"Friendship is a ship big enough to carry two in fair weather, but only one in foul…"—Ambrose Bierce

 Insurance agents once had solid, often longstanding, relationships with the insurers with which they placed business. To some insurance agents, these business relationships seemed more like friendships. They believed that they could count on their insurers to stand by them, even by offering an agency accommodation, in problematic claims situations. However, the above quote reminds us though that such "friendships" are just one E&O claim away from being tested, particularly in the present economic climate. Insurance agent relationships with the insurers they do business with are particularly put to the test when the errors and omissions lawsuit is brought against the insurance agent—not by a customer/insured, but by the insurer.

 In a number of states, lawsuits brought by insurance companies against their insurance agents are becoming more commonplace particularly in this economy. In addition, a number of such lawsuits are brought in what appears to be a knee-jerk fashion, based upon incomplete investigation and/or seemingly questionable legal advice. Generally speaking, just as a number of insurance companies may take arguably narrower views of insurance coverage, some insurers are also suing their insurance agents in an effort to shift to them the burden of paying a claim.

 For example, insurers may pay the insured and then sue the agent to recoup the payment by alleging that the insurance agent bound the insurer to a risk which exceeded the agent's binding authority and/or violated the insurer's underwriting guidelines. Insurance agents can also anticipate a lawsuit by an insurance company the agent represents when the insurance agent fails to timely report an insured's claim to the insurer and thereby, arguably, prejudices the insurer's ability to either deny or defend the claim.

Insurance agents should thus bear in mind that they are exposed to potential lawsuits not only from their insureds, but also from the insurance companies whom they represent. Insurance agents can lessen their E&O exposure arising out of their relationships with insurers by implementing the following loss control procedures agency wide.

 1. Know and act within your binding authority and underwriting requirements when issuing a binder, or sending an application in on a bound basis.

 2. Confirm any changes to the company's underwriting requirements in writing.

 3. If the underwriter agrees to deviate from the insurer's underwriting guidelines to allow you to bind coverage for an insured, confirm the agreement with the underwriter in writing before binding and also send the binder and/or the bound application to the underwriter. If appropriate, transmit these items through the company/agency computer interface system. Due to the frequent turnover of underwriters, the underwriter who confirmed the change may be unavailable to verify the authorization by the time a claim is submitted. As with all important documentation, save this confirmation in your agency file for the given insured.

 4. Promptly report all claims and tender all summons and complaints immediately to all insurers that may potentially be involved and all layers of insurance including any excess insurers. Document the insured's file that you have done so. Do not hold occurrences or claims, either at the request of the insured to see if something develops, or to wait for further details. Do not promise that the insurer will afford coverage for the claim unless the insurer has confirmed that fact to you in writing.

 5. Do not give a recorded or signed statement to an insurer or its investigator concerning a claim. The legal significance of the wording of the statement may not be readily apparent. It is also a good indication that your insurance company is contemplating a lawsuit against the insurance agency. Do not give testimony in a deposition or examination under oath without the assistance of legal counsel, even if you believe you did nothing wrong; lawsuits are frequently commenced against insurance agents and brokers after they testify under oath without the presence of counsel. Such a request for a statement or testimony could also be construed as a claim under the E&O insurance. Promptly put the agency's E&O insurer on notice of such development. Obtain the advice of experienced E&O counsel who may advise you not to give a statement or to testify.

 6. If the insurer denies coverage for a claim, do not write a letter, or send an e-mail to the insurer commenting on who is to blame for the "misunderstanding". Do not include phrases such as "I made an error, but so did the insurer", or "we did not handle this right, but…" These statements are not likely to result in a change and may encourage an insured v. agent claim or lawsuit.

 7. Do not request that the insurance company make an agency accommodation or claims concession. These requests are often perceived as an admission of liability and may compromise your E&O coverage. Seek advice of experienced legal counsel who can intervene and write a letter to the insurer with the specific coverage and/or legal arguments which are more likely to persuade the claims representative to provide coverage.

 8. Do not give a copy of your agency file materials to an insurer investigating a claim without first consulting with an E&O attorney. Your agency agreement may contain a clause providing that you have a duty to cooperate with your insurance company. However, since it is not uncommon that a request for your agency file may herald an insurer v. agent lawsuit, it is important that you obtain the advice of E&O counsel before agreeing to the request. Oftentimes, E&O counsel can respond to the insurer's satisfaction while still protecting the agency's interests.

 9. Do not make any admissions "off the record" in any conversation concerning a claim. Such statements are frequently used against the insurance agent in an E&O lawsuit.

 10. Instruct all insurance agents, customer service representatives, account representatives and other staff that any requests by anyone, including an insurance company claims representative or investigator, for a written, recorded or other statement or for a review of a given insured's file materials in connection with a claim should be referred directly to a designated person at the agency, preferably an agency principal, for handling as outlined above.

Business Risk Exclusion Prevents Coverage for Defective Workmanship

 A Georgia Court of Appeals handled a dispute between the insurer and the insured over coverage for a claim of defective workmanship. The trial court had denied the insurer's motion for summary judgment and this appeal followed. This case is QBE Insurance Company v. Couch Pipeline & Grading, Inc., 2010 WL 1136193 (Ga.App.).

 Couch contracted with Georgia Maintenance and Contracting to perform certain grading and pipe work during the construction of an office building; QBE issued a commercial liability insurance policy to Couch at this time. Georgia Maintenance refused to pay the full amount of the bill from Couch because it alleged that some of the grading work was defective. It maintained that instead of removing unsuitable soil, Couch covered the soil with good soil and because of the bad soil, the building pad was unable to be compacted 95 percent, the compaction ratio required by the contract. Both parties sued each other over this dispute. QBE filed a declaratory judgment action, contending that it had no duty to defend or indemnify Couch.

 QBE contended that the claims against Couch do not constitute an occurrence because an occurrence is defined in the policy as an accident. Here, the insurer said, the insured intentionally placed a layer of good soil over the building pad that contained unsuitable soil and compacted the pad. Thus, there were no unexpected happenings; rather there was an event that was reasonably to be expected. The appeals court rejected this argument.

 The court said that although QBE alleges that Couch performed its grading work in exactly the manner intended and expected, it has pointed to no evidence that Couch intended to prevent the building pad from being suitable for compaction. The damage was caused by an accident, an occurrence, because Couch did not intend the damage to occur.

QBE also asserted that because the damage was limited exclusively to Couch's work and there is no evidence of consequential property damage flowing from that work, the business risk exclusions preclude coverage. The court agreed with this argument. The court, noting the exclusions in the policy, found that Georgia Maintenance claimed damages in the amount it cost to repair Couch's defective work; it did not claim damages to other property flowing from Couch's work. Georgia Maintenance contended that the work itself was defective and had to be redone, so the damage was only to the defective work of the insured.

 The judgment of the trail court was reversed.

 Editor's Note: In its decision, this appeals court discussed the business risk exclusions in the CGL form. The court's words are worth repeating in order to help in understanding the purpose of these exclusions.

 Business risk exclusions are designed to exclude coverage for defective workmanship by the insured builder causing damage to the construction project itself. There are two kinds of risks that are incurred by a contractor. The first is the business risk borne by the contractor to replace or repair defective work to make the building project conform to the agreed contractual requirements. This type of risk is not covered by the CGL form and the business risk exclusions make this clear.

 The second kind of risk is the risk that defective or faulty workmanship will cause injury to people or damage to other property. Because of the potentially limitless liability associated with this risk, it is the type for which commercial general liability insurance is contemplated. The risk intended to be insured is the possibility that the work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the completed work itself, and for which the insured may be found liable.

 The insured may be liable as a matter of contract law to make good on products or work that is defective or otherwise unsuitable for use. This may even extend to an obligation to completely replace or rebuild the deficient product or work However, this liability is not what the insurance coverage under a CGL form is designed to protect against.

Notification to Loss Payee Upon Policy Expiration

 This is an appeal from a circuit court's ruling that the insurer had improperly cancelled an automobile policy without giving notice to the insured and to the loss payee. The case is Putnam Bancshares, Inc. v. T.C.'s Used Cars, LLC, 2010 WL 1408107 ( W.Va. ).

 Daniel purchased a car from T.C.'s Used Cars and financed that purchase with a loan from Putnam County Bank. A requirement of the loan was that Daniel was to maintain an insurance policy sufficient to cover any physical damage to the vehicle and was to list

Putnam County Ban as the loss payee. Progressive Insurance Company issued the policy to Daniel according to these requirements.

 Before the policy was to expire, Progressive offered to renew the policy by sending a renewal invoice to Daniel. This notice had a declarations page that expressly noted that the policy was effective only if Daniel paid the renewal premium. Daniel did not do so and the policy expired.

 After this, Daniel had an accident and the car was declared a total loss. The following day, Daniel paid the minimum of the premium amount required to renew the policy and in accepting the premium, the insurer noted that the policy would renew with a lapse in coverage; the renewal effective date was one day after payment was made. Later, Putnam Bank, as the loss payee, made a claim with Progressive to recover for the loss of the car and Progressive denied the claim. Putnam filed a lawsuit against the insurer.

 When the case arrived at the appeals court, that court said it was presented with issues as to what notice, if any, is required where an existing auto policy expires on its own terms after the insured failed to accept an offer to renew and did not pay the required renewal premium.

 The first issue, the court said, was whether West Virginia code requires that an insurer send a notice of cancellation of a policy where the original policy has expired on its own terms. The court found no statutes requiring this procedure.

 The second issue was whether the codes required the insurer to send a notice of cancellation when an insured fails to accept an offer to renew an expiring policy by paying the required renewal premium by the due date. The answer here was also "no".

 The third issue was whether the law required Progressive to notify the loss payee. The state law required that an insurer notify a loss payee regarding coverage only when the insurer notifies an insured that it is cancelling a policy or is refusing to renew the policy. It was clear in this case that neither of those circumstances were present and so, the court ruled that where an insurer has extended an offer to renew an auto policy and the insured does not accept that offer, there is no duty on the insurer to provide notice to the loss payee.

 The final issue addressed by the court was whether Daniel's payment of the renewal premium one day after the accident obligated the insurer to provide coverage for the accident. The court found that while Daniel was entitled to reinstatement of the expired policy, a lapse nonetheless occurred. This lapse and the lack of coverage for the lapse is expressly provided for by West Virginia law. A reinstated policy begins a new coverage period.

 The judgment of the circuit court was reversed and the matter was remanded for entry of summary judgment in favor of Progressive.

 Editor's Note: This case is presented to show that, while loss payees are usually entitled to notice of a policy cancellation by law, there is no requirement (in West Virginia, at least) for a notification of the insured's decision to not accept a renewal offer. The standard personal auto policy, PP 00 01, does not mention the loss payee; the rights of a loss payee for notice are listed on an endorsement, PP 03 05, that can be attached to the policy. However, this endorsement does not have a requirement to notify the loss payee if the insured has declined a renewal offer.