Agent found not responsible for maintaining low-cost coverage option
In 1994, a professional employer organization (a firm that leases employees to other businesses on a long-term basis while also providing such services as payroll and benefit administration, workers compensation and health insurance for the leased employees) asked an insurance agent to procure workers compensation insurance for the PEO and its customers. The agent introduced the PEO to a captive insurance company–i.e., one owned by its insureds–that was managed by a traditional insurance company.

The captive issued a master policy to the PEO that covered all its employees. The rate for the master policy was set at a significant discount, which enabled the PEO to pay less for workers compensation coverage than its customers collectively would have had to pay for individual coverage. The PEO made a profit by billing its clients for an amount higher than the discounted price.

In 1998, the PEO formed a second PEO to shift its employees working for higher-risk clients–e.g., construction companies–to another insurance policy. These employees posed a higher risk for injury than the captive would accept. The second PEO procured workers compensation coverage from a traditional insurer. Like the captive, it issued a single master policy that covered all of the second PEO's employees.