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Risk Management Failure to obtain coverage Agents need to be careful when helping out insureds By Donald S. Malecki, CPCU In an attempt to provide better service to their insureds, some producers take steps that turn out not to be worth the effort. In fact, their efforts can sometimes come back to bite them. One instance that comes to mind is when a producer reduced his commission so that a home owner could obtain more insurance on her dwelling. That might have been commendable in the eyes of the producer, but when the dwelling was heavily damaged by fire, the dwelling was still found to be undervalued. It did not matter how generous this producer was. When the home owner found out she did not have enough insurance to rebuild her dwelling, she brought suit against her producer. Fortunately, the jury sympathized with the producer. Another way producers can get into trouble is to take over the role of a wholesaler in issuing certificates of insurance and/or additional insured endorsements. What often prompts this shortcut is when insureds are in a quick need for proof of insurance from insurers that the producers do not represent, such as some excess surplus lines insurers. Truckers, for example, often cannot obtain a load without first providing the shipping company with an insurance certificate showing proof that the trucker has insurance. The delay here can be caused because the trucker's insurance is with an excess and surplus lines insurer where requests have to be made through an intermediary, such as a wholesaler. Whatever the reason, it is advisable that producers not accept someone else's role as a wholesaler, or even suggest doing it because it can result in a world of trouble; in fact, enough trouble that a producer would ordinarily not bargain to ever accept. Actual case Briefly, the facts are as follows: A general contractor (L&K) entered into a contract with a school district to construct a building. L&K entered into a subcontract with Pro-Set, which maintained a CGL policy from Nautilus Insurance Company (Insurer). Pro-Set had obtained this CGL policy from the Carlson Agency, which was described by the parties as the "insured producer," "retail producer," or "retail agent." (For purposes here, reference is to retail producer.) This CGL policy was obtained by the retailer producer from the insurer's designated agent, Hull & Company, referred to here as the wholesaler. When Pro-Set, the subcontractor, entered into a contract with L&K, the general contractor, Pro-Set requested its retail producer to add L&K and the school district to Pro-Set's CGL policy as additional insureds and to issue certificates of insurance. This was done. While work was in progress, an employee of Pro-Set, the subcontractor, was severely injured when he fell from a scaffold. After receiving workers compensation benefits, this injured employee filed a lawsuit against the general contractor alleging claims of negligence. As would normally be expected, L&K, the general contractor, tendered its defense to Pro-Set, the subcontractor. Both L&K and Pro-Set then tendered the defense to the Pro-Set's insurer on the grounds that L&K was an additional insured. The surprise came when the Insurer denied coverage on several grounds. One of these was that L&K, the general contractor, was never properly designated as an additional insured, because the retail producer was never authorized to issue such as endorsement without approval from its designated agent, the wholesaler. This Insurer also denied coverage based on the workers compensation exclusion, and the employer's liability exclusion, the latter of which precluded coverage for bodily injury sustained by an employee of any insured arising out of and in the course employment by an insured. (This reason is discussed later in this article.) Who said what? Anyway, in this case, it was said that, in light of Pro-Set's numerous additional insured requests, the wholesaler provided the retail producer with blank endorsements to complete when Pro-Set, the subcontractor, requested them. In fact, according to the retailer producer's affidavit, it was the agency's "regular practice and procedure" to issue additional insured certificates and send them to the wholesaler, who was said to have never objected to the "dozens" of additional insured certificates issued. The problem was that there was no direct evidence that the additional insured endorsements and certificates naming L&K, the general contractor, were ever faxed or otherwise sent to the wholesaler or the insurer. The retail producer's agency, furthermore, did not have any business relationship with the insurer, since it was said that the insurer: (1) never made Carlson its designated agent; (2) did not file a notice of appointment of this agency with the department of insurance; (3) did not authorize this agency to act as its agent; (4) did not have any known contact with Carlson; (5) did not know Carlson was holding itself out as insurer's agent; and (6) did not know that Carlson was issuing these endorsements and certificates. The insurer also objected to the retail producer's statement that his agency was specifically authorized by the wholesaler to issue additional insured endorsements without first obtaining specific approval from the wholesaler for each such endorsement. Despite making this assertion, the retail producer did not aver or provide evidence as to when or by whom the wholesaler provided the authorization. He also did not explain whether or how the wholesaler received authorization from the insurer to vary from the usual procedure of issuing these endorsements and certificates. The retail producer's statement that some unidentified person at the wholesaler authorized him to issue endorsements and certificates was held to be inadmissible heresay offered to prove the truth of the matter. Whenever authority of an insurance agency becomes an issue, a subject that needs to be aired has to do with actual, apparent or implied authority. The reason is that even though an agency is not officially appointed as such, it can still be held to that status, if it can be shown that it practiced under one of these characteristics of authority. As it turned out, there was no evidence that any one of those categories of authority applied. In fact, the agency admitted that it had no direct contact with the insurer. Other Issues This is what had happened in this case where the retail producer had no authority to bind the insurer when it issued the additional insured endorsement and certificate of insurance to L&K, the general contractor. It was stated that no coverage applied, even if the retail producer had such authority to issue those documents, in light of the exclusions relied on by the Insurer. What was brought out in this case was that there were two entities that were co-employers of the injured employee. Pro-Set was one of the employers and Pay Check Connection was another entity held to also be an employer because it provided payroll, and human resource services, and workers compensation insurance. So the two exclusions relied on by the insurer applied to both entities. What may beg a question here, however, is why no coverage applied to L&K, the general contractor, who was not an employer of the injured employee. The insurer here was said to have cited treatises and cases indicating that the policy behind the employee exclusions is to prevent turning a commercial general liability policy into a workers compensation and employers liability policy. The above is true if the party seeking coverage is the employer of such an employee. But not L&K! Under standard CGL policies, the party who is not an employer but an additional insured still should have coverage because the exclusion for employers liability applies to "the" insured who is the employer of such injured employee; and with the policy's separation of insured condition, the policy applies separately to each insured against whom a claim is made or suit is brought. With the policy issued by the insurer in this case, the exclusion was amplified by defining "employee" to mean "any person or persons who provide services ***directly or directly to any insured" and includes a "leased worker," "temporary worker," "volunteer worker," a contractor, a subcontractor, an independent contractor, and "any person or persons hired by, loaned to, or contracted by an insured's contractor, subcontractor, or independent contractor…" Conclusion First, retail producers should not volunteer or accept the job delegated to a wholesaler, no matter how much better service can be provided to the producer's insureds. The tradeoff is not worth it, unless the producer wants to spend a lot of unproductive time in the court system. Second, the producer should know what the problem areas are with liability policies he or she sells and issued by excess and surplus lines insurers to contractors. This coverage gap is not an isolated situation. If producers are going to place this kind of coverage for contractors, and have no choice with insurers, they need to add to the usual excess and surplus lines disclaimer, with the additional caveat to read the policy. Documentation also is very importan, because disputes over coverage are common with insurers that cut the heart out of coverages. The author
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