As you all know by now, the inspiration for many of the E&O Reports we write are based on claims, cases, and issues that we have handled. This month follows that pattern. Out of respect for all involved, and like the famous beginning of the 1960’s TV police drama Dragnet, in this E&O Report, “the names have been changed to protect the innocent.” 

This month’s topic is not so much about E&O claims and how to prevent them, but instead making sure you have that E&O coverage in place to respond if, and when, a claim is made and/or a lawsuit is commenced against your agency or brokerage. The following is a hypothetical that we will use to illustrate. 

ABC Brokerage specializes in handling professional liability insurance for law firms. The law firm of Dewey, Cheatem & Howe, LLP. (“DCH”), focuses its practice on financial planning and structures. ABC had been assisting DCH in procuring malpractice insurance for the law firm for each year from 2014 to 2017. 

In 2018 ABC was bought by DEF Brokerage in an asset sale, which included the DCH account. As part of the sale, DEF required that ABC purchase three (3) years of tail coverage. Mr. “C” of ABC Brokerage was hired by DEF as an employee. For the years 2018 and 2019 DEF obtained malpractice insurance for DCH. 

In 2020, DEF was bought by Universal Brokerage, also in an asset sale. Mr. C was now an employee of Universal. DEF was still in existence, (as it was winding down), so it had E&O coverage of its own in place. 

In 2015, DCH was advised of certain potential legal malpractice claims or “facts that might give rise to a claim” for the exposure of a client due to the allegedly improper structuring of a financial entity. Eventually, a court ruled against the legitimacy of that kind of entity. Since that type of financial entity was used by the law firm for four (4) other clients, that ruling, it was argued, would not only affect DCH’s other similarly situated clients, but would also give rise to claims by them against DCH. 

Lawsuits by the clients were eventually filed against DCH and DCH submitted those lawsuits to its malpractice insurers; pre-2018 and post-2018. One insurer denied coverage for late notice and the other for late notice and the failure to advise of the prior claim(s) when applying for coverage in 2018. Both of the insurers sued DCH for a declaration of no coverage. 

In 2021, ABC, Mr. C, DEF and Universal were all sued by DCH for various alleged wrongdoing, including late notice and the failure to procure coverage or advise of the prior claims. Now, this is where the wheels come off the wagon.

Assuming all the correct E&O and tail coverages, for the years 2014-2017 the E&O carrier for ABC, (insurer #1), should cover that period and Mr. C as a principal of ABC at that time. Then DEF’s E&O Insurer (insurer #2), would pick up for 2018 and 2019 even covering Mr. C for those two (2) years as he was covered as an employee. Universal’s E&O carrier, (insurer #3), would then pick up for 2020 and 2021. Without getting too much into the weeds, this would allow for either a joint defense agreement, or an agreement to share in the costs of litigation and/or a recognition of who would be responsible for what period of time. 

But, unfortunately, ABC did not have long enough tail coverage in effect when the suit was filed, leaving ABC and Mr. C uninsured and exposed for the critical years of 2014-2017. While DEF is insured, the lack of coverage made it impractical for DEF to assert a cross-claim against ABC, and even Mr. C, for the pre-purchase period. Add to this situation the fact that Universal self-insures. While this seems not to be an issue, consider this. There is a difference between having an E&O policy with a high SIR as opposed to being self-insured. At least the former still has an E&O policy in effect; but, the latter does not. When there are multiple E&O insurers providing overlapping coverage, all a good insurance coverage attorney has to do is read the policies and their Other Insurance provisions to see how they will interact. But with a self-insurer, there is no other policy and, thus, no Other Insurance, or any similar clauses, to examine and compare. 

Now, also consider this. The statute of limitations for various claims and causes of action against New York insurance agents and brokers can have periods that run as long as six (6) years. Some, despite shorter periods, have complicated and nuanced accrual dates regarding when the statute of limitations begins to run. So, even if a statute of limitations period is only three (3) years it might not begin to run until many years after the alleged wrongful act by the broker. For example, a negligence, “failure to procure” coverage cause of action has a three (3) year statute of limitations. You might think that the period begins to run when the policy is issued, as that is when the alleged failure would have occurred.  So, after three (3) years you are not worried about getting sued by your Insured. But, in New York the three (3) year statute does not begin to run until the date of the liability insurer’s denial. 

We are seeing an uptick in issues with insurance agents and brokers, as well as their professional clients who have claims-made policies with denials, reservations of rights, and litigation involving the interaction of policy effective dates, retroactive dates, continuation dates and long tail coverages. With the increasing purchase and sale of insurance agencies and brokerages these issues are becoming even more important. We are also seeing an uptick in lawyers suing insurance agents and brokers personally in these types of situations. Even worse, courts sometimes allow the individual to be sued personally, piercing the corporate veil that should be a shield preventing that potential personal liability. 

Our recommendation on this topic is simple.  If you are involved in a sale of an insurance agency or brokerage, do not simply assume the purchase of three (3), or even five (5), years of tail coverage is enough to provide the needed protection. You should carefully examine your individual situation to help you make sure that you have the coverage that you may need. Doing this will help you sleep better at night and put you in a better position to be protected should an E&O situation arise. If you have any questions regarding the issues related to tail coverage, or any other issues concerning the professional liability insurance coverage for your insurance agency or brokerage, you should contact IAAC, Inc. in New York and IAS, Inc in Connecticut, to explore the various options that may be available.   

 

Submitted by: 

Howard S. Kronberg, Esq.

Keidel, Weldon & Cunningham, LLP