Filed Under:Agent Broker, Coverage Issues

A Radical Concept

Contractual liability coverage is important to your clients—and to your E&O protection

Back when I was an insurance newbie, from what seems about a thousand years ago, our profession was not necessarily better, but much simpler. No one even dreamed of computers, the Internet, competitive pricing and online marketing.

Because it was difficult to land an account on a price advantage or even get a client past the usual inertia to make a change, the trick to gaining a new account was to upset the client into believing that his or her current insurance producer had not provided the proper protection.

My favorite gambit: I tell a prospective client that his current insurance representative had not provided other car coverage for his commercial auto fleet. I had several favorite horror stories that almost always worked. Unfortunately, this no longer works because nearly everybody has “drive other car coverage.” However, pointing out missing coverages to a prospective client is still an effective way to get the prospect to stop thinking about price and view you as a top-flight insurance professional.

One of the things I have noticed over the past several years is how often contractual liability coverage is not included in the general liability policy. All of my sales instincts go on instant alert and this is a great way to “upset” prospects and clients. In today’s sophisticated and litigious insurance industry, it’s also a great idea because most commercial clients have a direct contractual liability exposures.

I am currently involved in a case where the main issue is whether or not a broker is responsible for not adding the landlord as an additional insured as required by the tenant’s lease. Before placing coverage for its tenant client, the broker was given a copy of the lease by its client. The broker has several defenses, including that broad form contractual liability insurance is not required because a lease is an “insured contract.”

I agree, but I can’t help thinking why is there so much litigation involving contractual liability? In this particular set of circumstances, consider if the landlord is sued but not the tenant; is there coverage for the landlord? Subrogation is a possible solution, except it becomes much more expensive and it’s questionable whether defense costs would be included in the settlement. Is it a good idea to rely on the contractual liability exceptions contained in every comprehensive general liability policy?

There are two main issues in this particular litigation: If the lease is an “insured contract,” does that take care of the tenant’s responsibility to indemnify the landlord? Secondly, because the tenant’s lease was given to the broker before the inception date of the liability coverage and a problem arises, is the broker/agent responsible for not adding the landlord as an additional insured, as required by the tenant’s lease?

In my opinion, the answer to the question about contractual liability is that the comprehensive general liability policy probably provides coverage. The problem for me is that in my view, insurance coverage probably doesn’t cut it.

With regard to the broker’s responsibility, because the broker had agreed to provide the necessary coverage for the tenant, the insurance professional field has a duty to procure insurance as requested. If it turns out that the insured’s broker was also an agent of the insurer, then my position becomes definite because any knowledge of the agent is considered knowledge to the insurer.

Let me take off my insurance expert hat and assume the role of the insurance producer. If I am making a sales presentation, I will include broad-form contractual liability on every policy I sell and ensure that the client knows why I include the protection.

If it becomes impractical to provide contractual liability coverage, you can be assured that my new client will receive a letter stating that contractual liability is not included in the coverage and the potential consequences of not having that coverage. Consider the following, as stated in the text “Commercial Liability Insurance and Risk Management”:

Contractual liability exposures can be avoided by an organization only to the extent that it refuses to be a party to any contract under which it would be required to assume the tort liability of another party such a refusal might be advisable when the organization’s bargaining power is so superior that it can dictate the terms of a contract without losing valuable business to a competitor that is willing to accept the hold harmless provision.

How many clients do you represent that have such superior bargaining power? I have a much simpler and shorter rationale: Why would you not want to earn an extra commission instead of being exposed to errors and omissions litigation?

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