You’ve heard it said that a chain is only as strong as its weakest link. We’ve certainly found that to be true numerous times in the insurance industry, especially when dealing with brokered business.
A common error that agencies make when handling brokered business is failing to review the policy for accuracy before forwarding it to the client. Here’s a typical example: You previously placed a commercial package policy for your long-time client, a plumbing contractor who has been happy with their policy over the course of many years and many, many claims. Unfortunately, the incumbent carrier is not as enthusiastic about your client based on their significant loss history. With the policy expiring in the next few months, the carrier decides to non-renew based on the loss history.
Being the ever-vigilant agent, you submit requests for new quotes to various carriers in the standard market. Not surprising, there is not one standard carrier that is willing to take on the risk. Time for plan B—contacting a wholesale broker that you have successfully used many times during policy procurement in the excess & surplus lines marketplace.
The broker sends a coverage proposal to you, and a quick glance seems to indicate that the limits of insurance are accurate and the coverages are what was requested. You forward it to your client, the proposal is accepted, coverage is bound and the policy is issued. Since this is brokered business, the policy is sent directly to you, and you once again forward it to your client. Job well done. Or is it?
Several months later, your client is contracted to do plumbing work at a commercial construction project and the client sub-contracts part of the job. Sub-contracting work is nothing new for them and is an aspect of their business. Of course, you have always been aware of this.
On that fateful day, one of the subcontractor’s employees fell 17 feet from scaffolding. Not only did he sustain a compression fracture to multiple vertebrae but also sustained a compound fracture to his leg with an open reduction and a permanent partial disability rating.
A claim is submitted to the client’s carrier who declines coverage based on the Bodily Injury to Contractors or Subcontractors Exclusion. This excludes any bodily injury sustained by a subcontractor or employee of a subcontractor performing services on behalf of the client.
You race over to your account file and pull a copy of the policy that you retained for your records. You go over the policy page, and there it is, the Bodily Injury to Contractors or Subcontractors Exclusion endorsement attached to the policy. You flip back to the page listing all forms made part of the policy and halfway down, you see it again, the Bodily Injury to Contractors or Subcontractors Exclusion endorsement is listed. The thought pops into your mind that this was not the proposal that was accepted. You review the proposal and nowhere is this exclusion listed.
Ultimately, a lawsuit is filed against the client who files a third-party complaint against the agency alleging you knew they utilized subcontractors—fair point—but obtained a policy that excluded coverage for injuries to employees of subcontractors, failed to notice the subcontractor exclusion and failed to obtain coverage from another carrier that did not have such an exclusion despite one existing in the marketplace.
A similar situation: An agent procured a replacement commercial general liability policy for a carpenter client with products-completed operations coverage subject to a $1 million limit. As in all these brokered situations, the policy was sent to the agency for disbursement to the client. A quick review of the declarations pages showed the $1 million limits for products-completed operations. Great! This is exactly what the client wanted, and all other coverages appear to be in place.
Sometime later, the client receives a letter from an attorney representing a former customer. Apparently, the work completed on a shed five years ago was faulty. A wooden beam was improperly installed, which eventually fell and landed on the client. A copy of the letter was sent to the carrier who declined coverage based on a policy endorsement that excluded coverage for products-completed operations prior to a specified date, which was the inception date of the policy. The previous policy had a retroactive date 10 years prior to the inception date.
If the agency had reviewed the policy and checked the forms list, corrective action could have been taken to guarantee an appropriate retroactive date. As it was, there was a clear case of liability on the agency.
Does the client share some fault for failing to review their own policy? Yes, but “my customer is at fault for not catching my mistake” is not a terrific defense for an agent. Does the broker have some liability for failing to offer a policy with a different carrier that did not include that exclusion? Possibly. However, that does not absolve the agency from its own mistakes. Bear in mind: Your customer hired you, while you hired the broker.
Don’t rely on a broker to guarantee that the coverages initially requested are included in the policy. When you receive the policy from a broker, make sure you review all the information to confirm that your client is being properly insured for their stated risks and exposures.
Barbara Rocco is an assistant vice president and claims specialist at Swiss Re Corporate Solutions and works out of the office in Chicago. Insurance products underwritten by Westport Insurance Corporation, Kansas City, Missouri, a member of Swiss Re Corporate Solutions.
This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article do not necessarily represent the views of the Swiss Re Group (“Swiss Re”) and/or its subsidiaries and/or management and/or shareholders.
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