Filed Under:Agent Broker, Coverage Issues

Passing the Buck

In litigation, the best defense is the one someone else pays for

With my apologies to Vince Lombardi, I must dissent from his oft-quoted advice that "the best defense is a good offense." In the civil justice system, the best defense is one that someone else pays for.

This quarterly column is usually about avoiding E&O exposure, but even the best preventative measures will only make an insurance professional bullet resistant, not bulletproof. Just as the unlucky policyholder doesn’t expect the joy rider to collide with his new Camaro, his insurance agent can’t anticipate everything. E&O claims are going to happen. They may be bogus or righteous, but one thing is certain: They are expensive to defend against.

Even when the verdict comes in, there is no guarantee that it will resolve who pays for whose defense. A general verdict is often just a number, preceded by a dollar sign, without a rationale or specific finding of degrees of fault. It can leave the defendants as much in the dark as they were before the verdict, other than knowing that they are jointly and severally liable to pay a sum certain to the plaintiff if the verdict stands up against post-trial legal challenges.

State laws may further restrict the application of indemnity agreements. Some states prohibit a contract from indemnifying a party against the consequences of his "active" fault, gross negligence, or some other term describing improper conduct. Other laws turn one-way indemnity agreements into reciprocal ones when the indemnity is dependent on who is the prevailing party at trial.

Insurance professionals in E&O cases are rarely pitted against lone gunmen, but the analogy holds in less dramatic settings, where, for example, a wholesale broker has advised the producer of a change in coverage terms upon renewal, and the producer, who has the direct contact with the policyholder, fails to advise him of the change. That may be a more feasible setting for implied indemnity, and the producer may even have adequate E&O limits to make the argument worthwhile.

Additional insured: myth or legend?

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