Serial entrepreneurs are some of the best customers for insurance agents and brokers. New businesses lead to new risks to be covered, which in turn leads to more work and additional commission from premiums for agents and brokers. However, sometimes these particular gift horses prove to be just as much of a headache. In this issue of The E&O Report, we discuss a case we recently handled where the conduct of this type of client created E&O issues for the broker involved.

We recently settled a lawsuit involving a broker who fulfilled the Murphy duty of care we have often written about in this space: procurement of the coverage specifically requested or informing the client in a timely fashion of the inability to do so.^[1] The serial entrepreneur client, who continues to be a customer of the broker to this day, alleged when an uncovered claim occurred that  the broker had taken on a further duty and failed to obtain insurance to adequately cover its businesses.

 In short, this client had a business selling physical stock at the time of the original procurement of the policy, which covered liability for not only the main holding company, but also for the subsidiaries doing several forms of business. Not at the first renewal, but at the second renewal, the client requested the broker add another subsidiary (practically wholly owned by the holding company) to the policy. Importantly, the client did not make clear that this subsidiary had a different business model or did anything other than what the original business did. This subsidiary was transacting business as a middleman, keeping no stock, and completing its transactions instantaneously over the internet. Not only that, the transactions were occurring at a location not listed on the policy. Again, the client did not make any of this clear to the broker, nor did the client make any comments that would lead the broker to ask questions that could lead to changing the coverage provided in the renewal.

 During that second renewal policy period, this newly-added subsidiary experienced a loss as the result of a cyber-attack of its server. This attack did not disrupt business; in fact, the entire point of the hack was to make sure the business kept going and the hackers could piggyback on some of the transactions this subsidiary was completing in order to get value for virtually nothing (while someone else would have to pay). The hack was discovered within a 72-hour window, and the hackers were kicked out of the system and customer accounts in short order. In that short window, however, the subsidiary found itself with hundreds of thousands of dollars of invoicing that its customers would not pay, as it was not those customers who made those transactions occur.  The agency's customer also claimed that the cyber-attack caused additional damages to its business amounting to several million dollars.

The client, for its holding company and the injured subsidiary, submitted a claim of loss to the insurance company on the policy. After a reservation of rights and a long investigation, the insurance company declined to provide coverage for the loss. Among the reasons for the declination included there being no loss or damage to physical stock, as well as no loss at a covered location. After receiving the insurance company declination, the client then sued both the insurance company and its broker.

The broker appeared to have satisfied its legal duty to the client and did nothing wrong. The insurance company also did not appear to do anything wrong by declining to cover a loss not covered by the policy. And yet, in the end, both the broker and the insurance company paid to settle the claim from this client, albeit for a fraction of the damages claimed, in order to avoid years of litigation. 

The lesson that can be learned from this situation is simple.  If you are faced with a client adding a new business to their commercial policy, or any other of the many transactions with a customer that occur every day, always try to get as much information concerning what the client is doing and why.  Then, be sure to sufficiently document that information in the customer file.  An insurance agency or brokerage that follows this practice will not only help protect itself from a potential E&O claim or lawsuit but, in the process, will also help its customer better protect itself.

Submitted by:
Michael E. Kremen, Esq.
Keidel, Weldon & Cunningham, LLP

[1] Murphy v Kuhn, 682 N.E.2d 972 (1997).

Keidel, Weldon & Cunningham, LLP concentrates its practice in the defense of insurance agents and broker's errors and omissions claims and litigation, errors and omissions loss control counsel and education, insurance coverage analysis and litigation and insurance regulatory matters. Please direct any comments or questions to James C. Keidel, Esq. by mail to the main office of Keidel, Weldon & Cunningham, LLP, at 925 Westchester Avenue, Suite 400, White Plains, NY 10604, telephone at (914) 948-7000 or e-mail at jkeidel@kwcllp.com. The law firm also maintains offices in Syracuse, New York; New York City, New York; Wilton, Connecticut; Fair Lawn, New Jersey; Warwick, Rhode Island, Philadelphia, Pennsylvania, Williston, Vermont and Naples, Florida.