When agents and brokers go to trial on errors and omissions matters, they should be prepared for the possibility that unrelated and wholly irrelevant prior missteps can rear their heads at trial.

That's just one of the lessons of a 2007 insurance broker E&O case, which started with an underwriter's mistake and a broker's failure to renew a policy with the same terms as an expiring one.

LESSON 1: REVIEW EXPIRING COVERAGE

The most basic lesson of the case, Haynes v. Edgerson, is that a request for a policy renewal is not always as simple as it seems.

In Haynes, a Missouri appellate considered the basic issue of whether a broker met his requirement to procure requested coverage or advise of the inability to do so within a reasonable time period.

The broker's failure to renew the policy with the same terms ultimately put him on the receiving end of a lawsuit alleging breach of duty, although his fate is yet to be decided, because some tactics used by plaintiffs' lawyers to tarnish the broker's character resulting in a Missouri appellate court's decision to grant a new trial.

The underlying situation in Haynes involved the owner of a banquet hall, who was sued for wrongful death after an individual attending a birthday party at the banquet hall was shot and killed during the event. A jury verdict was returned against the banquet hall's owner, in the amount of $5 million, and he was also hit with an additional award of $560,000 in post-judgment interest.

After the suit was initiated, the banquet hall's owner notified his general liability insurer, and requested that he be provided with indemnity and a defense. The insurer denied the claim, because the policy contained an exclusion for claims arising from “assault and battery.”

When the policy had first been issued, it actually included coverage for assault-and-battery claims. This was apparently a mistake by the underwriter, however, which would normally have included an exclusion for such coverage absent a request for this specific coverage and payment of an additional premium.

Prior to expiration of the policy, the insured requested that coverage be renewed. On renewal, the broker submitted the same application form he had submitted when he first procured the liability coverage. This time, however, the policy issued contained an assault-and-battery exclusion.

The broker accepted this coverage, ultimately leading to denial of the claim arising from the shooting incident. Left without coverage for the wrongful death award, the banquet hall owner sued his broker, alleging that the broker had breached a duty of care to him by failing to procure coverage which did not contain an assault-and-battery exclusion.

A jury awarded the banquet hall owner a verdict for $5.73 million against the broker, to be reduced by 25 percent due to his comparative negligence, leaving the insured with approximately a $4.3 million award.

At the close of trial, the broker moved for a judgment notwithstanding the verdict, on the grounds that the insured banquet hall owner had not presented a “submissible case.” This motion was denied and, on appeal, the broker argued that this was error.

In making the argument on this point, the broker contended that he had no continuing duty to this insured with respect to providing advice or guidance from one policy to the next. He resubmitted the same policy application, received a policy, and the insured accepted it. That, he argued, was all he was required to do.

The appellate court rejected this argument on the grounds that this case was not about a continuing duty from one policy to the next. Instead, the court said it was about the fact that the broker had been requested to procure the same coverage as had previously been in place, and failed to do so or advise his client of this.

Significantly, the broker admitted that he did not review the first policy before procuring the second. The court found that he had a duty at the very minimum to review the first coverage before seeking renewal, and check to see if he had actually been offered the same coverage.

LESSON 2: PAST SINS CAN HAUNT YOU

At trial, the insured's lawyer had been successful in convincing the trial court judge to allow him to cross-examine the broker about complaints to the Missouri Department of Insurance that were completely unrelated to the claims at hand, including one hinging on the brokerage's failure to refund a premium paid after a policy had been canceled.

This is a not uncommon gambit–to try and paint the broker as a “bad guy” and prejudice the jury against him.

While it worked at trial, on appeal the judge's decision to allow this line of questioning was deemed reversible error. Accordingly, a new trial was ordered.

This would seem to provide some sense of comfort, but it should not. The fact is that trial court judges are generally accorded a great deal of discretion with regard to evidentiary relevance and prejudice rulings.

Plaintiffs in insurance agent and broker E&O cases will constantly be looking for opportunities to offer evidence tending to tarnish the reputation and reliability of the agent or broker in the eyes of the jury.

Not all appeals of difficult evidentiary rulings will be successful.

LESSON 3: INSUREDS CAN PIERCE THE CORPORATE VEIL

Another issue that came up on this appeal arose because the agent or broker's E&O insurance coverage was insufficient to indemnify an insured's loss.

In such a situation, it is common for plaintiff insureds to seek to hold the owner of the brokerage personally liable, on a theory that the court should pierce the brokerage firm's corporate veil.

Generally, it is extremely difficult to pierce the corporate veil because it requires evidence that the defendant exercised control over the corporate entity, plus evidence that the defendant used that control to commit fraud or violate a legal duty.

In Haynes, however, the insured's lawyer presented evidence that the brokerage firm was undercapitalized from the start.

The appellate court found undercapitalization to be circumstantial evidence of an improper or reckless disregard for the rights of others, and thus ruled that it could form the basis for a claims piercing the corporate veil (i.e., that it could constitute the requisite violation of a legal duty).

See related article, “What Can Insurance Customers Expect?” for a discussion of agents' duties.

Special Reports /

Common Plaintiff Lawyer Tactics Revealed In 2007 Broker E&O Case

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