As a grammar school child who was educated in the New Jersey Public School system of the 1960s, the “Classics" were not on my curriculum. So I learned about such characters and portends for the future…from….what else…TV & MOVIES! For those of you of a certain age you will remember this. But for many of you born in the late 70s and thereon, there was a time when TV was the only source of entertainment. TVs were the size of a small SUV, and remote controls were either non-existent or the size of a small microwave. An advantage of having a child of 5 or 6 years old in the 1960s was that they sat by TV and acted as a human remote control for mom, dad and older siblings. That is the role 6 y/o Howard played. Thus, my love of TV shows, movies and my references to them in these E&O reports.

In my humble opinion the greatest device ever created to tell people that something bad was coming was the John Williams “Thump, Thump, Thump…." music in JAWS. Once you understood that music meant the Shark was coming, the hair on the back-of-your-neck stood up every time you heard it for the rest of the film. Sadly, for the characters in the film they were not hearing the music that we the audience did, otherwise they would have gotten the hell out of the water…fast.

But through the BIG I, its seminars, these reports, the E&O Hotline and your collective knowledge and experience, you can hear the “Thump, Thump, Thump…." and we can protect ourselves.

I believe the JAWS music of the insurance industry comes from apolicy's forms and endorsements. I look at them and can see what is coming. I am not All Seeing, however you have brought problems that your insureds are having to my attention.  Now we can address them before they get worse.

I want to address 2 such forms and endorsements that are finding their way into policies and will / have created problems for your insureds which means potential E&O problems for you. We have addressed these in the past, but they deserve attention now more than ever. Then we will look at a subsection of an endorsement that may be helpful.

As you all know, a liability policy has 2 distinct contractual and separate obligations; the Duty to Defend and the Duty to Indemnify. The Duty to Defend is critical as it requires the insurer to pay for the defense, even if eventual indemnification is problematic. An insurer will be called upon to provide a defense whenever the allegations of the complaint suggest a mere reasonable possibility of coverage. The key to triggering defense, is that it is based on, and only on, the allegations contained within the four corners of the complaint. As the Courts have said time and time again, the duty to defend remains “even though facts outside the four corners of [the] pleadings indicate that the claim may be meritless or not covered."[1] Documents and information obtained by a claims adjuster during its investigation of the claim or suit are called “extrinsic evidence." Even if those documents would prove there is no coverage for that suit, they are forbidden from being used to deny defense. “Where there exists, extrinsic facts suggesting that the claim may ultimately prove meritless or outside the policy's coverage, the insurer cannot avoid its commitment to provide a defense."[2]

In order to sue a Broker for failing to procure coverage, the insured MUST HAVE “damages" defined as “out of pocket" payments. As long as the insurer is defending the Insured, even if under an ROR (Reservation of Rights), the Insured has NO DAMAGES to bring an E&O claim, since they are not paying for their own defense. Sometimes Insurers may settle the underlying personal injury claim while under a ROR as to Indemnification for any number of reasons, including cost efficiency. The point is, that the longer it takes before an Insured can legally sue the broker, the more likely a resolution without an E&O claim is possible. Those days are waning.

For a while now I have seen the addition to GL policies of an “Extrinsic Evidence" Endorsement and I heard the “Thump, Thump. Thump…." of Jaws coming for my clients. To get around decades old New York Law, this Endorsement allows an insurer to DENY Defense, EVEN IF THE COMPLAINT alleges a covered claim, IF…the insurer claims it has OUTSIDE information that would support a denial. To the extent possible, individually or collectively, ask that these Endorsements be removed. They are a ticking time-bomb.

I am seeing more and more GL policies issued to Owners or General Contractors with a “CONTRACTORS' CONDITIONS" Endorsement. (“CCE"). This endorsment provides that if the Owner or GC is NOT an Additional Insured who actually gets Defense and Indemnification on the GC or Subcontractor's policy their OWN policy is voided. Worse, even IF there is a covered claim and the Owner/GC is an Additional Insured IF… IF the limits on those Additional Insured policies are NOT exactly what the CCE requires, (even if the accident/suit will not need such limits), the carrier will and has denied coverage. I recently saw that denial because the Additional Insured policy only had $3M in coverage and not the required $4M as per the CCE even though the accident and claim was at best, a $200K injury.

Make no mistake, you will be sued by your insured because of the lack of coverage in SOMEONE ELSES' policy that you had no role in procuring. The claim will allege a failure to advise and review that other policy.

This last is item is subtle and interesting as it is a HELP to you in preventing an E&O claim not the other way around. But I want to put it on your radar.

A broker was sued for not renewing an Excess GL policy issued by a non-admitted carrier. The policy was eventually renewed but with a 3-month Gap in coverage.

As you all know non-admitted carriers are not subject to many NY Insurance Law statutes nor NYDFS Regulations. So, the statutory “Automatic Renewal" provision of NY Insurance Law §3426 did not apply.

A serious personal injury accident happened during the gap in coverage and the excess carrier disclaimed. But lurking in the back of the 60 page policy, in the last subsection of the last page of this 3-page endorsement was this:

The takeaway is that forms and endorsements are being added, one might even say “snuck into" policies, without any fanfare or notice to you. Most are deleterious to your insureds, your future, and your potential for E&O exposure.

To end as we began, in the movie Dune, mentor Thufir Hawat tells the hero, Paul Atreides this: “Now, remember, the first step in avoiding a trap - is knowing of its existence". Endorsements that seem innocuous but that upend New York law are most certainly traps for you and your insureds. Know the policies you are procuring.

Submitted by:

Howard S. Kronberg, Esq.

Kaufman Dolowich, LLP





[1] Fitzpatrick v. American Honda Motor Co., 78 N.Y.2d 61, 63 (1991).

[2] Fitzpatrick v. American Honda Motor Co., 78 N.Y.2d 61, 66 (1991); see also, Automobile Ins. Co. of Hartford v. Cook, 7 N.Y.3d at 137 (2006).