In the September E&O report I discussed the differences between Agents and Brokers, how courts and even clients do not understand the legal differences and the E&O implications and differences between the two. Last month's article focused on Wholesale Brokers and their Producer Agreements. A “Wholesale Broker" is still a “Broker", even with an Agreement with the Carrier and NOT an AGENT.

To close the loop this month I will discuss what your exposure is when you are acting as an ACTUAL AGENT of a carrier pursuant to an AGENCY AGREEMENT with Binding Authority.

Unless you are a Captive Agent, even if you are an ACTUAL AGENT of one of more companies, when a Customer comes to you, you are a Broker and thus you have all the Murphy duties to the Customer. Then comes the decision to choose a carrier. If you submit the application to a carrier with whom you are NOT an Agent, then you are acting as a Broker.

BUT, if you decide to chose a carrier for whom you are an AGENT, at that moment, you are acting as an Agent and thus your conduct is governed by the Agency Agreement.[1]

Agency agreement typically have standard three provisions I want to highlight:

                        1.         Agent's Authority

                        2.         Indemnification/Hold Harmless

                        3.         Arbitration  / Choice of Law  

In reverse order. The last is “Arbitration" self-explanatory. Unless you negotiate it out of the Agreement, you lose any right to litigate a dispute with the carrier in court and have no right to appeal. Also, you may have agreed to have a State's law apply to the situation even if you have never done business in that state and such law may be stacked against you.

Unlike when you are sued as a Broker by the Insured who cannot get legal fees for suing you, the “Indemnification/Hold Harmless" provision exposes you to having to pay ALL the LEGAL FEES of the carrier if you lose. (And vice versa if the provision is “mutual" and it should be.)

Your “Authority"….. that is where the most basic E&O/Breach of Contract[2] claim comes in. This has 2 main parts. (i) That you have “BINDING" authority and (ii) LIMITED TO THE UNDERWRITING GUIDELINES.

Note that there is a factual and legal difference between being able to BIND coverage as opposed to ISSUE a policy. That is a critical difference for fighting an E&O claim by the Carrier.

Recently I have been involved in 2 similar arbitration matters for my AGENT clients. Both got arbitration demands from their carriers for Breach of the Agency Agreement. Both were accused of BINDING coverage for risks in violation of the Underwriting Guidelines which, in both cases, said that the businesses of the Applicant were not insurable. But my clients BOUND coverage anyway.

One Insured had a fire due to the storage of combustibles and flammables at the premises resulting in a $1.5M payout by the carrier on the policy for the First Party Property Damage claim and the liability claims of adjacent business. This on top of the (i) legal fees for the Defense of the liability claims and (ii) the legal fees related to the claim against my client and the arbitration. The carrier wants all that money back from my client because the Agent failed to comply with the clear underwriting guidelines.

First, and obviously, ABIDE by the Underwriting guidelines.

Second, to the extent that you have any discretion in making an exception, follow the protocols for getting that exception and document it with emails with the carrier. If you are aware of this carrier insuring risks prohibited by the UWGs, then document each and every instance in a “Rainy Day" folder.

Third, and this is subtle…. there is a difference between BINDING authority and the authority to ISSUE a policy. While I will defer to you all based on your vast experience, I have never seen an Agency Agreement that gave the agent the Authority to actual issue a physical/digital full policy…. and I am glad. Here is why and it provides me with my only Defense to the above factual scenario. (Actually more of a reduction in what we might have to pay.)

In arcane and out of touch decisions with the modern world, many states have cases that says that a “Binder is temporary insurance until the policy ISSUED". Springer v. Allstate Life Ins. Co. of N.Y., 731 N.E.2d 1106 (2000) with the Court saying: “Thus, a binder is limited in time until an assessment of risk is completed by the carrier."  True, but it misses the point and is applied too broadly and incorrectly. Here is the example.

10 years ago I was representing a Broker sued by the Insured for a claim that was denied based on a Designated Premises Exclusion Endorsed to the policy. BUT…. that Endorsement was NOT listed on the 3 page Quote, (which listed EVERY form and Endorsement) and NOT listed on the IDENTICAL 3 page Binder. The carrier snuck it in at POLICY ISSUANCE. I argued to a Federal Judge that was ludicrous. In trying to make my point that the policy cannot control I suggested this scenario to the court. “If the Court holds that the policy controls and does not have to match the quote and binder that means that I can apply for Homeowner's insurance, get a binder for HO coverage, pay the premium and then have the Insurer issue a Motorcycle policy and I am stuck with it?" The Court said “Yes".

While I have been trying to undo that bad law for years, I intend to use it in the above Agent case and it underscores why your Agency Agreement has to make sure only the carrier as the power to ISSUE policies and not you as Agent.

Assuming my Agent-Client violated the UWG by BIDING a policy for a clearly unacceptable risk, SO WHAT!!!! Binding, as the Courts have said, is merely TEMPORARY insurance until the POLICY IS ISSUED by the carrier based on their  final “assessment of the risk". Thus, the carrier is the last man standing when it comes to the decision of Whether or Not to Issue a policy and if so, what the terms and conditions are.

As long as we do not have a scenario where the loss happens during the period covered by the binder and as long as you did not ISSUE the policy, we have a defense of Waiver and Ratification by the carrier. Again, as the final decision maker of IF to issue……a strong argument can be made to lay all or part of the loss on them reducing the exposure to you as an Agent.