E&O Report |  September 2024 |  Volume 39, Number 5

First, I hope that everyone's summer was fun, relaxing and not as short as it feels as I write this.

Second, despite many years of formal and, like you, continuing education, I find that much of my knowledge base can be traced back to what I learned from television going back decades. It was years before I ever learned that “Potpourri" was actually a mixture of dried petals and spices placed in a bowl or small sack to perfume clothing or a room. For me growing up in the 1960s-70s it was a category of questions in the TV game show Jeopardy along with such miscellaneous categories as “Potent Potables" and “Hodgepodge". The game show used these catch-all categories for important, but hard to otherwise label, topics. Over the past months similar important issues, decisions and scenarios have come to my attention. As they have no common thread other than giving rise to potential E&O exposure, I am calling this article the Hodge Podge or Potpourri E&O Report. But do not let the literariness of the title lull you into thinking these issues do not present significant possibilities for all manner of E&O problems.

Premium Finance Agreements

In the last few months, I have been getting more calls from brokers and agents than I ever have on problems relating to premium finance agreements. I learned in short order facts which you in the industry already knew, that these agreements have been changing over the years in concerning ways for you.

A premium finance agreement, (“PFA"), is like any loan agreement, a two-party contract between the borrower, (Insured), and the lender, (PF Company). If the lender is not getting paid by the Insured the monthly agreed upon payment, the PFC has legal and contractual remedies. This is how it should be. But when the broker gets involved in any greater role than as a communications conduit between them, it risks getting blamed by both for things outside its legal and factual responsibility.

Yet a growing number of PFA's list the broker/agent as a guarantor of the financial obligation. Avoid this if at all possible. Even if your agency has the financial wherewithal to make good on the obligation of your insured while you try to collect the premium owed from your insured, you are opening up a whole host of legal problems, relationship difficulties and the time and money to untangle these messes.

Even those PFA's that do not require the broker/agent to be a guarantor as to the financial obligation, have provisions in there that require you to “warrant" or “represent" that the information on the PFA, (that you got from the insured), is true and accurate. You have now contractually agreed to stand by and be responsible for information that you likely did not and could not vet. Let alone should not. Right now, one such PFC is making demands on my clients based on that warranty section in the PFA.

To the extent you can negotiate these provisions out of the PFA, do so. To the extent that you feel you do not have the individual leverage, perhaps as a group you can for the betterment of all agents and brokers.

Your Insureds Must Comply With Policy Provisions Even After A Loss Or Policy Expiration

You know from experience that when there is any issue or problem between an Insured and the Insurer, you are going to be asked to get involved. That always entails time and money and the risk of an E&O claim. Three weeks ago, I was contacted by a broker because its Insured was refusing to comply with a premium audit. The insurer actually filed suit to have a court force the Insured to comply with the audit policy provisions. I was asked to intercede as peace maker. So far so good. But had this proceeded via the courts, (and still might), the Insured would have ended up providing all the audit documents and whatever additional premium the Insurer was entitled, AND a bill for legal fees from the Insurer to the Insured as part of the breach of contract damages element in the lawsuit. My experience tells me that the Insured, even though unfairly, would blame you for the situation of its own making.

Similarly, a recent decision in Liberty Mutual Insurance Company, LM General Insurance Company v. Judith Dejoie, in the New York County Supreme Court, held that, (while notice provisions are, as we all know, “conditions precedent" to coverage), so are post-loss requirements on the insured like submitting for an Examination Under Oath (“EUO"), or in this case providing documents even after the insured sat for an EUO! The court held that entitlement to coverage aside, the Insured “breached a condition precedent to coverage as established by the No-Fault Regulations and the subject policy of insurance and accompanying No-Fault endorsement by failing to respond to post-EUO document demands…".

My view is simply this. A broker/ agent is almost always the party to be blamed by an Insured when there is a lack of coverage for any reason…even when it is the fault of the insured, like above. Telling the insured, and documenting it, that they must comply and cooperate, is a great way to avoid any entanglements.

Further Limitations On Additional Insured Coverage

While I am not at the point where I am going to lecture a child about how I had to walk 3 miles to grammar school before they invented sidewalks…as I am sure my grandmother did when I was young, I find that, more and more, I reference back to my experience in this field as a benchmark to how it is changing. I can think of no better example than Additional Insured coverage.

Additional Insured coverage issues, particularly with regard to both construction and Landlord/Tenant issues has always generated a lot of litigation. My earliest dealings as a young coverage/E&O attorney in the 1980s was that an Additional Insured, (with limited exceptions), provided the AI with the same coverage that the Named Insured had. That changed drastically over the years with Additional Insured coverage, (which your subcontractor and tenant insureds are contractually required to obtain), being limited in greater and greater ways.

On August 22, 2024, the influential New York Appellate Court for the First Department, (NY County), issued a ruling in Arch Specialty Insurance Company v. HDI Gerling American Insurance Company. This decision seems to be an outlier but a positive one at that pushing back on such limitations as least as to the Duty to Defend.

SHS was the owner of the property undergoing construction. It was an additional insured based on an agreement between it and elevator contractor TKE. The Appellate court affirmed the lower court ruling that the HDI policy issued to TKE affords additional-insured coverage to SHS on a primary and noncontributory basis, with the scope of the additional-insured coverage to be determined based upon the underlying action, and that HDI is required to defend SHS in the underlying action.

This ruling was notwithstanding an amendment to the additional insured provision providing that an additional insured was ONLY to be defended and indemnified for claims arising from the Named Insured's TKE's acts, actions, omissions, or neglects, but not for SHS own acts, actions, omissions, neglects, or bare allegations, The Court did however reserve the issue of the Duty to Indemnify for the future saying that “the fact that an additional insured may ultimately be found liable solely for its own independent negligent acts or omissions, which are not covered under an additional insured provision, does not negate an insurer's duty to defend it".

CONCLUSION

The above are just of the many things that you need to keep on your radar. When your instincts, or the hair on the back of your neck tells you that something is amiss or has changed, you are likely correct. The best course of action for you, BIG I Member and your industry, is to contact the BIG I.

On a personal note.... Thank you for your support and continued loyalty as we transitioned to our new home at Kaufman Dolowich.

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