Agents' Claim against Professional E&O Insurers
Miller v. Westport Ins. Corp., 2009 WL 211734 ( Kan. ) is a contract case involving an insurer's duty to defend on an errors and omissions policy. The plaintiffs were licensed insurance agents who referred several of their clients to John F. Usher and Associated Financial Solutions, Inc., a non-profit company offering debt adjustment services. Usher, the owner of Associated, absconded with the clients' funds while he was under investigation by the Kansas Attorney General's office. The agents made claims under their professional E&O insurance policies with defendants Westport Insurance Corporation and Employers Reinsurance Corporation and coverage was denied. The insurers asserted that the agents' claim did not arise out of services rendered as licensed insurance agents. The agents settled with their clients and again sought coverage and were unsuccessful, and the defendants cited several policy exclusions to support their denial. The agents then filed an action in the district court, which granted the insurers' motion for summary judgment. The court of appeals affirmed, and the Supreme Court of Kansas granted the agents' petition for review.
The supreme court addressed the question of whether the lower courts erred in concluding that insurers Westport and Employers had no duty to defend the agents. All three agents had sold insurance for Woodmen Accident and Life Insurance Company, which required its agents to investigate clients' needs and financial ability. In the course of their business, the agents referred certain clients to Associated to enable the clients to pay insurance premiums and fund their purchase of other insurance products. They continued to refer clients to Associated for approximately a year before the agents' clients complained that their debts were not being discharged and that they could not get in touch with Associated.
The agents claimed they did not know that Associated was not authorized under Kansas law to perform debt adjustment. The agents denied any wrongdoing and refused to enter into a consent judgment, but they did agree to reimburse their clients for monies paid to Associated.
Each of the agents was at all pertinent times covered by a professional errors and omissions policy with defendants Westport and Employers. The agents duly notified the insurers of their claim for coverage under the policy. The agents' claim included losses sustained by the 12 clients who had been referred to Associated.
The E&O policy on which agents relied provided coverage for loss “caused by any 'wrongful acts' committed by the 'insured agent,' arising out of the conduct of the business of the 'insured agent' in rendering services for others as a licensed life, accident and health insurance agent.” It also provided that Westport and Employers would “have the right and duty to investigate, defend, conduct settlement negotiations and enter into settlements for any 'claim' or 'suit' for which coverage is provided by the terms of this policy” and would pay “all expenses incurred in the defense of any 'claim' or 'suit' against the insured alleging any covered 'wrongful act,' and seeking 'loss' on account thereof, even if the 'claim' or 'suit' is groundless, false, [or] fraudulent.” The policy defined “wrongful act” or “wrongful acts” to mean “any negligent act, error, [or] omission … committed or alleged to have been committed by the insured agent.”
The relevant policy exclusions stated that coverage did not apply to “any intentional, dishonest, fraudulent, criminal or malicious act, or assault or battery committed by or contributed to by any insured or to any 'claim' arising out of or in connection with a fraudulent or nonexistent entity.”
The district court ruled that neither side fully addressed whether the agents committed a 'wrongful act.' The court reasoned that a “wrongful act” was defined under the policy as a negligent act; and, because there was no evidence that the agents could have foreseen Usher's theft of their clients' money, the agents were not negligent and thus did not engage in wrongful conduct. In addition, even if the agents did owe a duty to their clients, the clients' losses did not arise out of the agents' referrals to Associated. Rather, the proximate cause of the losses was Usher's theft of funds, which was not a natural and probable consequence of the agents' referral of clients to a company without the correct legal status. The court granted the defendants' motion for summary judgment and suggested that the agents' only recourse would be to “chase the thief.”
The court of appeals reached the same conclusion, while holding that the agents' referrals to Associated were not negligent and thus no coverage was triggered. The panel also addressed the agents' argument that the question of proximate cause should have gone to a jury, concluding that the agents' conduct could not, as a matter of law, be the proximate cause of their clients' losses because the theft by Usher was not foreseeable. The court then addressed the agents' argument that the policy covered allegations of negligent acts as well as the acts themselves. Although the court agreed, it held that the agents failed to establish there had been any such allegations.
In the decision by the Supreme Court of Kansas, the court held that, under Kansas law, lawsuit pleadings were merely a starting point for a duty to defend analysis. An insurer must additionally consider actual facts of which it is or should be aware when evaluating its duty to defend. Under this extrinsic evidence approach, the insurer's duty to defend still hinged on the potential for coverage, although the universe of information from which that potential must be ascertained was much greater than the universe used in an approach limited to the eight corners of a pleading and the applicable insurance policy.
Although the insurers argued that the clients' allegations against the agents did not arise out of the “conduct of the business of the 'insured agents' in rendering services for others as a licensed life, accident and health insurance agent,” the court found that, at a minimum, under the extrinsic evidence approach this raised an ambiguity to be resolved in favor of the insured agents on the coverage/duty to defend issues.
The court also rejected the defendants' argument that the facts as known or as reasonably should have been known to them excused their duty to defend the agents. The exclusion for “any intentional, dishonest, fraudulent, criminal or malicious act” which insured agents committed or contributed to did not relieve the insurer of the duty to defend the agents as the agents did not necessarily contribute to the fraud by their referrals.
Finally, the court considered the policy's exclusion of coverage for “any 'claim' arising out of or in connection with a fraudulent or nonexistent entity.” The court determined that Usher committed dishonest and fraudulent acts and otherwise failed to comply in certain respects with Kansas law, but, on this record, it appeared the Associated entity nevertheless existed as it was incorporated for ostensibly lawful purposes. Thus, this exclusion also did not relieve defendants of their duty to defend the agents.
Having determined that a duty to defend arose and was not undercut by the policy exclusions advanced by defendants, the court held that summary judgment in favor of the defendants must be reversed and entered instead for the plaintiff agents.
There was no compliance with the contractual duty to defend, and, as a direct result, the plaintiff agents incurred defense and settlement costs
The case was therefore reversed and remanded with directions to the district court.