November 2020 |  Volume 36, Number 11

While dating back to a proverb from the 1500s, it is not an urban legend, but Benjamin Franklin actually said, “Honesty is the best policy." For our purposes today, I would rather quote Mother Teresa who astutely observed that, “Honesty and transparency make you vulnerable. Be honest and transparent anyway." 

Of course, everyone in an insurance agency or brokerage should always conduct themselves with honesty and integrity at all times.  While everyone should keep this in mind, they should also remember that they must always be careful of what language they may put in any writing; whether it is an internal communication, email, letter or anything else.  In our experience, language contained in agency documents can sometimes be problematic when it comes to defending against an E&O claim or lawsuit.

We have often seen situations where, in trying to get a carrier to overturn a coverage denial position, or to influence that decision before it is made, the broker or agent makes various mea culpa statements to the carrier or MGA with a plea not to hold their mistakes against the insured and to please provide coverage.

Consider another example: A producer at an insurance agency is applying for insurance for his client. Filled out and executed applications are submitted to the insurance carrier. Then the carrier, based on the information in the first set of submissions, tells the producer that for a certain line of coverage that is being sought, a supplemental application is required. The producer is sent the supplemental application by the underwriter, but the producer forgets to send it to the client. The policy is thus issued without that particular line of coverage. As you already guessed, a suit is brought against the client that would have been covered for defense and indemnification had that supplemental application been submitted and the additional coverage included in the policy.

The producer, acting in the utmost professional manner, sends an email to the agency principals, in which he lays out the timeline of the procurement, his admission of getting the supplemental application from the carrier and his failure to send it to the client for late submission to the underwriter. While a testament to his integrity, he continues to write in that email that this is all his fault…that he messed up and was negligent in not paying attention to getting the supplement application filled out, executed and submitted to the insurance carrier.   

It is only after an internal investigation by the agency that the E&O lawsuit is submitted, and our office was retained to assist with the situation. It is eventually determine by the agency that the producer only failed to send the supplemental application to the insurance carrier because the supplemental application had in fact been sent to the insured to complete, but the insured failed to return it to the agency.  The agency employee who sent the application to the insured had not noted the transmission of the document to the insured in the insured's file and the producer was unaware that the document had been sent.  Unfortunately, the email that was written by the producer with his statement that the lack of coverage was all his fault exists.  This email is discoverable and only serves to complicate the defense of the agency in the litigation.

Without getting into too much detail, know that discovery, (that part of a litigation in which the parties documents are exchanged and witnessed deposed), is generally governed by an overarching principle found in the New York court rules known as CPLR §3101(a), which provides as follows: "(a) Generally. There shall be full disclosure of all matter material and necessary in the prosecution or defense of an action, regardless of the burden of proof, by: (1) a party, or the officer, director, member, agent or employee of a party." Basically, this means that absent a privilege, any and everything relevant to the issues in the case are discoverable.

While New York CPLR §3101(a) provides for full disclosure, this principle is limited by CPLR 3101(b) and (c), which make "privileged matter" and "attorney's work product" absolutely immune from discovery.[1] In addition, pursuant to New York CPLR §3101(d)(2), material that is prepared in anticipation of litigation "is subject to a conditional privilege, and, thus, is subject to disclosure only by a party's showing that he or she is in substantial need of the material and is unable to obtain the substantial equivalent of the material by other means without undue

hardship." [2]

Had the above email, or any internal investigation of a potential E&O claim occurred after a formal notice of a potential E&O claim by the client, or notice to the E&O carrier as to facts that might give rise to a claim, or even after counsel was retained, then an argument could be made that the email was created in anticipation of litigation and would not be discoverable.

A good way of thinking of this is to see how the doctrine is applied to insurance companies, as most of the litigation in insurance cases concerns getting their pre-litigation/pre-declination files. The legal principles are the same when applied to anyone, brokers and agents included.

We understand the reticence that an insurance agency or brokerage may have with putting its E&O carrier on notice of every potential situation that may arise where something is amiss. We also understand the need for an agency to investigate situations internally before notifying its E&O carrier to determine, as a predicate, if anything was done correctly, incorrectly, or not done at all. Of course, in the end the agency or brokerage must use its judgment. Our suggestion is twofold: (1) That all agency employees should always think very carefully before putting anything in writing in an internal document, an email, or otherwise, that the agency would not want exposed during discovery; and (2) If there is even an hint of a potential problem, contact counsel to assist with the situation so that communications with the agency or brokerage, as well as those in anticipation of litigation, would be privileged and not be able to be used against it. The prudent insurance agency or brokerage that proceeds in this manner will be in a better position to defend itself in the event an E&O claim or lawsuit occurs.

 
Submitted by:

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

[1] See, Spectrum Sys. Intl. Corp. v Chemical Bank, 78 NY2d 371, 377-378 (1991); Rossi v Blue Cross & Blue Shield of Greater N.Y., 73 NY2d 588, 593-594 (1989).
[2] Teran v Ast, 164 AD3d 1496, 1498 (2^nd Dept., 2018).