

Why Just Any Lawyer Will Not Do 

The handling of an E&O case against an agent is very specialized. The parameters of the duties required of an agent are defined for the most part by case law, which changes rapidly as courts decide new cases. For example, new theories of the expanded duty of an agent may be imposed by developing case law. The attorney who has the responsibility of representing the agent must keep abreast of developments in the law and should also be familiar with the way an insurance risk is marketed, insurance proposals, certificates of insurance, endorsements to an insurance policy, and how to read an insurance policy. These are just a few examples of the information necessary to represent agents. 

Sometimes, an agent may have a friend, a relative, or their own corporate attorney who they would like to have represent them in an E&O case. Although they may be good attorneys in their field of law, they will not have the expertise of the defense counsel who spends the majority of his or her practice representing insurance agents and is knowledgeable about the insurance industry. The benefit of having an experienced professional liability lawyer representing the agent is that he can save much unnecessary time and expense, as he can quickly assess the liability issues. 

Experienced defense counsel is better equipped to convince the other attorney and, if necessary, the court that the case against the agent has little or no merit, and bring the matter to a close more quickly and, in most cases, obtain a more successful resolution  

E&O Claims Examples 

• Failure to Report a Potential Claim to the Carrier 
  • The client of an insurance agent received a letter from an attorney threatening to sue the client for poor work in a design for a concrete floor. The letter further advised the client to turn this matter over to his professional liability insurer. The client presented this letter to his insurance agent and advised the agent that his design was perfect, and the damage was caused by the company who poured the concrete. The client said he did nothing wrong. The agent then advised his client not to turn this claim in at that time but wait and see if he is eventually sued. 
  • At renewal time in response to the routine question, “Are you aware of any facts that could lead to a claim or lawsuit,” the agent put “No,” and the client signed the application form. Both the agent and the client knew this information was incorrect. 
  • After issuance of the new policy, the client was sued for professional negligence along with the company who poured the concrete. The suit was turned over to the client’s insurance carrier, who denied coverage for failure to advise them of the possible litigation or claim of which the client was aware. As a result, the agent’s insurance carrier had to drop down and defend the client. 
  • This problem could have been avoided if only the agent had advised his client to turn in this claim immediately after receiving the threatening letter from the attorney. 

• Trying to Help Your Client After a Loss Occurs: Obtain Insurance Coverage Where None Existed  
  • This agent had a client who owned a fleet of cars. This client had historically been late in payment of premiums. At times, the agent advanced the payment of premium for the client until the agent finally advised the client, he would no longer advance premium payments. 
  • The following scenario took place: On March 15, the client sent paperwork to the agent to add additional vehicles to the fleet policy. On April 4, the agent sent a letter to the client advising that he would not add these additional vehicles to the fleet policy until he has received the past due premium. The letter went on to state, “These vehicles are out on the street without insurance coverage.” On May 4, as you would guess, one of the vehicles which the client had requested to be added to the fleet policy on March 15 was involved in a crash. The passenger sustained serious injuries with over $600,000 in medical bills. 
  • The claim was turned into the client’s insurance carrier, and coverage was denied since that vehicle was not listed on the policy. The client asked the agent for his assistance in trying to get coverage for this uninsured vehicle by having a policy backdated to the date insurance was requested. The agent, in trying to assist a long-time client, contacted the specialty broker through which he placed coverage and asked to have the insurance carrier backdate the policy to March 15, the date that the client first requested coverage for that vehicle.  
  • In support of that request, the CSR for the agent sent the March 15 letter requesting to add additional vehicles to the fleet policy, including the one involved in the accident, but intentionally left out the agency’s response sent April 4 wherein they advised the client that there would be no coverage without the payment of a premium. The insurance carrier not only refused to backdate the coverage to March 15, but they also pointed out that the agent sat on the request for coverage and stated they should turn this matter over to their professional liability carrier. 
  • The client in this case sued the agent for failure to provide coverage for the vehicle listed in the March 15 letter. The client, again as you would guess, denied receiving the April 4 letter advising him that there would be no coverage until the premium was paid. 
  • Fortunately, we were able to resolve this case with no payment by our agent or his insurance carrier, but the agency spent a lot of its valuable time in meetings with me and retrieving documents, as well as responding to voluminous interrogatories and requests for production of documents sent by his client’s attorney. This was time that obviously would have been better spent on furthering his business and was caused primarily by the agent’s actions after the loss, trying to assist his client in obtaining coverage for the claim. 

• Aggressive Involvement for a Client in a Claim on an Insurance Policy 
  • An agent wrote a policy for insurance on a building that housed a bar and restaurant. 
  • The coverage for both the building and its personal property totaled $1,600,000. The agent placed the policy through a specialty broker who was responsible for putting the policy documents together. The policy provided a “mechanical breakdown” endorsement and showed $1,600,000 in coverage. This mechanical breakdown coverage did not give the insured additional limits but merely provided broader coverage. When putting the policies together, the specialty broker mistakenly showed the mechanical breakdown endorsement in the space marked “additional coverage.” The previous policy had the endorsement in the same space as the limits of $1,600,000. 
  • The building had an extensive fire and burned to the ground—a total loss. The insured had a history of several fire losses, but there was no suspicion of arson. The fire report was unclear as to whether the fire originated due to a mechanical problem or some other cause. In fact, the cause would not have mattered in this case since the limits for the building and personal property were a total of $1,600,000. 
  • The insurance carrier hired an independent adjuster, and the agent went to the site and met with the adjuster. This was not a necessity, but in this case, the agent wanted to show his client he was providing good service in helping the client with the claim. The site of the loss was over one hundred miles from the agent’s office. 
  • The client was complaining to the agent that the insurance company was too slow in making payments on the claim, and the client wanted to start to rebuild the business. The agent, on his own, came up with a plan to light a fire under the adjuster and the insurance carrier. 
  • The agent wrote a poorly worded letter to the adjuster telling the adjuster that there was a strong possibility that the mechanical breakdown provided $1,600,000 in additional limits and that, therefore, the total amount of coverage was $3,200,000. The agent’s client became impatient with the pace of his payments from the insurance carrier and filed suit against the insurance carrier, as well as the agent. Naturally, he sued the insurance carrier on the policy, alleging he had $3,200,000 in coverage. 
  • He sued the agent for negligence, negligent misrepresentation, breach of contract, breach of fiduciary duty, fraud, and fraudulent misrepresentation, alleging he requested $3,200,00 in coverage, and the agent told him he provided that amount of coverage. Attached to the petition as an exhibit was the poorly worded letter the agent had written to the adjuster. Not only was the agent sued for $3,200,000 in actual damages, but for punitive damages as well. 
  • When I met with the agent, he advised me that he was aware that there was only $1,600,000 in total limits, but he was simply trying to expedite the insurance payments to his client and that he had advised his client of the purpose of this letter prior to sending it to the adjuster. Unsurprisingly, the client denied that he ever had such a conversation with the agent and in fact testified in his deposition that the agent had showed him how he could double his limits with very little additional premium. 

Even with the poorly drafted letter the agent had written, I felt confident that I had several good defenses to the claim for the additional $1,600,000. The insurance carrier was dismissed from the lawsuit and the case proceeded against the agent only. 

Then the unexpected happened. The agent was arrested and pled guilty to a felony and was sentenced to several years in prison. The agent’s deposition was taken twice in a federal penitentiary. As a result of the conviction of the agent, we were forced to settle this case. Lesson learned: The agent should never involve himself or herself in the claims process.  

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