A question of coverage

Mistakes happen.

Consider the case of listing agent, Robert. Robert happened to be on vacation when he received an offer at list price. He reviewed the standard form on his cell phone and reported to the sellers that it looked great. The agreement was executed electronically as was the sellers’ estimate of closing costs.

At settlement, the sellers and listing agent were surprised that the net proceeds were $9,000 less than estimated. The reason: The Agreement of Sale called for seller assist that accounted for the $9,000 discrepancy. Robert had filed to take note when reviewing the offer on his cell phone. Nearly two years later when a claim was asserted, and I was engaged to defend Robert, he readily admitted his error.

The claim asserted against Robert was a disciplinary complaint (order to show cause) filed by prosecutors with the commonwealth of Pennsylvania, Bureau of Professional and Occupational Affairs. Robert was ready to sign my engagement letter, though I first suggested that he determine whether his errors and omissions insurer would cover this. Many E&O carriers will pay defense costs for their insureds involved in disciplinary matters, though they will not pay any fines levied. In most cases, a deductible will not apply.

Determining whether coverage existed was difficult. Robert was employed by Broker A on the date of his error. Though Robert then discussed the matter with his broker, his broker decided not to report it to the E&O carrier. Robert’s broker reasoned that the sellers were equally culpable for their loss because they failed to read the Agreement of Sale and because no threat of a suit had been communicated to her or Robert. Why risk having E&O rates increase over a report that does not come to fruition?, the broker reasoned.

At the time of his receipt of the order to show cause, Robert was practicing with Broker B. At issue is whether Robert is insured for his defense costs and, if so, whether through the insurer for Broker A or Broker B.

My advice to Robert was to have both Broker A and B report the claim to their E&O insurers. Broker B did so and the quick response from the insurer was that there was no coverage. Robert was not affiliated with Broker B at the time of the occurrence.

Broker A was less compliant. Why report a claim for a past sales agent when it may lead to increased premiums? My advice to Robert was to insist that Broker A submit the claim. Robert’s contract with Broker A stated that Broker A would provide E&O coverage. Robert had kept his end of the deal as a sales affiliate, the broker who benefited from Robert’s service should likewise fulfill her obligations. Broker A eventually relented and submitted the claim. Because the occurrence at issue happened while Robert was with Broker A, her coverage was the applicable policy and the claim should be covered.

Robert’s identifying the right E&O carrier was not the solution to Robert’s dilemma, unfortunately. All policies require claims and potential claims to be reported promptly and you will recall that Broker A upon learning of the matter had decided not to report it to her insurer. Years later, when a case was initiated and after relenting to Robert’s demand that she report it, the E&O insurer wanted to know why the broker had not notified it of the problem, and whether Robert or his broker had knowledge of a potential claim. While the sellers did not threaten to file suit, nor advise Robert that they would be filing a disciplinary matter, Robert certainly knew that his error might subject him to liability. And no, he didn’t make the report because as you read above, his broker did not want to do so.

Whether Robert will have coverage under Broker’s A insurance is, as of this writing, not determined. If Robert is denied coverage, does he have a claim against his broker for failing to report it to the E&O insurer at or near the time of the occurrence? There are too many issues to state with certainty, including Robert’s failure to insist that his broker report the occurrence. Regardless, it is a situation that pits an agent against his former broker.

The lessons to draw from this situation are several. When a mistake is detected, report it. Your premium is not increased because you reported a potential claim. When a claim is subsequently filed, you can then determine whether you will have it covered through your E&O policy. [Note: I always suggest that an insured broker/agent submit a claim to their E&O insurer. It is risky not to do so because even the smallest claims can cost more to defend than imaginable and damages have a way of aggregating as time passes.]

Another important issue is determining what your coverage includes. Ask questions of your insurance agent. If a claim is asserted against a former sales agent, but does not include the broker as a defendant or respondent, does the former sales agent have coverage through the broker’s policy? Agents, ask questions of your brokers. When transferring to a new broker, find out who the E&O carrier is and ask questions about coverage for incidents that occurred previous to your employment. Learn the differences between a claims-based and an occurrence-based policy.

Lastly, and this is especially so if you determine that coverage exists, don’t fret. As I told Robert, his mistake was hardly a condemnation of his skills and competency. It happened. He has undoubtedly made worse mistakes that could have far graver consequences (e.g., looking at a text message while driving). It happened, it is not a “deathbed issue” (one that will be Robert’s last thought on that fateful day) or anything more than a financial burden. Make the right decisions with regard to E&O coverage and sleep peacefully.