IA 00 01–INSURANCE AGENTS AND BROKERS PROFESSIONAL LIABILITY POLICY ANALYSIS

Insurance Agents and Brokers Professional Liability Policies have been available for a number of years from a variety of carriers. IA 00 01–Insurance Agents and Brokers Professional Liability Policy is the first Insurance Services Office (ISO) policy that provides this coverage.

This policy begins by stating that it is a claims-made policy. This means that only claims first made during the policy period or during an extended reporting period may potentially be covered.

The policy also states that certain policy provisions restrict coverage. It encourages the named insured to carefully read the policy in order to understand each party’s rights and duties and to determine what is covered and not covered. It also points out that the terms you and your refer to the named insured. The terms we, us, and our refer to the insurance company that provides the coverage. Section VII–Definitions should be reviewed because certain terms used in the policy have meanings that affect the coverage being provided.

SECTION I–INSURANCE AGENTS AND BROKERS PROFESSIONAL LIABILITY COVERAGE

A. Insuring Agreement

1. The insurance company agrees to pay amounts the insured is legally obligated to pay as damages because of a wrongful act. However, this insurance must cover the wrongful act.

The insurance company not only has the right to defend any suit brought against the insured, it also has a duty to do so. That duty, which can be very expensive, does not apply to suits brought for wrongful acts that this insurance does not cover.

The insurance company decides what is investigated. This is very important because Section VI–Conditions states that the named insured is required to report all incidents of wrongful acts. The insurance company receives that information and decides when and if it will investigate such incidents.

The insurance company can settle any claim that may result from an incident. However, the named insured must agree, in writing, to any settlement prior to its being made. This is important to protect the reputation of the insurance agent. However, it is not without consequence. Section VI-Conditions B. Consent to Settle explains that the insurance company does not pay more on the claim than the amount it could have settled for but didn’t because of the named insured’s refusal.

Example: Jerry sues Marcy. Marcy’s carrier, Happy Insurance, works with Jerry and they agree to settle for $150,000. Happy presents the settlement to Marcy who adamantly refuses to agree to a settlement. Happy withdraws the settlement offer and the case proceeds to trial. Jerry is awarded $450,000. Happy Insurance pays only $150,000 of the award. Marcy must pay the remaining $300,000.

The amount this policy pays is in accordance with Section IV–Limits of Insurance. The insurance company no longer has a duty to defend once payments under this policy use up the limit of insurance.

Example: Hazel is an employee of Best Agency Ever, Inc. She made a series of mistakes that resulted in 150 policyholders not having coverage when a tornado devastated the community. Best Agency’s carrier, Trusted Friend Insurance Company, paid the $1,000,000 limit in settlements. It then notified Best Agency that it would no longer defend or pay claims because the limit was used up.

2. The only additional obligations that the insurance company has beyond what is described in 1. above, are those items specifically described in Paragraph C. Supplementary Payments.

3. Wrongful act(s) that this policy covers must meet all of the following conditions:

Take place in the coverage territory
Begin on or after the Retroactive date and before the policy period ends
The resulting claim must first be brought during the policy period or an extended reporting period.

Note: Items 4. and 5. below explain what this means.

Example: Christopher is an enthusiastic producer. He meets Joanie on a Mediterranean cruise and agrees to bind her Homeowners coverage. He uses his tablet computer to forward all information to his office staff and Joanie contacts her current carrier and orders it to cancel all coverage. Joanie presents a claim for a stolen necklace to the Homeowners carrier a year later. The carrier denies coverage because Christopher did not bind a jewelry floater. Joanie sues Christopher in Amsterdam, her current place of residence. Christopher’s professional liability carrier denies coverage.

4. The date a claim is deemed to have been received by the insurance company is important because that date determines coverage. It is the earliest of the following:

When the claimant presents a claim to an insured, the date the insurance company is notified of that claim. The notice to the insurance is not required to be in writing but the written notice is to follow as soon as practicable.
The date a claim is presented, in writing, directly to the insurance company by the claimant.

A claim that the insurance company receives from an insured within 30 days following the policy period is considered received within the policy period. However, this grace period does not apply if there is an Extended Reporting Period in effect or if another policy is in effect.

Example: Penelope’s policy is in effect from 03/01/19 to 03/01/20. A claim is presented on 03/15/20.

Scenario 1: Penelope’s policy was allowed to lapse and the Extended Reporting Period was not activated. The claim is considered part of the 03/01/19 to 03/01/20 policy.

Scenario 2: Penelope’s policy was cancelled and Penelope purchased the Extended Reporting Period. The claim is considered part of the Extended Reporting period for the 03/01/19 to 03/01/20 policy period.

Scenarios 3: Penelope’s policy renewed on 03/01/20. The claim is considered part of the 03/01/19 to 03/01/20 policy period.

5. The named insured cannot simply wait for a claim to be presented. It has a responsibility to notify the insurance company whenever a situation arises and the named insured can reasonably conclude that a claim against this policy might occur. The claim date is the date that the situation is reported to the insurance company.

Example: On March 5, Paul, the agency principal, overheard Jack, his new producer, advise a customer to not purchase flood insurance because of the cost. Paul questions Jack about this. Jack explains that he gave the same advice to 50 other customers located in flood zones because he thought they would receive free emergency payments through FEMA. Paul immediately notifies his insurance carrier of potential claims. He also begins to contact all of Jack’s clients to correct the mistake. The claim date is March 5.

6. All claims that result from the same wrongful act are considered a single claim. The date of that single claim is the date on which the first claim was reported.

Example: The rains started on March 6. Paul and his staff contacted all of Jack’s clients but could not bind coverage for any of them who requested coverage because of NFIP rules. Seven clients sustained flood losses that would have been covered had flood insurance been purchased. The claims were presented on different dates but all are assigned the same claim date of March 6. The total payment for these claims is subject to a single limit of insurance.

B. Exclusions

This insurance coverage does not apply to any of the following, except as noted:

1. Abuse and Molestation

Coverage does not apply to any claim that is related to abuse or molestation that occurs while an insured is providing professional services. This exclusion applies regardless of who is abused and who does the abusing. The exclusion applies if the abuse or molestation actually occurred or was only threatened.

Example: Gretchen was desperate. She was the bookkeeper for Glad Foods. She forgot to pay the renewal premium and just received the nonrenewal notice. She visited Stephen, Glad’s insurance agent, and asked what he could do to protect her from her boss’ wrath. Stephen suggested that they have dinner together to discuss a mutually satisfactory resolution to the problem. The problem is resolved but Gretchen regrets her actions and files a molestation action against Stephen six months later. Stephen presents the claim to his insurance carrier to defend but the carrier denies the claim.

2. Bodily Injury or Property Damage

This policy covers wrongful acts or professional liability. It does not cover bodily injury or property damage. Commercial General Liability Coverage Forms and Policies provide that coverage.

3. Business Enterprise

a. Professional services that are rendered on behalf of the named insured or any predecessor organization are covered. Coverage does not apply to services that are rendered on behalf of any of the following business enterprises:

· One that an insured or an insured’s spouse owns or controls

· One that an insured or an insured’s spouse operates or manages

· One in which one or more insureds and/or insured’s spouses have more than 10% control or ownership

Example: Jerry is a partner in Jones and Jones, LLP. His wife, Karen, is a producer for Smith Financial Services. A client of Jones and Jones names Karen in a suit because of insurance advice she provided. Smith’s professional liability does not cover Karen because she rendered her professional services on behalf of Jones and Jones, her husband’s business enterprise.

b. Any claim brought by any of the following business enterprises is excluded:

· One that an insured or an insured’s spouse owns or controls

· One that an insured or an insured’s spouse operates or manages

· One in which one or more insureds and/or insured’s spouses have more than 10% control or ownership

Example: Connie is the top producer at Great Agency, Inc. Millie, the receptionist at Great Agency, and her husband own a restaurant. Connie writes all of their insurance coverage. A fire damages the restaurant. The claim for the loss is presented but the insurance company denies it because the policy was allowed to lapse. Millie and her husband sue Connie but the insurance company denies coverage because Millie is an insured at Great Agency, Inc.

Note: Coverage under this policy is for the named insured’s benefit. This means that there is no coverage for claims presented for businesses that are not the named insured or a predecessor organization.

4. Contractual Liability

There is no coverage when liability for a wrongful act was assumed in a written contract or agreement. However, coverage does apply if the insured would have been liable without such a contract or agreement.

5. Criminal, Fraudulent, Malicious, Dishonest, or Intentional Acts

Coverage does not apply when a claim is made because an insured committed criminal, malicious, fraudulent, or dishonest acts. It also does not apply when a claim arises from acts, errors or omissions that are intentional. However, this exclusion does reach out and exclude all insureds because of one insured’s excluded actions. Innocent insureds remain covered but only if they meet this form’s definition of innocent insured.

Insureds are considered innocent when they meet all of the following conditions:

They did not commit the act.
They did not assist or participate in the act.
They did not agree that that the act was acceptable.
After finding out about actions excluded in this paragraph, they did not remain passive.

Note: Section II–Coverage Extensions B. Protection for Innocent Insureds provides coverage for innocent insureds.

The insurance company is required to defend an insured until it is determined that the excluded acts were actually committed by that insured.

Example: Bob sues Peter and his employer, Surety Bonding Agency, for breaking Bob’s confidence and providing confidential financial information to Bob’s estranged wife. Peter denies the allegation. Surety Bonding’s insurance company investigates the allegation and defends both Peter and Surety Bonding. When the allegation is proven true, Surety’s insurer stops defending Peter but continues to defend Surety Bonding because it did not know about Peter’s intentional act.

6. Discretionary Investments

There is no coverage for securities advice or securities investments. The only exceptions are the ones related to variable annuities or variable life insurance.

7. Discrimination

There is no coverage for claims related to discrimination. There are no exceptions.

8. Electronic Data

Coverage does not apply to damages that arise out of the loss of, loss of use of, damage to, corruption of, inability to access, or inability to manipulate electronic data.

Electronic data is defined as information, facts, or programs used with computer software or any other media used with electronically-controlled equipment.

9. Employment-related Practices

All employment-related practices acts, errors, omissions or policies are excluded. Examples include wrongfully terminating or refusing to hire; promotions, demotions, evaluation, reassignments, and discipline; and slander, harassment, humiliation, libel, or slander.

Example: Willing Hands Agency employs ten producers and five customer service representatives. All producers are male. Four CSRs are female and one is male. The male CSR is offered a position as a producer even though he has been a CSR for only a short period of time. The four females sue Willing Hands. This policy does not provide defense coverage in this case.

10. ERISA

Coverage does not apply to any actual or alleged violation of the Employee Retirement Income Security Act of 1974 (ERISA) on behalf of any insured party that is considered a fiduciary or trustee of the plan.

11. Failure to Disclose Compensation

There is no coverage for claims brought against an insured because of failing to disclose the way compensation is received for providing the professional services.

Example: Edgar Agency operates in four different states. One of the states requires that all quotations and bills clearly state the way the agency receives its compensation. A quotation Edgar gives to a potential client in that state does not provide the required information. A competing producer informs the customer and the insurance commissioner of the violation. Edgar does not have any coverage for any fines or subsequent actions because of this oversight.

12. Fungi or Bacteria

Claims related to any effects of fungi or bacteria within a building are excluded. There is also no coverage for any actions taken concerning fungi or bacteria such as abating, testing, or assessing its existence, regardless of the party that takes or requires such actions.

13. Improper Use of Funds

Insurance agents collect premiums from their clients and forward them to the insurance company. This very important responsibility is spelled out in contract language, insurance department regulations, and statutory accounting guidelines. Violations of this fiduciary responsibility are not covered under this policy. Specifically, any claim with respect to such funds from any of the following actions is excluded:

Conversion
Defalcation
Commingling
Embezzlement
Misappropriation
Improper Use

Note: Defalcation means gross recklessness with respect to use of money entrusted to a fiduciary.

Example: Jerry receives a 100% guaranteed tip on a horse running at the local track. He is short on funds but decides to make a loan to himself in order to place the bet. He makes the bet and is rewarded for it. He then returns the borrowed funds. While this transaction did not result in loss of funds, Jerry is guilty of defalcation because he was grossly reckless with the funds entrusted to him and the way he used them was not approved.

Claims that involve profit, remuneration, or any type of illegally gained monetary advantage are also excluded.

Example: James received a quote from A&B Excess for $10,000. However, he told his client, Greg, that the premium was $100,000. A&B issued the policy and James kept the $90,000. Greg discovered the truth and sued James. There is no coverage for damages due to James illegally profiting from the transaction.

Coverage does not apply when a claim is brought because funds are not paid, collected, safeguarded, or returned.

Example: Hunter’s Insurance cancels Derrick’s policy less than 60 days after it was issued. Derrick asks Pamela, his agent, for the return premium but Pamela always refuses. After two years pass, Derrick sues Pamela for the return premium. There is no coverage in this case.

However, this exclusion does reach out and exclude all insureds because of one insured’s excluded actions. Innocent insureds remain covered but only if they meet this form’s definition of innocent insured.

Insureds are considered innocent when they meet all of the following conditions:

They did not commit the act.
They did not assist or participate in the act.
They did not agree that that the act was acceptable.
After finding out about actions excluded in this paragraph, they did not remain passive.

Note: Section II–Coverage Extensions B. Protection for Innocent Insureds provides coverage for innocent insureds.

The insurance company is required to defend an insured until it is determined that the excluded acts were actually committed by that insured.

14. Insolvency

The financial condition of an insurance carrier is very important to a client and it can be expected that a claim might result if a carrier becomes insolvent and the client is left without insurance. This exclusion is unusual in that the exception to the exclusion depends on the A.M. Best Company, Inc. rating. If the rating of the carrier is B+ or better this exclusion does not apply.

However, if the rating is less than B+ any claim that results from an insurance carrier, reinsurer or other entity that assumes risk becoming insolvent, bankrupt, liquidated, placed in receiver shop or unable to pay is excluded.

Example: Mike offered three different options to his client, Tough Product. Two were with B+ carriers but the third carrier was unrated. Mike explained the reasons he was concerned with the third carrier, but Tough Product insisted on the lowest possible premium because it offered Commercial General Liability coverage on an occurrence basis. The policy was issued for one year. Four years after the policy was issued, Tough Product forwarded a claim against it to the carrier. Mike had to tell Tough Product that the carrier was insolvent. Tough Product sued Mike for recommending the carrier. Mike’s insurance company denied coverage because of this exclusion.

15. Insured versus Insured

There is no coverage for any claim that one insured brings against another insured.

16. Invalid or Unobtained License

All states require that agents be licensed to provide professional services. This insurance does not provide any coverage when a license is required for the services but the insured did not obtain the license or the license was not in effect at the time the services were provided.

Example: Patrick is a licensed producer in a state with mandatory education requirements. His life is hectic and he loses track of time. While reviewing some files one day, he discovers that his license expired ten months ago and he has been operating without a valid license. This policy excludes coverage for any claim for a wrongful act that occurred during those ten months.

17. Multiple Employer Welfare Arrangement

There is no coverage for claims associated with an insured creating, administering, or placing coverage in any type of multiple employer welfare arrangement. The Employment Retirement Income Security Act of 1974 defines this type of arrangement and it must be examined when this exclusion is applied.

18. Mutual Funds

Coverage is not available for any claim that is related to the insured selling or serving mutual funds. This exclusion applies to any type of mutual funds, even those that are part of variable annuities.

19. Notary Claims

Many insurance agents are notaries or employ individuals who are notaries. If a claim arises because such an insured notary authorizes or certifies a signature without actually observing or seeing the signature being placed on the document, there is no coverage.

Example: Joanie is a notary public and an employee of Mainville Insurance Agency. Molly is a Mainville client. She needs to send paperwork to the claims adjuster but Reed, her husband, is out of town on business. Molly had Fred sign the paperwork and brought it to Joanie to notarize. Molly signed the paperwork in front of Joanie but Joanie attested to both signatures. Mainville submitted the claim, the insurance company issued the check, and Molly placed the funds into their joint account just before she removed all the funds in the account and left town. Fred was quite surprised and sued Joanie for attesting to his signature. There is no coverage for Joanie’s action.

20. Other Position or Capacity

The only covered wrongful acts are those related to the named insured or its predecessor organization. Claims that result from any insured providing professional services within another organization are excluded. This exclusion applies if the insured is part of the other organization by choice or was directed by the named insured to serve within that organization.

Example: Petula is an employee of Percy and Sons Insurance Agency. Percy insists that she also serve on the local Fair Board. She helps draw the insurance specifications but recuses herself from selecting the winning bid. One of the pig barns burns down and the Fair Board discovers that the barn was not on the schedule of covered buildings. The Fair Board sues Petula for her wrongful act. Coverage for Petula does not apply because of this exclusion.

21. Personal and Advertising Injury

This policy covers wrongful acts or professional liability. It does not cover personal and advertising injury. Commercial General Liability Coverage Forms and Policies provide that coverage.

22. Pollution

Coverage does not apply to any claim that arises out of the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of pollutants at any time.

Coverage also does not apply to any loss, cost, or expense that arises out of the following:

Any request, demand, order, or statutory or regulatory requirement that any insured or others test for, clean up, treat, respond to, or assess the effects of pollutants in any way
Any claim or suit by or on behalf of a governmental authority because of testing for, cleaning up, treating, responding to, or assessing the effects of pollutants in any way

23. Prior Notice

This policy’s coverage does not apply to any claim for which notice had been given under a prior policy. This applies only if that prior policy provided the same type of coverage that is available under this policy.

Example: Larry notified ABC Insurance Company that it failed to purchase flood coverage that 15 different clients had requested. XYZ Insurance Company provided Larry’s Insurance Agents and Brokers Professional Liability coverage the following year and three clients presented claims because they did not have the flood coverage they requested. XYZ traces these claims to Larry’s notice to ABC the previous year and denies coverage in the current year.

24. Prior or Pending Litigation

The declarations has a space for entering a date for Pending or Prior Litigation. When a date is entered in that space there is no coverage for claims related to any litigation that was pending prior to that date. Such claims are all that arise from the same or similar circumstances or allegations. When the word “None” is entered in that space this exclusion does not apply.

Example: The Pending or Prior Litigation Date is 09/01/16. A claim is presented on 10/01/20. The claims investigation reveals that it is related to a wrongful act that occurred 08/15/15 that is currently in litigation. The claim is forwarded to the carrier who had the coverage on 08/15/15 to be considered with all other pending litigation related to that wrongful act.

25. Related Professional Services

This insurance provides coverage for Insurance Agents and Brokers Professional Liability. This exclusion removes coverage for any other types of professional exposures. As a result, claims presented because of any of the following activities by an insured are excluded:

Accounting
Actuarial
Attorney
Financial consultant or planner
Real estate agent or broker
Managed care provider
Health care services provider
Insurance claims third-party administrator
Public claims adjusting services

26. Viaticals

Coverage does not apply to claims that arise from the insured helping a person use his or her life insurance policy as an investment product.

Example: Patricia has a life-threatening illness. She contacts Mary and explains that she wants to buy life insurance and sell the beneficiary rights to a third party in return for immediate payment now to cover medical and other expenses. Mary arranges for the life insurance and also arranges for five different individuals to be the beneficiaries to pay the premium. Thanks to the money she received from this arrangement, Patricia is cured and the beneficiaries do not receive the intended monetary benefits. They sue Mary because she made the arrangements. There is no coverage for Mary in this case.

Note: Viaticals is selling one’s life insurance beneficiary rights to another party for a price. It is legal but many insurance companies consider it questionable. Many states have imposed regulations that limit its use.

27. Violation of Any Securities Laws

There is no coverage for any claim that is the result from an insured violating the Securities Acts of 1933, the Securities Exchange Act of 1934, or any other similar federal, state, or local regulations that relate to securities.

28. Warranty or Guaranty

There is no coverage for claims that result from an insured providing a guaranty or warranty concerning any type of performance or valuation intended to occur in the future.

Example: We Protect You Insurance Agency guarantees that no insured will ever be underinsured when a loss occurs. Leandra has a significant fire loss. According to the insurance company she is underinsured by 30% which results in a much lower payment than she anticipated. She sues We Protect You for the difference in the settlement plus her costs to prove the loss. There is no coverage for any guarantee although there might be coverage for errors that were made.

C. Supplementary Payments

The insurance company pays the following for any claim it investigates or settles. The company also pays these expenses when they are incurred to defend a suit for which it has a duty to defend.

None of these costs reduce the limits available to pay for settlements, claims, and judgments. In addition, none of them are subject to the deductible.

1. All costs the insurance company incurs

2. If the insurance company pays a judgment, it also pays the prejudgment interest charged against the insured. However, if the insurance company offers the full limits to settle, it does not pay any prejudgment interest that accrues after it makes the offer.

3. Interest that accrues on the full amount (not just the amount within the available limits) of any judgment after it is entered but before the insurance company pays, offers to pay, or deposits with the court the part of the judgment that is its responsibility.

4. Up to $500 per day in lost earnings when the insured must be away from work because the insurance company requests that he or she appear for depositions, hearings, or for other reasons related to defending a claim. The maximum payment is $10,000 per policy year, regardless of the number of insureds.

5. A suit's court costs that are the insured's responsibility. Attorney fees or expenses that the insured is taxed by the court are not covered.

SECTION II–COVERAGE EXTENSIONS

The coverages that this section provides are within the limits of insurance. They are not in addition to the limits of insurance. This means that any payment made under one of these extensions reduces the amount of insurance available to pay other losses.

A. Spousal Liability

Occasionally a claim will include the name of an insured and also the name of his or her spouse. When the spouse is named only because he or she is an insured’s spouse or because of the ownership interest of that spouse in property or assets that are being sought in the claim, this policy will respond.

While the policy does not specifically define the term “spouse,” it does state that a spouse can be a statutory, common law or any other type of spouse as determined by the law of the country.

This Coverage Extension applies only when the claim is presented due to the insured’s wrongful acts. It does not cover any claim that arises due to the spouse’s wrongful acts.

Example: Peter is a producer for Argyle Insurance Agency. He and his wife, Helen, are sued by their former neighbors.

Scenario 1: The neighbors claim that Peter had agreed to handle all payment issues with their insurance carrier and, because of his negligence, their insurance lapsed and resulted in an uncovered loss. Helen is named in the suit against her husband. As a result of this Coverage Extension, Helen is covered.

Scenario 2: The neighbors claim that Peter, as their insurance agent, had agreed to handle all payment issues and that Helen, as their accountant, was responsible for monitoring the insurance payments. The lapse of coverage is due to actions of both Helen and Peter. This Coverage Extension does not cover Helen because she is named because of her active role as bookkeeper, not because she is Peter’s spouse.

B. Protection of Innocent Insureds

Exclusions B. 5. and B. 13. exclude coverage for insureds who engage in certain types of activities. This extension explains that those exclusions do not reach out and exclude all insureds because of one insured’s excluded actions. Innocent insureds remain covered but only if they meet this form’s definition of innocent insured.

Insureds are considered innocent when they meet all of the following conditions:

They did not commit the act.
They did not assist or participate in the act.
They did not agree that that the act was acceptable.
After finding out about actions excluded in either or both exclusions B.5 and B. 13, they did not remain passive.

Example: Ralph’s nephew, Tom, is an accounting major. Ralph hired him and entrusted him with monitoring accounts. Three months later, Ralph begins to receive cancellation notices for customer accounts that were not paid. He confronts Tom, who admits that he had not paid any accounts since he joined the firm. Ralph immediately fires Tom and takes actions to correct the problems. If any claims are brought, Tom is not covered but Ralph is covered because he took immediate action when he discovered the wrongful act.

C. Teaching an Insurance Course

Teaching and attending insurance courses are regular activities for many insurance agents. Information provided at a course may be inaccurate and, when used, result in the student being legally liable due to a wrongful act. This Coverage Extension provides up to $10,000 when such a claim is made against an insured who taught the course. This Coverage Extension is not subject to a deductible.

Example: Albert taught a crop hail course. He provided a written timetable that explained how to submit claims. Unfortunately, the timetable had factual errors due to poor proofing. One of his students used that timetable in providing advice to his policyholders. As a result, one of his clients missed an important date and he did not receive his full payment. The client sued the student and the student then sued Albert. This coverage extension pays up to $10,000 for the claim against Albert.

SECTION III–WHO IS AN INSURED

There are six different types of entities or individuals that are insureds under this policy.

The named insured is an insured. The named insured is the entity or individual listed on the declarations. There can be multiple named insureds.

Any entity listed in the application as a predecessor organization is an insured. The named insured must be the entity’s majority successor of interest with respect to the predecessor organization’s financial assets and liabilities.

The following are insureds if the described relationship is with either the named insured or with the predecessor organization. The insured status applies to only professional services that they perform on behalf of either the named insured or a predecessor organization:

Past or present principals, officers, directors, partners, shareholders, or members
Past or present employees
Independent contractors or salespersons

The following are insureds if an insured, as described above, dies, becomes incapacitated, insolvent, or bankrupt. The coverage available to these insured is the same as that which would have been available to that insured whom they represent:

Estates
Heirs
Trustees
Administrators
Legal representatives

SECTION IV–LIMITS OF INSURANCE

A. The most the insurance company pays are the Limits of Insurance on the declarations, subject to other items in this section. This is regardless of the number of insureds, claims made, suits brought, or number of parties that make claims or bring suits.

B. The Each Claim Limit is the most paid due to all damages that are the result of a single claim. This is subject to the Aggregate Limit.

C. The Aggregate Limit is the most paid for damages because of all wrongful acts that this policy covers.

This section also clarifies how the limits of insurance apply. They apply separately to each consecutive annual period and to any remaining period of less than 12 months. The period begins with the policy period “From” date on the declarations and ends on the policy period “To” date, unless extended after issuance for any additional period of less than 12 months. If the dates are extended the additional period is treated as part of the last preceding period for the purpose of determining the limits of insurance.

Example: Deanna has limits of $1,000,000 per claim and $2,000,000 aggregate. The policy period is 12/15/19 to 12/15/20. She wants the policy period to be changed to 01/01/21 for the renewal. Scenario 1: The 12/15/19 to 12/15/20 policy is endorsed to extend it to 01/01/21. If a new claim is made on 12/17/19, any limits that remain on the policy as of that date are available. The renewal policy is issued 01/01/21 to 01/01/22 and its policy limits are available to future claims. Scenario 2: The 12/15/19 to 12/15/20 policy is renewed from 12/15/20 to 12/15/21. It is cancelled on 01/01/21 and a new policy issued with an effective date of 01/01/21. If a claim is made on 12/17/20, the full limits of the policy effective 12/15/20 are available. If a claim is made on 01/15/21, the full limits of that policy are available for the claim.
Claim amount/date	Scenario 1: 12/15/2016 to 01/01/17	Scenario 2: 12/15/16 to 12/15/17	Scenario 2: 12/15/17 to 01/01/18	Scenarios 1 and 2: 01/01/18 to 01/01/19
$750,000 claim first made on 03/15/19	Paid in full	Paid in full	N/A	N/A
$250,000 claims first made on 06/15/19	Paid in full	Paid in full	N/A	N/A
$750,000 claim first made on 09/15/19	Paid in full	Paid in full	N/A	N/A
$250,000 claim first made on 12/01/19	Paid in full	Paid in full	N/A	N/A
$500,000 claim first made on 12/17/19	Aggregate used up–no payment	N/A	Paid in full	N/A
$500,000 claim first made on 04/14/21	N/A	N/A	N/A	Paid in full

SECTION V–DEDUCTIBLE

This insurance company does not pay anything until damages exceed the deductible on the declarations. It then pays damages that exceed the deductible up to the limit of insurance on the declarations.

The deductible applies on a per wrongful act basis. All claims directly or indirectly related to the same wrongful act are subject to the same deductible.

The insurance company has the right to pay the full amount of the loss in order to reach a settlement and then require that the named insured pay its deductible. The named insured is expected to immediately reimburse the insurance company the deductible amount when asked to do so.

Example: Ten different policyholders sue Charlie’s insurance agency because of a wrongful act on the part of the agency that three different employees carried out. The deductible is $50,000. While ten policyholders filed claims and three employees were involved, there was only one wrongful act and the $50,000 deductible applies only once. The insurance company settles with the ten different policyholders for a total of $160,000. It then contacts Charlie and asks that he pay the $50,000 deductible.

SECTION VI–CONDITIONS

A. Bankruptcy

Bankruptcy or insolvency of the insured or the insured’s estate does not relieve the insurance company of its obligations that are a part of this policy.

B. Consent to Settle

The insurance company has the right and duty to investigate and settle losses as it deems appropriate. However, under this policy the insurance company stipulates that it will not make a settlement until the named insured agrees to it and does so in writing.

Please note that the consent to settle requirement applies only to the named insured. This means that the insurance company is not required to obtain a written consent to settle from any entity who is insured solely because of its relationship with the named insured or processor organization.

Example: George is the top producer at Manderly Insurance Agency. One of his clients sues him for a wrongful act that George swears never took place. George is furious and believes that any settlement will destroy the reputation he has built over the past 20 years. The insurance company recommends accepting a $60,000 settlement agreed upon with the claimant. Manderly’s owners agree that the settlement is in its best interest. George is furious but does not have any say in the matter.

The named insured may refuse to grant permission for a settlement. In that case, the insurance company continues to handle the claim. However, if the ultimate loss is more than the settlement amount the named insured rejected, the named insured must pay all amounts that exceed the settlement amount.

Example: George convinces Manderly to refuse the $60,000 settlement so he can get his day in court. The day comes, the jury rejects George’s version of the events, and awards the policyholder $100,000. Manderly must pay the $40,000 that exceeds the amount in the settlement offer.

C. Duties In The Event of Claim or a Wrongful Act That May Result in a Claim

The named insured (not the insured) has a number of duties to perform when there is a wrongful act or when a claim is presented.

1. The named insured must take the following actions when an insured receives a claim:

Record the details of the claim.
Record the date the claim was received.
Write and notify the insurance company within a reasonable period of time.

2. The named insured must work with the insureds involved with the claim and do the following:

Immediately send copies of demands, notices, summonses, and legal documents it receives in conjunction with the claim to the insurance company.
Provides the necessary authorization so that the insurance company can gather needed records and other information.
Cooperate with the insurance company as it investigates or settles the claim or defends a suit.
Only when the insurance company requests, help it enforce any right against any person or organization that may be liable to the insured for injury or damage that this insurance covers.

Note: The named insured is not to act independently but instead must wait on the insurance company.

3. No insured may voluntarily make any payments, assume any obligations, or incur any expenses without the insurance company's consent. If it does, it does so at its own cost or expense.

4. When the named insured learns of conduct that could lead to a claim, it must notify the insurance company in writing. The time frame is as soon as practicable. The reporting is required when the named insured has a reasonable expectation that the claim could occur. The notification must provide the following:

A description of the wrongful act or conduct. Dates must be included.
Persons who took part in the wrongful act. This means the insureds, the potential claimants and any other relevant persons.
An explanation of why the named insured believes these acts could lead to a claim
The type of damages that may arise from the wrongful act
How the insured discovered that a wrongful act had occurred

Example: Jill lives in the Southwest Subdivision. The Hill Agency sends a general solicitation letter to all who live in the Southwest Subdivision. Jill reads the letter and is very surprised to find a major, unintentional error. She contacts Jerry, the agency owner, to alert him to the error. Jerry is not pleased and realizes that a claim could result from this and prior mailings. He writes a letter to his insurance carrier, includes a copy of the solicitation letter, and explains how his friend Jill realized there was a problem after she received the letter.

D. Subrogation

Any rights the insured has against others to recover all or part of any payment the insurance company makes transfer to the insurance company. The insured must preserve those rights and not do anything after the loss occurs to impair them. The company can request that the insured bring suit or transfer those rights to it and help it enforce them.

Note: An insured can give away its rights to recovery prior to a loss but it cannot give away any of those rights following a loss. This is a very important tool an insurance company will use in seeking reimbursement following a loss so the insured will be required to prove that any such rights were relinquished and when it did so.

E. Other Insurance

The insurance company's obligations to pay are limited if there is other valid and collectible insurance that applies to the loss. If that other insurance uses the same plan, terms, and conditions as this policy, any payment is made proportionally with the other carrier. The share is determined by dividing the amount of insurance under this policy by the limits available from all carriers.

Example: Jerald’s Best Insurance has an effective date of 01/01/20. Jerald forgot to non-renew his coverage with Company A. When a loss occurred on 01/02/20, the new policy with Company B and the policy with Company A that should have been non-renewed but was not so both are in effect. Company A’s policy has a limit of $2,000,000. Company B’s policy has a limit of $3,000,000. Company A pays 40% ($2,000,000/$5,000,000) of the loss and Company B pays 60% ($3,000,000/$5,000,000) of the loss.

When other insurance available for a wrongful act is not as described above, this policy pays only amounts in excess of that other insurance. This policy is excess even if the other insurance cannot be collected. The most paid under this policy will not exceed the insurance limits on the declarations.

F. Assignment

This policy is for the named insured. Changes or modifications for parties that have an interest in this policy can be made only with the insurance company’s written consent.

G. Legal Action Against Us

No party has the right to bring the insurance company into any suit involving an insured under this policy. No party can sue the insurance company under this particular policy unless all of its terms and conditions have been satisfied. After an agreed settlement has been reached or a final judgment rendered against an insured, a party may sue the insurance company for recovery. In such a case, the insurance cannot be held liable for damages that are outside of the provided policy coverage or for amounts in excess of the policy’s limit of insurance.

The term “agreed settlement” is one that the insured, the insurance company, and the claimant or its legal representative agree upon and then sign and agree to release liability.

H. Representations

By accepting this policy as issued, the named insured agrees that the statements on the declarations are complete and accurate and are that they are based on its representations. It further agrees that the policy issued is based on those representations.

Note: This is very important because this condition allows the insurance company to use inaccurate statements in any application to void coverage.

I. Separation of Insureds

Other than the Limits of Insurance and any rights and duties that apply specifically to the named insured, the insurance provided applies to each insured as though it were the only named insured. It also applies separately to each insured against whom claim is made or suit is brought.

Note: This wording is different from that used in the CGL. There is no reference to the “first” named insured but only to the named insured. It also specifies that the insurance applies as if an insured is a named insured.

J. Changes in Exposure

1. Acquisition or Creation of Another Organization

If the named insured creates a new organization or if it acquires another organization during the policy year, this policy’s coverage is available but is limited to only those wrongful acts that occur following the date the entity was created or acquired. Furthermore, coverage applies only if the named insured does all of the following:

Provides written notice to the insurance company within 90 days of the creation or acquisition
Receives written consent from the insurance company that it will extend the policy
Pays the additional premium the insurance company calculates

2. Acquisition of Named Insured

If the named insured is merged into another organization such that the named insured does not survive, coverage continues until the end of the policy period but only for wrongful acts that occurred prior to the merger. The annual premium for the policy is considered fully earned as of the date of the merger and there is no return premium.

The policy requires that the named insured give the insurance company written notice of this acquisition change as soon as practical. The named insured is expected to provide answers to any relevant questions the insurance company has regarding the acquisition.

3. Cessation of Subsidiaries

If an organization that was a subsidiary of the named insured ceases to be a subsidiary, coverage continues for that subsidiary until the end of the policy period but only for wrongful acts that occurred prior to the date of cessation.

K. Cancellation

This condition explains how cancellations are handled. Many states require using a mandatory state form in place of this cancellation condition but this is a good starting place.

The first named insured is the only party that can cancel and it does so on behalf of all named insureds. The only thing it must do in order to cancel a policy is to mail or deliver the policy to the insurance company before the cancellation date.

The insurance company can cancel by mailing or delivering written notice to the first named insured. The notice must be either mailed or delivered at least ten days prior to the cancellation date when the reason for cancellation is non-payment of premium. The named insured must receive at least 60 days’ notice if the cancellation is for any other reason. This notice must clearly state the date of cancellation because it becomes the policy period's end date.

The first named insured receives a return premium when the policy is cancelled. The return premium must be pro rata of the policy premium when the insurance company cancels. However, the return premium may be less than pro rata when the first named insured requests cancellation.

Note: The short-rate penalty is not mandatory but it is possible.

The cancellation is in effect even if the named insured did not receive the return premium.

Proof that notice of cancellation was mailed is sufficient to effect cancellation. Proof that the first named insured actually received the notice is not required.

L. When We Do Not Renew

If the insurance company decides to not renew, it mails or delivers written notice of the non-renewal to the first named insured listed on the declarations at least 30 days before the expiration date. Proof that notice of cancellation was mailed is sufficient to effect cancellation.

Note: State amendatory endorsements may supersede this condition.

M. Changes

The policy that the insurance company issues and the application attached to it represents the agreement it makes with the named insured. If the first named insured requests a change, the insurance company has the right to accept or reject the request. An endorsement that amends, waives, or changes any part of the policy must be attached to the policy.

N. Premiums

The first named insured is the party that pays the premiums and receives all return premiums.

SECTION VII–EXTENDED REPORTING PERIODS

There are two extended reporting periods. One is automatic and the other is optional.

The automatic extended reporting period is called the Basic Extended Reporting Period. The reporting period begins at the end of the policy period and lasts for only 60 days. No additional premium is required. It applies only if:

Coverage is cancelled or not renewed
The insurance company renews or replaces coverage with claims-made insurance but the retroactive date is changed to a later date than the one on the declarations for this policy.
The insurance company renews with coverage that does not apply on a claims-made basis.

The optional extended reporting period is called the Additional Extended Reporting Period. The named insured has only 60 days following the end of the policy period in which to purchase this reporting period. If purchased, the reporting period begins at the Basic Extended Reporting Period and lasts for one year. It is available only if:

Coverage is cancelled or not renewed
The insurance company renews or replaces coverage with claims-made insurance but the retroactive date is changed to a later date than the one on the declarations for this coverage.
The insurance company renews with coverage that does not apply on a claims-made basis.

Additional premium is required and an endorsement must be attached to the policy. The insurance company calculates the additional premium according to its rules and rates but it cannot be more than 200% of the annual premium charged for this policy.

The named insured is responsible for requesting the Additional Extended Reporting Period and it must be requested within 60 days of the policy period end date. The request must be in writing and must be accompanied by the premium and any other amounts of money the named insured may owe the insurance company, such as deductible reimbursements. The premium is fully earned and neither party can cancel the endorsement.

Note: The only coverage differences between these two reporting periods are that the Basic Extended Reporting Period applies automatically and expires at the end of 60 days while the Additional Extended Reporting Period applies only if purchased, begins when the Basic Extended Reporting Period ends and expires one year later. The periods do not overlap because the Additional Extended Reporting Period, if purchased, begins after the Basic Extended Reporting ends.

The following apply to whichever extended reporting period is in effect:

This extended reporting period does not:

Apply to claims covered under any subsequent insurance coverage that the named insured purchases. This limitation applies even if that purchased coverage is no longer available to the insured because the limit of insurance has been exhausted because of claims payments.
Increase or reinstate the Limits of Insurance.
Change the coverage the policy protects
Change the policy period

The sole purpose of an extended reporting period is to extend the time during which claims may be made. This means that only claims with the following characteristics can be reported within the extended reporting period:

The claim is initially made in the extended reporting period.

The wrongful act(s) that resulted in the claim must have occurred after the retroactive date and prior to the policy’s expiration date.

Example: Graceless Agency’s carrier declined to renew its Insurance Agents & Brokers Professional Liability policy. The policy period was 10/1/2019-10/1/2020 with a 10/1/2017 retroactive date. Graceless Basic Extended Reporting Period is effective 10/1/2020 –11/30/2020. Graceless purchased the Extended Reporting Period that is effective 11/30/2020-11/30/2021. Claims were presented as follows:
Date wrongful act occurred	Initial Date claim is made	Response
9/15/2017	10/15/2020	Not covered because wrongful act was prior to the retroactive date
12/18/2018	8/1/2020	Covered because wrongful act occurred after retroactive date and claim presented during policy period
1/20/2018	9/15/2018 and 10/15/2020	Not covered because the initial claim was made in the prior policy period. The second claim for the same wrongful act uses the same claims made date as the initial claim and the policy effective at that time must respond
8/15/19	8/21/2021	Covered because wrongful act took place after the retroactive date and the claim was presented during the purchased Additional Extended Period.
10/2/2020	02/15/2021	Not covered because the wrongful act happened after the policy period had expired.

SECTION VIII–DEFINITIONS

Defined words are used throughout the policy. Restricting their meaning to the definition in the policy gives all parties a clearer understanding of the coverage intended. Twenty-three terms are defined.

A. Advertisement

This is a published or broadcasted notice to the general public or specific market segments concerning the named insured's goods, products, or services in order to attract customers or supporters. Published notices include material placed on or in the Internet and other electronic forms of communication. Websites are not considered an advertisement. However, notices on websites that provide information about the named insured's goods, products, or services in order to attract customers or supporters are.

B. Application

The application provided is part of this policy. It includes all attachments, addendums, and any other material submitted to the insurance company along with the signed application.

C. Bodily Injury

This is bodily injury, disability, sickness, or disease a person sustains. Death that results from bodily injury, sickness, or disease is considered bodily injury whenever the death occurs.

Mental injury, anguish, or tension; emotional pain or suffering, and shock are all considered bodily injury regardless of how they occur.

D. Claim

A claim is any of the following:

A demand for monetary damages. It must be in writing.
A complaint or pleading that is served if it results in a civil proceeding
The filing a notice of charges, an investigative order, or similar documents that accuse the insured of a wrongful act that results in an administrative or regulatory process. An appeal following an initial ruling continues as claim.

E. Coverage Territory

The United States of America, its territories and possessions, Puerto Rico, and Canada

Coverage territory is also other parts of the world but only if the insured's responsibility to pay damages is determined in a suit based on the merits in the territory described above or in a settlement agreed to by the insurance company.

F. Discrimination

Federal, state, and local rules, regulations, and statutes provide a list of physical characteristics that, if used in making a decision, is considered a violation of that individual’s civil rights. Examples include gender, mental condition, religion, marital status, race, and age.

G. Employee

The term employee is broadened to include leased workers and temporary workers. It does not include independent contractors.

H. Fungi

This is any type or form of fungus as well as scents, spores, and by-products that fungi release. Mold, mildew, and mycotoxins are all considered fungi.

I. Insured

Section III–Who is an Insured identifies the parties that qualify as an insured. All insureds are treated equally and separately except when applying the limits of insurance.

J. Interrelated wrongful act

This is any wrongful act that occurs or results from the same circumstance or allegation and becomes the basis of a suit or a claim.

Related Court Case: Term in Agent's E&O Policy Found Ambiguous

Example: Harry sends all of his producers to the same training seminar. They come back and provide the same incorrect information to their clients. When claims begin to arrive at the agency, all acts can be traced back to the same training seminar and all are treated as a single interrelated wrongful act.

K. Leased Worker

A person that a labor leasing firm leases to the named insured under a written contract or agreement to perform duties related to conduct of the named insured's business. Temporary workers are not considered leased workers.

L. Multiple Employer Welfare Arrangement

The Employee Retirement Income Security Act of 1974 uses and defines this term. That same definition is the one that applies to this term when used in this policy. The actual definition is in ERISA Section 3(40), 29 U.S.C. §1002(40). Section 3(40)(A).

M. Named Insured

An individual or entity listed on the declarations. There can be more than one entity and/or individual named on the declarations.

N. Personal and Advertising Injury

Any injury that arises out of one or more of the following offenses:

1. False arrest, detention, or imprisonment

2. Malicious prosecution

3. When an owner, landlord, or lessor of a premises wrongfully evicts, enters, or invades the rights of a person who occupies that premises. The owner, landlord, or lessor may actually commit the wrongful act(s) or someone who acts on behalf of the owner, landlord, or lessor may commit them.

4. Any oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products, or services. This can take place using any form of communication, including the Internet and other electronic forms.

5. Oral or written publication of material that violates a person's right of privacy. The violation can take place using any form of communication, including the Internet and other electronic forms.

6. The named insured using another party’s advertising idea in its advertisement

7. The named insured's advertisement that infringes on another party’s copyright, trade dress, or slogan

O. Policy period

The policy period begins on the inception date on the declarations. It ends on the expiration date on the declarations unless there is an earlier termination or cancellation date.

P. Pollutants

Pollutants include irritants and contaminants such as smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste of a solid, liquid, gaseous, or thermal nature. Waste includes property to be disposed of, as well as property to be recycled, reconditioned, or reclaimed.

Q. Predecessor organization

Any organization named as such on the application in which the named insured has the majority interest in its assets and liability. It must engage in professional services as this policy defines.

Example: Hector and Riles Insurance Agency is a partnership that dissolves upon the death of Hector. Because of the partnership agreement, Riles is able to purchase Hector’s part of the agency from Hector’s estate. Riles reorganizes as a Limited Liability Corporation named Hector and Riles Insurance Agency, LLC. Hector and Riles Insurance Agency is a predecessor organization of Hector and Riles Insurance Agency, LLC.

R. Professional services

The primary professional service is selling and servicing insurance products. It includes selling variable annuities. The selling and servicing must be performed by an insured that operates on behalf of either the named insured or its predecessor organization.

Claims adjusting, loss control, notary public, and premium finance activities related to the insurance products are also considered professional services, as long as they are on behalf of the named insured or its predecessor organization.

Public adjusting services and third-party administration claims services are NOT considered professional services.

S. Property Damage

Property damage is physical injury to tangible property and all resulting loss of use of that property. Loss of use of tangible property is property damage even if the property is not physically injured. Loss of use is considered to have occurred at the time of the injury or occurrence that caused it.

Occurrence within this definition means an accident, including repeated exposure to essentially the same harmful conditions.

T. Subsidiary

Any organization where the named insured or combination of named insureds owns more than 50% of the securities or voting rights.

Example: Next Generation Agency needs help. Evolving Agency agrees to provide the necessary cash infusion and management help in return for 51% of the company stock. Next Generation is now a subsidiary of Evolving Agency.

U. Suit

This is a civil proceeding that alleges damages because of a covered wrongful act. Arbitration proceedings and any other types of alternative dispute resolution proceedings to which the insured submits to with the insurance company's consent are also considered suit.

V. Temporary Worker

Any person furnished to the named insured as a substitute for a permanent employee. The employee the temporary employee substitutes for must be only temporarily away from work. A person being furnished for seasonal or short-term needs is also a temporary worker.

W. Wrongful Act

There are five requirements for a wrongful act:

The act must be committed, or alleged to have been committed, by an insured.
An act, error, or omission must either have actually occurred or is alleged to have occurred.
The act, error, or omission must arise from professional services.
The professional services could have been rendered or should have been rendered but were not.
Damages must result. They can be alleged or actual.

Example: Charlotte is an employed producer of Best Insurance Agency. Her husband, Josh, is a stockbroker for Kenny and Sons.

Scenario 1: Josh is accused of providing inaccurate information about a Homeowners Policy. This is not a wrongful act because, while Josh provided information, he is not an insured.

Scenario 2: Charlotte is accused of providing inaccurate information about a Homeowners Policy. This is not a wrongful act because Charlotte never met the person who made the accusation.

Scenario 3: Charlotte is accused of providing inaccurate investment advice. This is not a wrongful act because providing investment advice is not professional services defined by this policy.

Scenario 4: Charlotte advices her customer to take a lower valuation than the insurance company calculates so that her premium is lower. A loss occurs; the customer incurs a coinsurance penalty and is not fully compensated for the loss. This could be considered a wrongful act.

Scenario 5: Charlotte advices her client to wait to purchase flood insurance. The client does not accept the advice, purchases the coverage, and is paid for her loss when the flood occurs. This is not a wrongful act because there were no damages.

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