Broker Beware- The Devil is in the Details - A New Program Analyzed

Broker beware: I love new programs like an exclusive insurance agent and broker E&O Program. They boast a broad definition of professional services and other hazards. However, when you look under the hood one finds the engine might be missing.

First, let's start with the insuring agreement. The insuring agreement states: "...coverage is limited to liability for only those claims that are first made against you and reported to us in writing after the retroactive date and during the policy period or any optional extended reporting period, if exercised by you."

What stands out, is the fact that the optional extended reporting period does not allow any additional time after the expiration of the policy to report a claim. That is contained in the Automatic Extended Reporting provision that is in the paragraph preceding the Extended Reporting Period. In addition, while there is a claims reporting requirement that requires that a claim be reported as soon as practicable but in no event later than 60 days after policy expiration, one only need to look at the case of James River Insurance Company v. Garcia, a Florida decision. that basically upheld the concept that no automatic reporting was included in the insuring agreement itself. Thus the window could close at midnight at expiration to report a last minute claim. There are certainly ambiguities in this form.

While it doesn't appear to have any impact, I do wonder why a claim must be "reported to us in writing after the retroactive date," language I have never seen an insurance agreement before.

Next, lets look at the definition of "Claim" which includes five items, all of which might constitute a "claim" : Claim means a:

1. Written demand received by an Insured for Damages or Equitable Relief;

2. Suit (ed: definition section requires it be served);

3. Formal administrative or regulatory proceeding commenced by the filing of charges, formal investigative order or similar document;

4. Arbitration or mediation proceeding commenced by the receipt of a demand or mediation or similar document; or

5. Written request first received by an Insured to toll or waive a statute of limitations.

However item 3 does not require receipt by the Insured, how you report something you do not know about? 3 Cases already have upheld denials where an unknown by the insured sealed indictment was issued during a policy term. Obviously the "Claim" was not reported until unsealed and served long after the policy expired.

Independent Contractors are also covered, however, in the definition of same, there must be a "written contract". Be forewarned.

Predecessor Firm coverage is provided too. Certainly that is a valuable proposition. However, take note, does the Retroactive Date on the Declaration page or by Endorsement go back far enough so as to pick the inception of the predecessor firm ?

Note to that the Definition of Retroactive Date is unusual as many other Insurers do the exact opposite. It states: Retroactive Date(s) refer to the dates shown in Item 8. of the Declarations page. If no Retroactive Date is shown on the Declarations page, the Retroactive Date will be inception of the Policy.

There are 34 exclusions applicable to the insurance agent broker exposure, (and additional ones for the included cyber Liability coverage). 34 exclusions use absolute language excluding from coverage anything that is "based upon, arising out of, or in any way related to, directly or indirectly..... etc. A few contain a carveback for selling insurance or bond.

Yet 11 such exclusions exist that do not have either a carveback for selling insurane or a bond nor limit the exclusion to the acts of the Insured. Thus, if an Insurance Agent or Broker sells fiduciary liability and gets sued, they might not be covered as the underlying loss involves ERISA which is excluded in the policy.

The other 10 broad absolute exclusions that could very well be "connected or associated with" the Customers of the Insured are :

Criminal acts, arising out of or in any way related to directly or indirectly any willful or criminal violation of any statute or rule or law. This exclusion is not limited to the insured's activities, and thus, would the Broker be covered for any any alleged error when an underlying insured or policyholder who bought a crime policy, bond, (or any other policy providing such coverage) has a problem with coverage sold to them? Note, that unlike other exclusions in the policy, there is no Carveback were the insured sold insurance or bond. That would therefore distinguish this exclusion from those that do,making the intent rather clear.

Deceptive business practices have the same problem. If it if a broker sells a D&O policy to a customer who is sued for deceptive business practices, and for some reason the claim is denied, is the E&O claim against the Insurance Broker covered given the fact that the deceptive business practice exclusion does not contain a Carveback for selling insurance or bond?

Spamming is another exclusion, which immediately brings to mind any kind of Media Liability exposure, Advertising Injury exposure etc. in an underlying policy sold to a customer. Should the customer have a problem with coverage, and sue the broker the same problem would exist given there is no Carveback for selling insurance or bond.

The is an absolute exclusions for Over Redemption, which doesn't cover any claim arising over redemption of coupons, awards or prizes etc. Many insurance brokers sell prize related insurance, hole-in-one coverage etc. Given the fact that this exclusion does not contain a Carveback, also creates a problem with respect to coverage for the Broker.

There is also an absurd exclusion with no Carveback for False Pretenses which excludes from coverage, any claim for any transfer, payment, or delivery of funds, money or property by anyone, which is caused by or induced by trick or misrepresentation. Social Media claims come to mind as found cyber space, a common problem with Cyber Liability policies. If a Broker sells a Cyber Liability policy, would they be covered for an E&O Claim arising from that kind of underlying loss?

There is also an absolute exclusion for website development, software computer code, and Warranties. Each of these also have no Carveback where selling or placing insurance or bond.

Finally, there is an absolute exclusion, which is particularly dangerous. It is a Pending and Prior litigation exclusion that excludes on an absolute basis, "any claim based upon arising out of or in any way related to directly or indirectly any demand litigation oral term the dispute resolution administrative agency or investigation that is pending prior to the pending and prior litigation date on the declaration page." To whom does this refer? Does this refer to any prior or pending matter against the insured or any customer of the insured. Such language has already been upheld.

Finally, one needs to also look at the extended reporting provisions. Some of the language has already been discussed above. More telling is the fact that should the insured sell their business or have a cancellation or nonrenewal and thus need to buy extended reporting coverage, the policy is silent as to what length of time options may exist, and how much it will cost. The language in essence states t"hat the available optional extended reporting period options and additional premium are determined in accordance with the rules, rates and rating plans we then have an effect in your state." The insured in essence would be in quite a vulnerable in the event of such a need.

While many States are being very liberal in interpreting absolute exclusions in the language set forth above, not all do. Thus, you must consult with competent coverage counsel in your jurisdiction to determine whether or not any of the above would be enforceable as to you. Note however, that many States do follow the four corner rule in a rather strict manner. Thus consult with your counsel. However, the fact that Florida or Texas might enforce the language as to the policyholder, and you're not in either one of those States, do you want to be the test case where you are?

I wonder whether or not the advertising and marketing of same constitutes an unfair trade practice?

Many of the problems noticed above, are items that are discussed in a four-part series of articles published by the International Risk Management Institute. The master title was the Dangers that May Lurk in all Claims Made and Reported policies. What could be more true.

Part 1 can be found here: https://www.irmi.com/articles/expert-commentary/possible-dangers-lurking-in-claims-made-policy-forms

Part 2: https://www.irmi.com/articles/expert-commentary/more-dangers-lurking-in-claims-made-policy-forms

Part 3: https://www.irmi.com/articles/expert-commentary/claims-made-coverage-trigger-dangers

Part 4: https://lnkd.in/e9hzAvD).

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