During the lockdown, I watched a lot of funny, lighthearted compilation videos on YouTube looking for a moment of levity. I found myself particularly enjoying those clips of young children caught red-handed by their parents after doing something naughty, like covering their younger sibling in shaving cream or make up. Several similar clips stand out in my memory where the child is covered in paint with it also all over the floors and walls. What I always found most intriguing is that in every instance, when confronted by their parent with what they had done, the child always denies that he or she did anything wrong, or amazingly, that anything happened at all. “What paint, Mommy?"   

It is a primal survival dynamic, hard-wired into our species, to deny any wrongdoing, no matter the truth. As we have seen, that behavior can have deleterious consequences. But that is also why I have the utmost respect for insurance agents and brokers when, as they should always to their E&O lawyers, they tell the truth as to the facts that give rise to an E&O claim or lawsuit. Thank you.

That being said, insurance agents and brokers that are facing a potential or actual E&O claim or lawsuit should never be that candid in any internal communications, whether oral or written. Such candor, true or from a place of misplaced guilt, can mean the difference between winning and losing that E&O claim or lawsuit.

This E&O report is to provide caution and admonition regarding this issue. Here is why.

Recently, I handled an E&O claim with the following facts. The Insured had primary auto insurance from Progressive that they obtained directly from the insurance carrier. There were 2 autos scheduled on the auto policy. The broker only handled the excess insurance for the client, on which the same 2 autos were specifically listed.  In 2015, the Insured bought a 3^rd auto. While the insured added the 3^rd auto to the Primary policy, they never advised the broker of its purchase at that same time. A year went by. The primary and excess policies were ready to renew. The broker asked if they could also quote the auto policy. The insured said “yes" and emailed the broker the list of all 3 autos. But that email did not mention anything about the Insured wanting to add the 3^rd auto to the excess insurance policy that they had in effect through the brokerage.

The Insured stayed with Progressive for their auto insurance coverage. The 3^rd auto was not added to the excess insurance policy by the broker.

For two years after the 3^rd auto was purchased by the insured, it was not listed on the excess insurance policy and was therefore uninsured for excess coverage. Of course, a serious accident then occurred that would have triggered the excess insurance coverage. What this situation did instead was trigger an E&O claim against the broker and our involvement. 

The case was highly defensible under New York law, because absent a specific request to add the 3^rd auto to the excess insurance policy there was no duty on the broker to do so.  Based upon the facts, it feels like there should be, or might be, a duty for the broker to add the 3^rd auto to the excess insurance policy; but there is not. The fact that the broker learned that the customer had the 3^rd auto prior to the time of the accident is legally meaningless.

However, the producer on the account, commendable in their forthrightness, felt that they had done something wrong and had let down their insured. There is nothing wrong with “feeling" that way. The problem was that they stated that and admitted wrongdoing in a series of emails (1) after the excess carrier denied coverage, and (2) before an E&O claim was submitted, and (3) before we were retained. 

Understand this, technical arguments aside, those emails would be discoverable by the plaintiff during litigation. There is an old saying that “Bad Facts Make Bad Law."  This is such an example. Any judge asked to dismiss the case against the insurance brokerage on the lack of a duty would bend over backwards to figure out a way to hold the broker liable when presented with such emails; likely making very bad law for brokers as a result. 

Under New York law, discovery is limited to “all matter material and necessary in the prosecution or defense of an action, regardless of the burden of proof, by a party, or the officer, director, member, agent or employee of a party."^[1] While we would argue that “duty" is purely a question of law^[2], and thus the later statements of the producer are not material or necessary to a legal question, it is likely the court would direct their production.

Also, keep in mind that since the statements were made by the producer before an E&O claim was submitted, and before counsel was retained, we would not be able to argue for either “Attorney Work Product" tied to the claim handling function of the E&O carrier nor “Attorney-Client Privilege."  Regarding Attorney-Client Privilege, also know that even after E&O counsel is retained, unless counsel is part of the communication, the privilege will not attach. Thus, such emails and internal oral conversations would be discoverable.

One final point. There is also the possibility, while we think rare, that such “admissions of liability" could be argued by your E&O carrier to potentially violate the provision in the professional liability insurance policy that states something like this: “The Insured shall not, except at the insured's own cost: voluntarily admit or assume liability..." This could be the basis for a claim denial, or at least a Reservation of Rights letter, by the professional liability insurer and sleepless nights for the agency owners when litigation comes.

Insurance agents and brokers should always do the following once they learn of facts that may give rise to a potential E&O claim or lawsuit: (1) Save everything, all documents and files, emails and communications in physical or digital format and separate them from the customer file. (2) Notify your E&O insurer sooner rather than later. These things do not go away. (3) Say nothing about the matter internally orally and certainly not in any email, memorandum, letter, or other writing, without making sure that your E&O counsel is included on each-and-every communication. (4) If you have to communicate as to any factual investigation, do it without comment or admission. Throwing yourself on the sword, while an indication of a moral compass and character, will not help the case and may significantly hurt it.

The prudent insurance agency or brokerage that proceeds as outlined above will be in the best position to defend itself if it is faced with an E&O claim or lawsuit. 

Submitted by:

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

[1]              New York Civil Practice Law and Rules §3101(a)

[2]              “[T]he imposition of duty presents a question of law for the courts."  Eiseman v. State, 70 N.Y.2d 175, 198 (1987).  The scope of a legal duty owed is also to be determined only by the courts.  Waters v. New York City Housing Authority, 69 N.Y.2d 225, 229 (1987); Beato v. Cosmopolitan Associates, LLC, 69 9 A.D.3d 774, 776 (2d Dept. 2010).