As you know from our E&O Reports over the years, in addition to writing about certain timeless Best Practices and E&O prevention issues, we also write about issues that arise from litigation that we are currently handling. Like the Noble Laureate in Economics, John Nash, in the 2001 biopic “A Beautiful Mind," we often start to see patterns in disparate E&O cases that, to us, are related and suggest a larger issue that may exist. Thus, we write about those issues through the narrative of discussing those matters. This is such an occasion.

The phrase, “A stitch in time saves nine" originated in France in the 1700's. It literally meant “Do one sewing stitch well" and you can avoid having to sew nine others. In our context today, this phrase means that an insurance agent or broker can avoid many problems and potential E&O claims and lawsuits by doing certain simple things at the outset.

Audit Premium vs. Minimum Earned Premium

Insurers in the non-admitted market have no impediment to issuing auditable policies with premium based, for example, on sales, with an accompanying 100% Minimum Earned Premium, (“MEP"). While in and of itself this might not seem to be an issue, consider the situation where the Applicant-Insured grossly overestimated their sales by several million dollars. Accordingly, the deposit premium was exceptionally high. Again, that would not ordinarily have been an issue as with the audit, the premium could be adjusted downward based on the actual sales for the expired policy period. But, the inclusion of the 100% MEP provision in the insurance policy precluded any downward adjustment. When that became apparent to the insured it sued the broker for the hundreds of thousands of dollars in overcharged premium.

The difficulty for the broker in this situation was that while the proposal from the insurer to the broker listed, among all the other policy forms, the MEP, the broker failed to (1) mention the inclusion of the MEP to the Insured and/or (2) similarly list the MEP on the proposal to the insured. This E&O situation could have been avoided by the broker simply by advising the customer of the existence of the MEP at the time when the proposal was presented.

Workers Compensation Premium

We have seen an uptick in premium audits by the State Insurance Fund where their audit has resulted in additional premium bills in the tens of thousands to hundreds of thousands to even millions of dollars. The consequences of these audit bills is obvious. An insured builds into its contract pricing the cost of insurance only to have any profits for that year decimated when it receives a large the audit bill.

Often the reason for that is that the original Workers Compensation Class Code is erroneous, overly rosy and optimistic and does not take into account that the codes can reflect the highest risk classes in a company and be applied more broadly than anticipated.

  Risks with the Digital World

Most pernicious is that with the takeover of insurance procurement by the digital world, certain safety nets that were concomitant with the physical way of doing things have been lost and with that, the loss of what were historically bullet proof defenses. The failures that have given rise to less defensible E&O claims are as follows.

Not having a signed application. We are currently litigating a multi-million-dollar E&O claim where the underlying primary insurance was not in compliance with the requirements as listed on the application for the excess/umbrella coverage. Unfortunately, the broker never obtained the insured's signature on the application, negating what would have provided us with a potent defense for the claims asserted.

Furthermore, it is imperative that there be proof that the Insured actually is the party that signed the application. More often than you might think, claims of forgery are asserted in E&O actions that may preclude dismissal of the claims against the agency or brokerage early on in the litigation. 

Not having proof of timely policy transmittal.  Not only is it imperative to have documented proof of the transmittal of the full policy to the insured, it must be done as soon as possible. Doing so three or four or more months after the policy incepts is simply unacceptable. So is not having proof of transmittal.  

As we have discussed many times over the years, pursuant to the laws of evidence, New York courts recognize a legal presumption of receipt of mail that is sent by the US postal system according to a regular office practice and procedure for mailing.  Unfortunately, there is  currently no similar type of standard legal presumption provided by the courts for communications that are sent by email.^[1]  Accordingly, the best practice to follow when policies are sent to insureds by email is to request that the insured affirmatively respond to the agency or brokerage that they received the email and were able to open to the attached policy.  If this is done, the email that was sent to the insured with the  insurance documents (whether it is the proposal, quote, application or policy) can be used in support of the duty to read defense by the agency or brokerage.  

​Conclusion

In all of the above scenarios, and many other situations, all that the agent or broker had to do to avoid the “nine stitches" is to have paid attention to the “one." Whether the “one" is the proper transmittal of a proposal that matches the one from the carrier, or getting a signed application by the insured or having proof of the timely transmittal of a proposal, quote, application and/or policy, the simple act of basic due diligence early on, prevents a world of trouble later.

Submitted by:

Howard S. Kronberg, Esq.
Keidel, Weldon & Cunningham, LLP

[1]    In one recent case, the court did find a presumption of receipt of an email to exist. While this is a developing area of law, the presumption that when something is emailed to a proper email address that  it is received by the recipient, is starting to be applied by the courts to emails in certain limited circumstances. See also, Couch v. AT&T Services, Inc., No. 2:2013cv02004 (E.D.N.Y. 2014).

​​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.