Court finds liability policy's definition of `authorizedagent' is unambiguous
An accounting firm bought a professional liability insurance policyfrom a broker's subagent. The broker obtained the policy through amanaging general agent. The policy read, in part:

“I. Notice of Claim: Upon the Insured becoming aware of any Act,Error or Omission which could reasonably be expected to be thebasis of a Claim covered hereby, written notice shall be given byor on behalf of the Insured to the Company or any of its authorizedagents as soon as practicable during the Policy Period or ExtendedReporting Period, together with the fullest information obtainable.If a Claim is made against the Insured, the Insured shallimmediately forward to the Company every demand, notice, summons orother process received by the Insured or by the Insured'srepresentative(s) [emphasis added].

On or about July 2, 1997, the accounting firm's president wasnotified of a potential professional liability lawsuit, to be filedby one of the firm's clients. The client wished to enter into atolling agreement to extend the statute of limitations in thematter for six months. The president called the subagent to discussthe situation. Subsequently, the subagent allegedly advised thepresident that the carrier had given the insured permission toenter into the tolling agreement. That afternoon, the accountingfirm signed the tolling agreement and delivered it to the broker'soffices.

Nearly six months later, the accounting firm received theexpected complaint and immediately forwarded it to the broker. Thebroker's claim manager testified that she faxed a copy of thiscomplaint to the carrier, along with a cover sheet that read, inpart: “You … were notified of this incident on July 3, 1997, by(the subagent).”

A claim analyst contracted to the carrier acknowledged receiptof the complaint but declined to indemnify or defend. The analyst'sletter read, in part:

“Your firm's last policy term with (the carrier) expired onAugust 1, 1997, and your firm did not purchase an extendedreporting endorsement. Consequently, you have no valid coverage …for this lawsuit.”

The letter also stated that while the subagent's recordsindicated that he placed a telephone call to the insurer's claimsmanger on July 3, 1997, to discuss the effects of a tollingagreement on the insured's coverage, neither the claims manager northe subagent had any record that a copy of the tolling agreementwas submitted to the carrier, or that the subagent submitted aletter to the carrier in accordance with the policy'snotice-of-claim provisions describing any “act, error or omissionwhich could reasonably be expected to be a basis of a claim.”

Four years later, the accounting firm filed a complaint fordeclaratory judgment and breach of contract against the insurer. Asubsequent amended complaint added causes of action against thesubagent and broker for negligence and breach of contract. Theyfiled a joint answer in which they generally denied the materialallegations and specifically stated that, at all times material tothe suit, the subagent was an agent for the broker, which acted asagent for the insurer. The insurer, meanwhile, denied that eitherthe subagent or the broker was its agent.

The case was heard before a trial court, sitting without a jury.The court said a major issue was whether the broker was authorizedto accept notice of a claim under the terms of the policy. It saidit was clear that there was no agency agreement between the brokerand the carrier. The carrier, however, had not claimed that thebroker was not authorized to at least handle the initial receiptand processing of the claim, the court said. It added that sincethe policy did not define “authorized agent” or designate an“authorized agent,” the term must be construed against the insurer,which had prepared the policy.

Accordingly, the court held the carrier was given proper noticeof the claim in July 1997, as required under the policy, so theclaim was covered. The court denied the insured's bad-faith claimagainst the carrier.

The trial court issued a declaratory judgment against thecarrier. It also dismissed the insured's claims against thesubagent and broker. The carrier appealed. The insured alsoappealed on one issue: If the appeals court reversed the trialcourt's decision that notice was proper, did the trial court err indismissing its breach of contract and negligence claims against thesubagent and the broker?

The appeals court said it was undisputed that the policy'scoverage period was Aug. 1, 1996, to Aug. 1, 1997. It was alsoundisputed that the insured never reported its claim to theinsurer. Rather, it relied upon its agents–the broker andparticularly the subagent. To that end the insured provided a copyof the tolling agreement to the broker. The fact that the subagentdiscussed the tolling agreement, either before or after it wassigned, with an employee of the carrier did not satisfy thepolicy's plain language that notice must be in writing. However,the court said that if the broker sent the tolling agreement to thecarrier–even if the broker was not an agent of the carrier, then,under the plain language of the policy, the carrier would havereceived written notice of a claim. There was no testimony,however, to indicate that the broker faxed or otherwise sent thetolling agreement to the carrier during the policy period, thecourt said.

The next question was whether the insured's giving the writtentolling agreement to the broker constituted notice to an“authorized agent” of the carrier. Here the appeals court disagreedwith the trial court. It said the terms “agent,” “authorizedagent,” and “duly authorized agent” have been used in legalese fromtime immemorial and were unambiguous.

The appeals court found that the broker had no direct authorityto write insurance policies for the carrier. Rather, it wentthrough an MGA. The court concluded that the broker was not anagent of the carrier. Consequently, the fact that the insuredprovided the written tolling agreement to the broker did notsatisfy the policy requirement that written notice be received byan “authorized agent” while the policy was in force. Therefore, thecourt said, the policy's notice requirement was not satisfied, andthe carrier was not bound to indemnify or defend. If any negligenceexisted in this matter, the court said, it was on the part of thebroker. It was undisputed that the subagent and broker were agentsfor the insured in the procurement of the policy, servicing of thepolicy, and for the purpose of giving notice of claims.

The appeals court reversed the trial court and sent the caseback down for entry of a judgment in the carrier's favor, and forpossible further proceedings concerning the action the insuredfiled against the broker and subagent.

Marlin & Edmondson P.C. v. National Union Fire Ins. Co.of Pittsburgh, PA., No. M2004-02280-COA-R3-CV (Tenn.App.12/22/2005) 2005.TN. 0002025 (www.versuslaw.com)

Don Renau is a retired agent and practicing attorney inLouisville, Ky. As an attorney, he consults for agencies andbusinesses in Kentucky. He also conducts P&C insurance trainingby line (non-CE credit) for agencies, either in person or by CD. Hecan be reached at [email protected] or at (502) 893-202.