By Barry Zalma, Attorney and Consultant
In the more than 45 years I have been involved in the business of insurance I have asked people from all walks of life if they have read and understood their insurance policy. Only two answered “yes” and both of them lied. If anyone can be expected to read and understand their own insurance policy it is a lawyer or an insurance broker. When they fail to read the policy they will often find that there is no coverage available when they suffer a loss.
Two lawyers bought a lawyers professional liability policy and when it refused to pay a claim they made they sued their insurance agent because they did not expect an exclusion to be in the policy.
In Guida v. Herbert H. Landy Insurance Agency, Inc., 12-P-1214 (Mass.App. 08/02/2013), [enhanced version available to lexis.com subscribers], Robert H. Guida and Christopher T. Perry (collectively referred to as attorneys or lawyers), sued their professional liability insurance broker, Herbert H. Landy Insurance Agency, Inc. (Landy), for failure to procure desired coverage. The attorneys charged Landy with negligence, negligent misrepresentation, and breach of contract. At the conclusion of the attorneys’ case-in-chief, Landy moved for, and received, a directed verdict.
In 2000, Guida started his own law practice. He decided to use Landy to obtain professional liability insurance. Landy brokered coverage from Hanover Insurance Company (Hanover); that carrier provided Guida his first policy, effective May 22, 2000, to May 22, 2001. At trial, Guida testified that he had read that policy in full. In February of 2001, Perry joined Guida’s law firm. Also in February, Landy wrote to Guida that Hanover was withdrawing professional liability coverage in Massachusetts. Landy procured a successor policy from National Casualty Company (National Casualty). At trial, Guida testified that he had reviewed the National Casualty policy, that he had looked at the declarations page, and that he had reviewed the exclusions. In July, 2001, Perry became a shareholder of the firm, and Guida added him to the National Casualty policy. The lawyers changed the name of the firm to Guida & Perry, P.C. (law firm).
National Casualty then withdrew from further professional liability coverage in Massachusetts. By letter of February 15, 2002, Landy notified Guida of that development. The letter also stated the following: ‘To avoid a gap in coverage, and continue coverage in a seamless manner, please complete the enclosed [Gulf Insurance Group (Gulf)] application. [Gulf] is a member of Travelers Insurance, which is a member of Citigroup and is rated A by A.M. Best.’ Guida signed the application materials for the Gulf policy, which became effective on May 22, 2002.
On the “declarations page” of the Gulf policy, in bold and capital letters, the following statement appeared: ‘THIS IS A CLAIMS-MADE POLICY. PLEASE READ IT CAREFULLY.” The Gulf policy also contained an eight-page “Lawyers Professional Liability Coverage Form.” On page one of the coverage form, also in bold capital letters, the policy stated, “NOTICE – THIS IS A CLAIMS-MADE POLICY WITH ‘CLAIMS EXPENSES’ INCLUDED WITHIN THE LIMITS OF LIABILITY, UNLESS OTHERWISE NOTED. PLEASE READ IT CAREFULLY.” Additionally, all of the exclusions to the policy appeared on page three of the coverage form. In particular, “exclusion L” stated that the policy did not cover claims “[a]rising out of the inability or failure to pay, collect, administer or safeguard funds held or to be held for others.” This exclusion eliminated coverage for theft of funds held by the law firm for the benefit of others.
At trial, Guida admitted that he had not read the entire Gulf policy, and that he had instead ‘skimmed it.’ He testified that he had relied on Landy’s assurance that the Gulf policy provided coverage identical to the previous two policies. In May, 2003, Guida renewed the Gulf policy for a second year, effective until May 22, 2004.
Guida & Perry, P.C., dissolved. Perry stayed in the practice and he kept the same staff as he created his own firm. He purchased a ‘tail’ for the Gulf policy, in addition to a new policy for his own firm (Perry firm). Shortly after Perry had formed his own firm, he discovered that his office manager, Rita Mauro, had been embezzling funds from the law firm’s Interest On Lawyers’ Trust Account (IOLTA account). She had committed these acts from some time in 2001 until September of 2004. Mauro had been the officer manager for both the predecessor firm and the Perry firm. Perry’s accountant estimated that she had misappropriated over $2,000,000. Perry immediately terminated her in September of 2004.
As a result of Mauro’s embezzlement scheme, the Board of Bar Overseers reprimanded Guida and Perry for failing to implement proper safeguards to protect their clients’ funds. Guida and Perry also paid $200,000 and $83,000, respectively, to settle claims brought against them. They subsequently brought this action against Landy for Landy’s alleged failure to procure coverage against the risk of employee theft, a risk allegedly covered by the earlier Hanover and National Casualty policies.
The attorneys pursued three theories of liability at trial:
(1) that Landy negligently failed to advise them about, or provide coverage for, the event of employee theft of funds from their IOLTA account;
(2) that Landy committed negligent misrepresentation by
(a) the language of the letter of February 15, 2002, and
(b) supplemental oral communications; and
(3) that Landy breached a contractual duty by failing to provide coverage similar to the National Casualty policy after the attorneys had allegedly requested equivalent coverage.
THE DUTY OF AN INSURANCE AGENT
The general relationship between an insurance agency and its policyholder customer does not impose a duty on the agency to investigate the customer’s needs for particular coverage or to advise about the availability of insurance products to meet those needs. However, an insurance agent or broker may acquire a greater duty of investigation, advice, and assistance to an insured by reason of “special circumstances.” Special circumstances of assertion, representation and reliance may create a duty of due care.
The appellate court concluded that the case does not present the requisite “special circumstances” between the parties. The lawyers did not employ Landy for coverage beyond their professional liability needs. Landy procured policies for the attorneys on only four occasions. The parties never met in person; they communicated by telephone and letter. The relationship was generic, not special. As a result, the court concluded that Landy had no heightened duty of care to inform the attorneys of the existence and consequences of exclusion L. In the absence of such a duty, no negligence occurred.
In general, an insurance agent does not have a fiduciary duty to ensure that a policy provides adequate insurance for the needs of the insured. When an insured agrees to purchase particular coverage, the insured may reasonably rely on the broker’s superior expertise and may assume that the broker has performed his duty. Still, a policyholder has a duty to read the policy and to bring to the agency’s attention any omissions or exclusions of expected coverage.
The attorneys failed to introduce evidence at the trial that they specifically requested from Landy a term for their desired particular coverage. Moreover, since the parties had a general – not special – relationship, Landy had no duty to investigate the lawyers’ needs for particular coverage or to advise about the availability of appropriate means of coverage for those needs.
With respect to the attorneys’ negligent misrepresentation claim, Landy’s February 15, 2002, letter stated to the attorneys that procurement of the Gulf policy would provide ‘seamless’ coverage. The letter did not make a representation about a specific aspect or exclusion of that coverage. Guida also knew that the Gulf policy had additional amendments, an awareness undercutting his claim that he thought the policy was identical to the previous two policies. Most importantly, if the attorneys had read the policy, they would have encountered exclusion L. The appellate court concluded that the attorneys should have read their policies rather than rely on representations by an agent.
Since the attorneys did not introduce evidence of a particularized request for coverage, nor did they show a specific promise or representation of such coverage from Landy, there was no duty, no “special circumstances” necessary for a duty of investigation and advice by Landy and the failure of the lawyers to read the Gulf policy defeated their claims of negligence and negligent misrepresentation. The absence of special circumstances and of a specific promise to procure a particular coverage also defeats the claim of breach of contract.
Lawyers, by definition, are supposed to understand contracts and the law of contract interpretation. This is so for their clients but not for themselves. Like the shoemakers children who have no shoes, the lawyer is so busy taking care of others that he or she seldom takes care of himself or herself.
In this case the lawyers failed thrice – first, they let their office manager steal $2,000,000 from their clients and second, they failed to read their policy and its exclusion against such embezzlement, and third, they filed suit against their agent without evidence of the special circumstances needed to prove their claim.
Reprinted with Permission from Zalma on Insurance, (c) 2013, Barry Zalma.
Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.
Mr. Zalma can be contacted at Barry Zalma or firstname.lastname@example.org, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.
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