Reviewing Contracts for Insureds
As every E&O attorney knows, there are a sizeable number of E&O claims against agents that arise out of the agent trying to do a favor for an insured. For agents that insure contractors, that “favor” often involves reading or reviewing contracts signed by the contractor. Many agents review other kinds of contracts, such as property leases. Agents are caught in a Catch-22 when reviewing contracts signed by policyholders. To run from the task would call into question the agent’s professional service. On the other hand, to tackle the project with no written guidelines or disclaimers could be disastrous for the agent and agency. The most commonsense approach, and one that is recommended by E&O attorneys, is the middle ground: review the contracts with disclosures and disclaimers.
Of primary importance is to state in writing that the agent is only reviewing the insurance requirements of the contract and is not providing legal advice.
A disclaimer should be provided at least annually to policyholders for which the agent frequently and routinely reviews contracts. For situations where a contract review is done only infrequently, it is recommended that the disclaimer be provided to the policyholder each time. E&O experts who favor a conservative approach recommend using the written disclaimer each time a contract is reviewed, no matter how many contracts are reviewed for a policyholder each year.
Below is a proposed disclaimer letter that can be used when reviewing contracts for policyholders. This proposed disclaimer should be reviewed with the agency’s legal counsel prior to actual use with an insured.
Sample Disclaimer Letter
Our agency has, upon your request, reviewed the contract indicated above. Specifically, we reviewed only the insurance requirements as contained in Section __, Page ___.
The scope of our review was to determine if the current insurance program which you have placed through our Agency addresses the types and amounts of insurance coverage referenced by the contract. We have identified the significant insurance obligations, and have attached a summary of the changes required in your current insurance program to meet the requirements of the contract. Upon your authorization, we will make the necessary changes in your insurance program.
We will also be available to discuss any insurance requirements of the contract with your attorney, if desired.
In performing this review, our Agency is not providing legal advice or a legal opinion concerning any portion of the contract. In addition, our Agency is not undertaking to identify all potential liabilities that may arise under this contract. This review is provided for your information, and should not be relied upon by third parties. Any descriptions of the insurance coverages are subject to the terms, conditions, exclusions and other provisions of the policies and any applicable regulations, rating rules or plans.
As an example of how simply doing a favor for an insured by reading or reviewing a contract can quickly bring an agent to the verge of litigation, an actual case is illustrative. The agent in this case insures several large contractors, and reviews contracts for these policyholders on a regular basis.
The agent failed to notice that one construction contract his policyholder had signed required limits of $20 million. The insured carried $10 million limits. Two weeks after the job began, the risk manager for the building owner called the contractor to notify him that the Certificate of Insurance reflected inadequate limits, and that work must stop immediately until sufficient limits could be obtained and verified.
The contractor immediately called the agent. Later that same day, the agent was able to obtain the additional $10 million excess quote for approximately $8,000 premium. The contractor was then angry that the additional premium was essentially going to come out of his profit on the job, since he hadn’t figured that additional cost into his bid. He told the agent to pay the additional premium, since it was the agent’s error.
The agent was advised by an E&O attorney not to pay the additional premium, no matter how embarrassed he was by the oversight. If the agent paid the $8,000 additional premium, it could easily be construed as admitting fault, which violates one key provision of his E&O policy.
Since the job had been underway for two weeks, with a $10 million gap in limits, the agent could theoretically be liable for the “missing” $10 million, should an injury already have occurred. And by paying the additional premium and thus probably admitting fault, the agent would be “bare” with no E&O coverage at all.
(The sample disclaimer and other information for this article was provided by the IIABA Virtual University.)
Texas Insurance Consulting offers fee-based contract review services to agents and their clients.