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Vol. 3, Iss. 14
October 6, 2014

Broker May Be On The Hook For Insured’s Failure To Provide Timely Notice Of A $5M Claim


When an insured is denied coverage for a claim it is not unusual for someone to suggest that the fault lies with the insured’s broker for its failure to have obtained it.

[On one hand, broker liability cases are not true coverage cases. On the other hand, they are nothing short of coverage cases. After all, if a policyholder fails to obtain any, or adequate, insurance from its own insurer for a claim, and if its insurance broker is legally responsibility for the coverage deficiency, then the broker’s errors and omissions policy may fill the void. Thus, the broker’s errors and omissions policy can sometimes be an insured’s [or plaintiff’s] policy of last resort. When you look at it this way, a broker liability case is a coverage case with just a different name.]

In general, there is a high burden that must be met to pin the blame on the broker in a failure-of-coverage situation. Again, very generally, to prevail in a negligence action, an insured often must establish that it made a particular request to its broker and the requested coverage was not obtained.

C.L. Thomas, Inc. v. Lexington Insurance Co., No. 13-13-566 (Tex. Ct. App. Sept. 11, 2014) involves a broker that may be on the hook in some way for an insurer’s denial of a $5,000,000 claim. But what makes this case different from a typical one, involving broker liability, is that it does not involve the broker’s failure to procure insurance to cover a risk. Rather, the broker’s potential liability is tied to its insured-client’s failure to timely notify an insurer of a claim.

The case gets its start in a wrongful termination and defamation action filed against C.L. Thomas by a truck driver employee. The employee was awarded nearly $5.1 million in an arbitration. C.L. Thomas satisfied the judgment and then sought coverage from Great American, under a primary policy, and Lexington, under an umbrella policy. To make a long story short, coverage litigation ensued. The Texas appeals court held that Lexington had no obligation to provide coverage to C.L. Thomas based on late notice – notice of the arbitration award was provided to Lexington six days after it was issued. The court also concluded that the untimely notice prejudiced Lexington. Nothing about this aspect of the case was too unusual.

C.L. Thomas struck out against Lexington but then did a Texas 2-step – pursuing a breach of contract claim against Acordia, its broker. C.L. Thomas alleged that Acordia: “(1) failed to notify Thomas that the Great American policy was a claims-made policy; (2) failed to timely deliver copies of all insurance policies to Thomas; and (3) failed to instruct Thomas as to the notice requirements of the Great American policy.” In support of its breach of contract claim, C.L. Thomas relied on a Client Service Agreement, between Acordia and Thomas, whereby Acordia “was to provide ‘insurance brokerage services,’ which was defined to include ‘review[ing] policies,’ ‘provid[ing] insurance summary,’ and ‘educat[ing Thomas] employees as needed.’”

The court responded to the breach of contract claim as follows. It rejected the argument that Acordia failed to notify Thomas that the Great American policy was a claims-made policy. A summary produced by Acordia stated, in bold type on each page, that the policy was a claims-made policy. Acordia also established that, under the Client Service Agreement, it had no contractual obligation to deliver copies of insurance policies to Thomas within any specific time.

However, Acordia failed to go three for three. “[W]ith respect to the claim that Acordia failed to instruct Thomas of the applicable notice requirements of the Great American policy, we find that Acordia did not establish its entitlement to judgment as a matter of law. . . . Acordia was contractually obligated to ‘educate [Thomas] employees as needed’ and, even if copies of all policies were eventually provided to Thomas, that does not in and of itself establish that there was no breach of this provision. In any event, it was reasonably foreseeable at the time Acordia allegedly failed to advise Thomas of the notice requirements that such failure may result in Thomas failing to timely file a claim with Great American. . . . Finally, we agree with Thomas that the language ‘This is a Claims–Made Policy,’ which appeared in the insurance summary provided by Acordia, did not ‘educate’ Thomas employees ‘as needed’ because it did not set forth the notice requirements contained in the Great American policy.” The court remanded for further proceedings consistent with its opinion.

There are a few morals to this story. The most obvious one being that a broker that takes on an obligation, in a Client Service Agreement, to educate its client’s employees as needed, must be certain that this is satisfied. And to achieve this, the broker would also be well-served to describe the nature of its educational obligation in more specific terms than the amorphous “educate employees as needed.”

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