In such an instance, can the agent or broker proclaim, "No harm, no foul," and have any E&O claims against him occasioned by the insurer's disclaimer dismissed?"

Not necessarily, according to a ruling earlier this year from a California appellate court, which may end up redefining the limits of the "proximate causation" defense in agent/broker professional liability cases alleging the insured was given negligent advice.

Insurance agent and broker errors and omissions cases typically arise from a common scenario: there is a claim that the insurer is refusing to indemnify or defend.

Facing an uninsured loss, or presented with the prospect of incurring the costs and expenses of defending against a claim the insured believes should have been covered, the insured brings suit against his agent or broker, contending that but for the agent's/broker's negligence in procuring coverage, the insured would have the benefit of coverage for the occurrence.

Agents and brokers have a variety of defenses available to them in defending against claims that they were negligent in their efforts to procure coverage. (See "Coverage Defenses.")

In the context of disputes regarding coverage for liability claims, the agent/broker can argue that where the insurer's disclaimer and refusal to provide a defense is ultimately found to have been improper, the agent/broker should thereby be deemed to be exonerated of any claim of negligence or wrongdoing.

In such case, the argument made is that "your claim was for negligence in failing to procure coverage, and the costs incurred in defending, settling or indemnifying a claim as a result. Because the policy has been held to respond to the claim, you necessarily cannot prove either my negligence in procuring the coverage for you, or damages incurred as a result."

In legal terms, this is referred to as a proximate causation defense.

In simpler terms, the underpinning of the defense is the concept that "while it is possible that I could have done my job better, my arguably poor performance was not the cause of your injury--your costs and expenses in having to litigate a coverage issue. Instead, the 'proximate cause' of your injury is the insurer's failure to provide the promised coverage."

In the recent decision in Third Eye Blind Inc. v. Near North Entertainment Ins. Services, LLC, the limits of this defense rationale were tested. The result, unfortunately for agents and brokers, was a decision evidencing that just because the insured may ultimately end up with coverage for a claim from its insurer, this doesn't necessarily mean the agent/broker can't be sued for negligence or breach of contract in connection with its procurement of coverage for the insured.

And it doesn't necessarily mean the agent/broker cannot be found liable for costs and expenses incurred by the insured in an effort to resolve a coverage issue claimed to have arisen as a result.

Rock Band Sues

The facts of the Third Eye Blind decision reveal that Third Eye Blind, a rock band, had a management company on retainer as its "business manager." In its complaint, the band alleged that the business manager, Provident Financial Management, was responsible for, among other things, "assessing the band's insurance needs, facilitating insurance planning, and obtaining appropriate insurance policies."

In addition to its business manager, the band also retained an insurance broker, Near North, which they allegedly selected based on the broker's claimed expertise in the field of entertainment insurance and risk management.

The business manager and broker purchased a comprehensive general liability policy for the band, which contained an endorsement excluding coverage for personal injury or advertising injury arising out of the "Field of Entertainment Business"--referred to as the "Field of Entertainment Limitation Endorsement" or "FELE." It was this endorsement, and how it applied to a claim against the band, that was at the heart of Third Eye Blind's subsequent legal battles with the insurer, business manager and broker.

After the band fired one of its members, the ex-band member, Cadogan, sued the band and the remaining band members, alleging they had made unauthorized use of his name, likeness and goodwill. The band members tendered the defense of the case to their CGL insurer.

But the CGL insurer denied the claim, relying upon the "Field of Entertainment Limitation Endorsement." As a result, the band members had to defend the case on their own. They ultimately settled the case, and claimed that between defense costs and the settlement payment, they expended about $3 million.

The band members then sued the CGL insurer, seeking a declaration that it had a duty to defend the suit. At the same time, they also sued the business manager and broker. The band alleged that despite the claimed expertise of the broker in the field of entertainment industry insurance, the broker had failed to advise or notify the band of the FELE or that an additional E&O policy would be necessary to guarantee full coverage. The band members claimed that had they been so advised, they would have purchased an additional E&O policy, would not have had to incur defense costs, and would not have had to incur legal fees litigating the coverage issue with the CGL insurer.

Addressing the coverage issue first, the trial court found that the CGL insurer actually had a duty to defend the claim, because it was possible there might be coverage under the policy, and the FELE exclusion was ambiguous as applied to the claims made by Cadogan. Ultimately, while the decision was being appealed, the band settled with the insurer.

At that time, relying upon the court's ruling that the insurer was, in fact, required to provide the band with a defense, the business manager and broker moved to dismiss the claims against them. They argued that as a result of the court's ruling it simply could not be established that their alleged negligence had caused the injury incurred.

The argument, in essence, was: "You claim that due to our negligence, you had no coverage for Cadogan's claim, and were compelled to defend the case and settle it on your own. In fact, however, the court has ruled that there was coverage for the defense of the Cadogan claim, and a defense should have been provided for the suit by the CGL insurer. As a matter of law, therefore, you cannot prove that any negligence by us caused your loss. Your loss was caused by the inappropriate coverage position taken by the CGL insurer."

The trial court agreed with this argument and dismissed the claims against the business manager and broker, explaining that the band members' claims against Provident and the broker were "predicated" on a claim that the CGL policy in issue was insufficient to provide coverage for the band members' lawsuit, yet the court had found that the policy was sufficient.

Nonetheless, on appeal the decision was reversed, and the claims against the business manager and broker were reinstated.

Appellate Court Weighs In

In reversing the trial court, the appellate court stated first that the contention that remaining band members were alleging merely that the business manager and broker were negligent because they had procured an insufficient policy was an "oversimplification" of the band's allegations.

The complaint, the court noted, alleged that despite their superior insurance knowledge and expertise, the business manager and broker had failed to notify the band of the FELE, that coverage for certain events might be excluded as a result, and that an E&O policy would be necessary to cover this potential shortfall.

The appellate court said: "These claims do not depend on an assumption that the CGL policy was deficient. The point is that respondents failed to alert appellants that the [FELE] would give [the insurer] a viable basis for refusing coverage under some circumstances and, consequently, failed to recommend that [the band] purchase E&O insurance to ensure complete, uncontestable coverage."

In short, the appellate court held that the issue of whether the insurer should have defended the claim was independent from the issue of whether the business manager and broker failed to provide competent advice.

Accordingly, "[a]though the trial court, in ruling on a motion for summary adjudication, concluded [the insurer] had breached its duty because there was a potential for coverage under [the] CGL policy," the appellate court concluded that "this ruling could not absolve respondents of liability for their own alleged negligence in failing to advise [the band] about the need for E&O insurance."

Critically, the appellate court concluded that because of the inclusion of the FELE, it was arguably foreseeable that a coverage issue could arise. Therefore, while one cause of the insured band members' loss was, in fact, the inappropriate coverage position taken by the CGL insurer, an additional cause could potentially be shown to be the business manager's and broker's failure to provide appropriate advice regarding coverage for the band.

The Sky May Not Be Falling

What is the import of this decision for insurance agents and brokers? Does it signal erosion of the basic defenses available to agents and brokers in responding to E&O claims? Does it evidence still further judicial willingness to sustain agent and broker E&O claims, and reluctance to dispose of them on "technical" grounds without giving the jury an opportunity to consider the claims?

Is the sky falling?

The answer to these questions, in this writer's opinion, is that you have to look at the facts of the case. If, indeed, coverage is found to have been appropriately procured, the courts generally cannot find that the agent/broker failed to fulfill his/her obligations to the insured to procure the coverage requested. The Third Eye Blind case does not alter this.

What the court in Third Eye Blind held was that, just because an insurer, under the broad duty to defend applied by the courts, must provide a defense while the coverage issue is litigated, doesn't mean that, as a matter of law, the agent/broker can't be found to have failed to exercise the appropriate care in advising the insured regarding coverage. Nor does it mean that he/she can't be held responsible for costs and expenses incurred as a result if the alleged negligent advice could be found to have forseeably led to a coverage dispute.

The problem, of course, is the concern that "bad facts can make bad law." It is not unreasonable to express concern that while the circumstances of this case may be unique, the principles espoused by the court in its ruling may be applied injudiciously in other, less compelling circumstances. But let's consider again the facts driving the Third Eye Blind court's decision.

In the Third Eye Blind case, the band had a business manager in place to cater to its every need, allegedly responsible for, among other things, "assessing the band's insurance needs, facilitating insurance planning, and obtaining appropriate insurance policies."

Additionally, the band retained a broker chosen based upon its claimed expertise in the field of entertainment insurance and risk management.

In such circumstances, it is not surprising that a court would conclude the insured had a right to ask a jury to decide if the insured received appropriate advice--particularly with respect to a policy endorsement labeled "Field of Entertainment Limitation Endorsement."

But what of a case with less compelling facts, where an insured nonetheless argues there was coverage out there that could have resolved any potential coverage issue, and the broker should have advised of this?

The fact is that there's almost always some coverage, somewhere, offered by someone that could have provided coverage for just about any uninsured loss. Will insureds be able to argue every time they don't necessarily have the fullest possible coverage available that they should be able to recover the uninsured balance or costs of litigating coverage from their broker?

We'll have to wait for further case decisions to come down the pike to see how this plays out. But the betting here is that, in the absence of circumstances such as were present in Third Eye Blind--where there were both a business manager and a broker alleged to have represented themselves as experts in an industry, where there was a policy endorsement that clearly should have set off alarm bells regarding potential coverage issues for a self-proclaimed expert, and where it was alleged that these issues were never raised with the insured--this does not necessarily presage a floodgate of successful claims by insured seeking to recover attorneys fees they incur in coverage actions from their brokers for allegedly failing to mention a potential coverage issue or additional insurance that could be purchased to obviate the issue.

This precedent is likely to spawn similar claims, nonetheless. And the danger is that more and more, as coverage litigations come about, agents and brokers will be dragged into the litigation, even if the coverage procured is ultimately found to actually provide the coverage requested.

Peter J. Biging, Esq. is a partner in the New York office of Lewis Brisbois Bisgaard & Smith LLP. He can be reached at [email protected]

Flag: Coverage Defenses

Agents and brokers have a variety of defenses available to them in defending against claims that they were negligent in their efforts to procure coverage. They typically include defenses centered on:

o The question of whether a contract to procure actually existed.

Was sufficient information provided to permit the agent/broker to set upon the task of procuring coverage?

o The question of whether the claim is barred by the applicable statute of limitations.

o The question of whether there is contributory negligence of the insured

o The question of whether the claim would not be covered--or would be excluded--for reasons having nothing to do with negligent conduct of the agent/broker in procuring the coverage.

For example, a claim might not be covered because the loss did not constitute a covered "occurrence" under the policy, or because of a misrepresentation made in the policy application.

Art Caption:

Dissonant Chord.While an appellate court ruling about a rock band's coverage hit a sour note for insurance agents and brokers, a flood of successful "negligent advice" claims isn't seen as the likely outcome of the recent ruling.