There is an interesting dynamic in human behavior particularly in how we perceive things over time. Something done over and over again for enough time becomes the “truth"…becomes “reality", unshakably so. For example, anyone who has ever wanted and ordered that famous jiggly gelatin dessert at a restaurant asked for “JELL-O". That name has become, through years of use, the name we all assert with that dessert. But we are all wrong. “JELL-O" is nothing more than a Brand Name of one company's “gelatin dessert" first trademarked in 1899.

Another universal example can be found in swimming. I just watched the “Freestyle" competition during the Olympics last night. Most everyone thinks that fast over-arm stroke we always see is called “Freestyle" because the swimmers all do it during a “Freestyle" competition. We are all wrong. That stroke is called the “Australian Crawl'. “Freestyle" is just a category of a swimming competition in which swimmers can do any stroke, (backstroke, breaststroke, or butterfly), they want. Since the crawl is the fastest, they all use that creating that untrue “truth".

An insurance policy is nothing more than a contract…like a lease, construction agreement etc. It is a bi-partite (2-party) agreement between the Insured and the Insurer. Like the above, we accept as truth and conventional wisdom that the policy as actually issued, embodies the agreement the parties had based on the proposal, quote and binder. You should be right but you are wrong.

Inexplicably the law holds that an insurer can issue a policy with forms and endorsements that can significantly reduce coverage (1) contrary to the quote and binder and (2) without any prior notice. It is basically “Buyer Beware".

Add to that carriers are increasingly adding endorsements to policies, even when listing them on the quote and binder, but that while seemingly innocuous, are very harmful to the insured and you from an E&O standpoint.

This article addresses the 2 most pernicious: Arbitration and “The Duty to Defend" / “Extrinsic Evidence" Endorsement.

The world has gone “Arbitration" crazy ever since the Federal Arbitration Act gave license to corporations to start whittling away people's rights to avail themselves of the court system to resolve disputes. Please understand that I am 100% for arbitration and mediation. As a litigator for 40 years I know, better than most, how cost-inefficient it is. BUT…agreeing to arbitration has to be voluntary and not jammed down the throat of the other party. [1]

Arbitration endorsements in policies are becoming the norm and they drastically reduce the rights of Insureds to challenge coverage disputes with carriers as they completely take away any right or ability to (1) address the issue in court and (2) appeal the decision. While one can always get a bad decision from a court, there are Motions to Reargue, Appeals and any number of statutory mechanisms to reverse that decision. Not so with arbitration.

One of the best defenses to an E&O claim based on a lack of coverage is for the Insured to win that litigation. As E&O counsel I have the ability to monitor and even assist your insured in fighting the carrier's denial. I have been in many a case with the Insured suing both the broker and the carrier at the same time with the broker's liability being contingent on the outcome of the coverage part of the case. That allows me to support the fight against the carrier. Not so with arbitration which is limited to the policies' contracting parties.

Simply, reject any Arbitration endorsement in any policy.

As you may know, a Liability policy has two separate and independent contractual obligations on the carrier: the Duty to Defend and the Duty to Indemnify. The former duty requires the carrier to hire and pay for lawyers to defend its Insured for a “Covered Claim". The latter duty requires the carrier to settle or pay the judgment.

Since an Insured cannot sue a broker UNTIL IT has “damages", (out-of-pocket expenditures), having the Insurer defend even while it may be disputing coverage is incredibly important and often avoids, or delays, the E&O claim for that denial based on a reservation of rights.

Legally, and CRITICAL to that broad defense obligation is that for over 100 years the law is that an insurer's “duty to defend is 'exceedingly broad' and an insurer will be called upon to provide a defense whenever the allegations of the complaint 'suggest ... a reasonable possibility of coverage." In other words, if the complaint contains any facts or allegations that bring the claim even potentially within the embrace of the policy, the insurer must defend its insured, “no matter how groundless, false or baseless the suit may be". Automobile Ins. Co. of Hartford v. Cook, 7 N.Y.3d 131, 137 (2006).

The law says that the Insurer's Duty to Defend is LIMITED to the actual allegations in the Complaint. (The “4-Corners" doctrine.) Even if they find out, during the claim's investigation process, indisputable facts (“extrinsic evidence"), that the claim would not be covered, they STILL have to defend. For example, if a complaint alleges injury due to Assault, (not covered as it is intentional), and Negligence, (covered), the Insurer MUST defend even if they have proof positive that the injury was intentionally caused by the Defendant-Insured.

Many an E&O case has been avoided or the exposure greatly reduced due to this. For example, if the money at stake in the liability case is not high, Insurers, faced with the Defense cost AND the costs of a separate coverage action, often settle negating the need for suing the broker.  At the least, an Insured getting a defense paid for by the carrier buys time and allows for a host of E&O defense strategies to be deployed.

A week ago, a Kinsale Endorsement came to my attention. Form ADF2000 0622 “POLICY AMENDMENT – EXTRINSIC EVIDENCE". It literally negates the common law and allows Kinsale to deny defense, even if the allegations of the complaint require a defense, based on outside ---Extrinsic Evidence. From the wording, Kinsale gets to unilaterally decide what is extrinsic “legal" evidence to support a defense denial as there is no standard in there.

The ONLY way this Endorsement can work to the harm of your insured, is if you let it become part of the policy. My great fear, like the ubiquitousness of “Arbitration" provisions in every App you use, like to pay for parking, is that EVERY carrier is going to follow suit and add its own version of that endorsement.

The moment a carrier denies defense coverage that would have been covered but for that kind of endorsement, the placing broker will be sued. As an industry you have the collective clout to stop this before it becomes ingrained…like Jell-O.