This article originally appeared in Goldberg Segalla’s Professional Liability Matters. Read the issue here.
As experienced insurance-agent and -broker E&O attorneys, we frequently defend agencies or brokerages after the principals have tried their best to neutralize a potential E&O claim. All too often an agency principal, producer, or claims person will write what we call an “unfortunate letter”—a letter, email, or text trying to convince an insurer to cover a disputed claim of an insured customer.
We understand that as owners of dynamic businesses, agency principals are accustomed to troubleshooting a variety of problems that land on their desks every day. However, when it comes to resolving a potential E&O claim, such self-help might prove harmful to the agency, including its business relationships with its customer, and may even trigger the loss of the agency’s E&O coverage.
Agency principals may have been encouraged to write such letters to insurers because in the past they have been successful. The insurer has been persuaded, the insured’s claim covered, and an E&O claim avoided with the agency’s business relationships intact. However, these appeals to the insurer, when written by the agent, have become decreasingly effective. This is particularly true in the present market.
In addition to this practical concern as to whether the letter will work, the agency principal must bear in mind that there are several legal consequences that flow from writing such unfortunate letters. First, the agency principal almost always copies the letter to the insured. If the insurer does not cover the claim, the insured may turn the unfortunate letter over to their attorney who will use it as a basis for drafting an E&O complaint. Even if the agent does not copy the insured on the letter, the letter will still become part of the insured’s claims file and is discoverable in an E&O lawsuit. In many instances, an insurer will pay the claim and then seek indemnification from the agency. Sometimes these unfortunate letters can even fuel such a claims stance by an insurer which was already ambivalent about covering the claim.
The problem with unfortunate letters is they are often written defensively and in haste without the benefit of a thorough investigation. Rather than marshal the relevant evidence of the insurance transaction and make pointed insurance coverage and/or binding authority arguments likely to persuade the insurer, these letters are often defensive and attempt to justify agency errors and/or request outright an agency accommodation. For example: “Although the CSR did not request the endorsement, our intent as your agent was to provide…,” or “as a Premier agent with a substantial premium volume we request an agency accommodation.” Also: “Although we made some mistakes, so did your underwriter.”
Such letters also commit the agency principal prematurely to a version of events, without the benefit of a thorough investigation that might bring to light a version more favorable to the agency. These letters become fodder for cross-examination and are often used as “Exhibit A” against the agency in an E&O lawsuit. Now the agency and its E&O attorney are unnecessarily forced into a defensive position.
A variant of self-help (particularly subject to boomeranging) occurs when the agent mounts an effort to have the insurance policy reformed after a claim to provide the “missing” or otherwise lacking/insufficient coverage. E&O carriers beware. Do not allow the insurance agents or their personal counsel to do this unilaterally and without the claims representative’s input, particularly if such counsel is not an experienced insurance-agent and -broker E&O attorney. Those of us who are know that reformation is a major fork in the road to be taken only if there is a very good chance of success. Why? In a premature or unsuccessful bid to garner reformation, the insurance agent necessarily makes certain admissions that it intended the insured to have certain coverages. In so doing, the agent may be giving up certain defenses resulting in the agent and its E&O carrier in effect buying the claim if the reformation attempt fails. In a recent high-dollar E&O case, prior to our involvement, the agent had its personal insurance coverage attorney write a letter to the commercial lines property and casualty insurer in an effort to get coverage after the fact for certain storm-damaged items (of a fairly modest value). Lamentably, in an effort to impute the agent’s intent to the property and casualty carrier in support of reformation of the commercial property and casualty policy, this attorney wrote a sweeping request for reformation letter to the carrier, claiming that the agent intended “everything on the property to be covered.” To make matters worse, the insurance agent was copied on and approved the letter. The property and casualty insurer denied the reformation request (see side bar box as to the limits of reformation).
Then came the boomerang: The insured reported to the agent that it found another item of storm damage, in the high seven-figure range, for a type of property for which insurance is not often, but can be, purchased. The insured had not previously reported the damage, and the property and casualty insurer had closed the claim early due to the lack of coverage and, thus, was unaware of this item of damage. Clearly, the agent, who had been out to the property to meet with the commercial insured before the loss, had not so intended that there be insurance coverage under the policy for this other item of property (in actuality, this large item of property had never been discussed at all by either the agent or the insured before the storm). The agent’s personal insurance coverage attorney had unwittingly written this unfortunate and unsuccessful letter which risked becoming “Exhibit A” against the agent in an E&O claim. Compounding the issue, the attorney had not provided the letter to the E&O carrier for approval ahead of time.
The smart strategy, rather than writing a letter yourself, is to promptly report the potential claim to your E&O carrier which can retain E&O counsel and/or insurance coverage counsel experienced in agency issues, to conduct an investigation and, if warranted, author an effective “advocacy letter” on the agency’s behalf to the appropriate insurers. A strategic letter authored by an experienced E&O attorney also has a much better chance of swaying the insurer.
In addition, the attorney can assist the agency in preparing itself at the earliest possible moment to defend an E&O lawsuit if the insurer refuses to pay the insured’s claim. Since the insured is often an existing customer of the agency, the agency may also have legal questions for the E&O attorney as to how to proceed in handling the account, day to day.
It also must be stressed that writing an unfortunate letter might run afoul of the terms of the agency’s E&O policy which normally obligates the agency to provide notice to the E&O insurer when the agency becomes aware of an act, error, or omission that may give rise to a claim. Agents who write these types of letters often are aware of circumstances that may give rise to an E&O claim. Moreover, if the unfortunate letter contains an admission, it might also jeopardize the agency’s coverage.
Although it might be hard to admit that it’s time to report a potential claim to the E&O carrier and secure help from an E&O attorney, in the case of unfortunate letters, the old adage holds true, “he who represents himself has a fool for a client.”