Down To Cases

In January 2000, the captive notified the PEO that it was increasing its rate from 0.81% to 1.84%, a significant change. In response, the agent provided the PEO with other workers compensation insurance quotes. One plan required a $75,000 up-front payment. The agent sent the PEO a contract, in case the PEO wished to participate in that plan, but the PEO never executed it. The agent also presented the option of temporarily transferring the PEO's employees to the policy covering the second PEO. The agent also mentioned that he was establishing his own captive that, when operational, would be another option for the PEO.

After analyzing the various options, the PEO's owners and the agent agreed that the best one would be to add the PEO's employees to the policy covering the second PEO until the agent's captive was operational or a better master policy quote could be procured. The PEO's coverage under the captive lapsed in March, at which time the PEO's employees were added to the policy written for the second PEO.

On April 3, 2000, the workers compensation carrier insuring the second PEO sent the owners a notice advising them that their policy would be cancelled on June 4 due to "underwriting reasons." According to the owners, an employee of the agency told the first PEO's benefits coordinator that the insurer cancelled the policy because the agency had failed to inform the insurer of the transfer, which tripled the insurer's risk. The husband of the couple owning the PEO immediately called the agent to discuss accepting the previously presented alternative quote. He said the agent told him not to worry because his captive would be operational before the effective date of the cancellation. The owners also said that when they later contacted the agent to again discuss accepting the alternative quote, he told them it was no longer available.

The agent said he tried unsuccessfully to procure other workers compensation insurance for the two PEOs during April and May. The owners said the agent assured them during this period that either his captive or another insurance company would provide them a master policy. They said that, as time passed, the agent failed to offer any options or encourage them to pursue other avenues. In mid-April, the husband-owner began writing letters to the agent expressing his continuing concern over the lack of a replacement master policy. He said he finally spoke with the agent on May 31–four days before the effective date of his existing coverage's cancellation. He said the agent told him he was optimistic that he could get the insurer to rescind the cancellation and was waiting on a call back from the carrier. In the end, the insurer refused to rescind the cancellation.

On June 2, an agency employee contacted the owners and asked them to immediate wire $161,000 so the agency could temporarily place the two PEOs in the state's assigned risk pool, with coverage to take effect on June 4. According to the owners, the "exorbitant" cost of workers compensation coverage through the assigned risk pool caused them to lose profits and market share. On June 5, the wife-owner met with the agent, who said he was 90% sure his captive would be operational by July 1. He also stated that he had submitted the two PEOs for underwriting with another insurance company and was awaiting a response.

Nothing came of the options discussed at the June 5 meeting. The agent's captive never was established. The PEO's owners terminated their relationship with the agent and engaged the services of another agent, who obtained individual policies for the two PEOs outside the assigned risk pool. The new agent could not procure a master policy for either PEO, however. The owners changed agents again, but the third agent also could not procure a master policy.

The owners sued the first agent, contending that he breached a contract to "timely procure workers compensation coverage at a lower premium" and negligently failed to obtain a master workers compensation policy at a discounted rate. The agent denied the allegations and asserted that his failure to obtain the desired insurance coverage was due to changes in the market beyond his control. The owners claimed they were placed at a competitive disadvantage by not having a single master workers compensation policy with a discounted rate. Their complaint sought $2 million in damages for the increased workers compensation premiums and "loss of business growth."

After the owners presented their proof at trial, the agent moved for involuntary dismissal. The trial court granted the motion, concluding, in pertinent part: "Plaintiffs failed to introduce any evidence of a contract with (the agent) by which he agreed to provide them a master policy at any rate, much less a discounted rate. Plaintiffs likewise failed to introduce any evidence that any insurance company would have issued a master policy to (the first PEO) at any rate, much less a discounted rate. Plaintiffs failed to introduce any evidence of what discounted premiums were available in the market at this time, even if a master policy had been procured. In fact, (the husband-owner) testified that his volume of premiums, an amount below $1 million, made him ineligible for programs that offered discounted premiums. Likewise, the testimony was that even with a master policy, the discounted rates would vary from program to program, or carrier to carrier. Indeed, it appears that (the first PEO) currently receives some discount, but the discount may not be as great as that which (the first PEO) had at one time with (the captive) and it does not result from a master policy."

During the trial, the owners' counsel was asked if he could "show that there was other insurance you could have gotten at a favorable rate?" While counsel stated "Yes," it did not introduce such evidence, nor did it introduce evidence that the first PEO could qualify for a master policy at discounted rates or even what discounted rates were available in the marketplace.

The trial court observed that the owners had not suffered an uncovered workers compensation claim that, as a result of the failure to obtain a master policy, would otherwise have been insured. In fact, the workers compensation policies provided by the assigned risk pool and the open market were the same. Therefore, coverage was not at issue. This case was solely about economic losses the owners claimed they sustained because the agent failed to obtain a master policy at a discounted premium, the trial court said.

To support the claim for damages, the owners had to show that the agent was negligent and that his alleged negligence caused them to suffer economic loss. To prove causation, the owners needed to establish they were eligible for a master policy with a discounted premium, and that master policies with discounted premiums were available and could have been obtained for them. The trial court concluded that the plaintiffs failed to meet this burden of proof. The owners appealed.

The issues on appeal were: 1) Whether the trial court erred in granting the agent's motion for involuntary dismissal and finding that the plaintiffs had failed to present a prima facie case of negligence. 2) Whether the trial court erred in finding that the owners had failed to prove that the agency had breached its contract with the owners to create a captive to provide the owners with a master policy. 3) Whether the trial court erred in placing the burden on the plaintiffs to prove that an insurance company would have issued a master workers compensation insurance policy covering the plaintiffs.

In regard to the first issue, a successful negligence claim requires a plaintiff to establish, by a preponderance of the evidence, each of the following elements: (1) a duty of care owed by defendant to plaintiff, (2) conduct below the applicable standard of care that amounts to a breach of that duty, (3) an injury or loss, (4) cause in fact and (5) proximate, or legal, cause.
The plaintiffs argued that the agent breached his duty to use reasonable care and diligence (1) by not notifying the insurer of the second PEO of the transfer, which led the insurer to cancel the plaintiffs' policy, (2) by allowing the insurer to unlawfully cancel the policy, (3) by not accepting the alternative quote and allowing it to expire, (4) by failing to give the plaintiffs timely notice that the agent could not obtain a replacement master policy, and (5) by failing to implement his own captive insurance company.

The appeals court found that the evidence did not support the first charge. It noted that the reason the insurer gave for the cancellation was that of "underwriting reasons," nothing more. The plaintiffs said that "underwriting reasons" was not a permissible cause for cancellation under the state's insurance statutes. The appeals court said that while the plaintiffs may have a claim against the insurer if the cancellation did indeed violate state law, "there was absolutely nothing to suggest that (the agent) had the power, much less a duty, to require (the insurer) to rescind the cancellation."

In regard to the plaintiffs' third argument, the appeals court noted that the record clearly showed that the agent presented the alternative quote to the plaintiffs, along with an application. The plaintiffs and the agent discussed the quote and other workers compensation insurance options, the court noted, and the plaintiffs decided to opt for transferring coverage for the first PEO's employees to the second PEO's workers comp policy. The appeals court noted there was nothing to suggest that the plaintiffs instructed the agent to accept the alternative quote or that the agent ignored such an instruction. After more time had passed, the husband-owner asked the agent to accept the quote, but it had already expired. The appeals court concluded that the agent used reasonable care and diligence in his handling of the alternative quote.

In regard to the plaintiffs' fourth argument, the appeals court said the evidence indicated that, contrary to the plaintiffs' allegations, the agent made them aware of the problems in the PEO insurance market. The plaintiffs knew of the agent's difficulties in locating a replacement master policy, much less one with a discounted rate.

The appeals court also found the plaintiff's fifth argument–that the agent failed to implement his own captive–to be without merit. The court noted that when the agent discussed the captive, he stated that it was not operational, but he anticipated that it would be in the near future. The appeals court said the reason the agent failed to establish a captive was not clear from the record, but the available evidence did not support a charge that the agency was negligent for failing to set it up or for failing to notify the plaintiffs that the captive would not be operational in time to address their needs.

The plaintiffs relied extensively on another case, Wood v. Newman, Hayes & Dixon Ins. Agency, 905 S.W.2d 559 (Tenn. 1995). In it, an agent was unable to renew a client's all-risk property policy on a marina and secured named-perils coverage instead–without informing the client. When the client's property was damaged by an event that was not covered by the named-perils policy but would have been by the all-risk policy, the state Supreme Court found the agent negligent for failing to inform the client of the change in coverage so she could have pursued other options.

But in the case at hand, the appeals court said, lack of coverage was not the issue. The agent had procured for the plaintiffs replacement coverage that was identical to what they previously had. "Granted, the coverage procured by (the agent) did not come with the low premium desired by the plaintiffs or in the form of a master policy," the appeals court said, "but at no time were the plaintiffs without workers compensation coverage."

The court said that even if the agent's actions had risen to the level of a breach of duty, the plaintiffs would still have a problem establishing causation. The record showed that, given the market conditions, a master policy similar to what the plaintiffs previously had was unavailable. The plaintiffs testified that they did not meet the $1 million premium requirement to qualify for a master policy. Furthermore, the two insurance agents who later attempted to locate insurance for the plaintiffs also could not procure a master policy. The plaintiffs failed to introduce any evidence that they could have obtained a master policy. Therefore, said the appeals court, they could not say that their economic losses–their higher cost of workers compensation insurance and loss of business growth–would not have occurred "but for" the agent's actions.

The third issue was whether the trial court erred in finding that the plaintiffs had the burden of proving the existence of an insurance company that would have issued them a master policy, rather than finding that the agent had the burden to prove that there wasn't one. In addressing it, the appeals court said the evidence clearly showed that market conditions caused the plaintiffs' economic losses. They were required to provide evidence to the contrary–i.e., that a master policy or, at a minimum, other comparable insurance coverage, was available to them in the market at a lesser cost than they ended up paying. "Their failure to provide such evidence leaves an essential element of their negligence claim–the cause in fact element–without support in this record," the appeals court said.

The plaintiffs also contended that the trial court erred in finding that they failed to present sufficient evidence to establish that the agent breached a contract by not creating his captive. The plaintiffs claimed the agent "offered" to establish the captive and that they accepted the "offer."

The appeals court replied that the evidence shows that both parties knew that the captive was in the planning stage and not operational. Both parties anticipated that the captive would be up and running in the near future. Still, the appeals court said the evidence did not suggest that the parties agreed in contract that the captive would eventually be created, and that it would provide a master policy to the plaintiffs. The trial court judgment was affirmed.

Administrative Resources, Inc. v. Barrow Group, LLC, No. E2005-01792 COA-R3-CV (Tenn.App. 07/31/ 2006) 2006.TN.0001082 (www.versuslaw. com).

Don Renau is a retired agent and practicing attorney in Louisville, Ky. As an attorney, he consults on a variety of issues, including business formation and estate planning, for agencies and businesses in Kentucky. He can be reached at drenau@thepoint.net or, by fax, at (502) 805-0702.