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Paul Zimmerman
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Le Moal Olivier 

Duty to Defend: Surplus Line Brokers and Professional Liability

Negligent solicitation and placement of insurance policies and failure to conduct due diligence into the admitted insurance market are covered under E&O policy

In a decision with significant implications for surplus line brokers, and which offers clarity regarding the breadth of certain professional liability policies, the United States Court of Appeals for the First Circuit has ruled that an insurance company has a duty to defend a suit by another insurance agency alleging unfair competition and interference with economic opportunities where the facts underlying those claims also support claims of professional negligence.

In 2009, CRES Insurance Services, LLC (“CRES”), a broker in the admitted market sued a number of surplus line brokers, including Herbert H. Landy Insurance Agency, Inc. (“Landy”)  alleging violation of the California Unfair Business Practices Act (B&P Code § 17200 et seq.) and negligent interference with prospective economic advantage on the grounds that Landy and the other surplus line brokers failed to properly conduct diligent searches and otherwise failed to comply with requirements for surplus line placements. 

The case was notable in its allegations that if any coverage is available in the admitted market, and surplus line coverage was procured at a lower price than that coverage, the procuring broker had ipso facto failed to comply with the surplus line placement requirements under California law, including the requirement to conduct a diligent search of the admitted market and the prohibition on exporting the coverage for a lower price. Under the theory propounded by CRES, a surplus line broker would be held responsible for improper placement if any one admitted insurer was willing to provide the coverage at a price higher than the surplus line company Similar claims were raised in a lawsuit filed in 2002 by Crusader Insurance Company (“Crusader”), an admitted insurer, against Harry W. Gorst Company, Inc., a surplus line broker. Because the CRES lawsuit was settled and Crusader was found to have no private cause of action, this issue remains unresolved in the courts. 

Landy was covered by a professional liability insurance policy issued by Utica Mutual Insurance Company (“Utica”) and sought to have Utica defend it in the lawsuit brought by CRES. Utica argued that it did not owe defense because the policy excluded coverage for “unfair competition of any type” and only covered errors and omissions in “rendering or failing to render professional services”, and sought a declaratory judgement to that effect in Massachusetts federal district court. Applying Massachusetts law, the district court denied Utica’s request, and the decision was upheld by the First Circuit on appeal.

The courts reasoned that, because the claim of negligent interference with prospective advantage was based on specific allegations that Landy had been negligent in providing services as a surplus lines broker, the alleged negligence was in rendering or failing to render professional services. In addition, because the negligence claim was covered by the policy, Utica was required to defend the entire lawsuit. The court held that if the alleged wrongful acts or omissions were inherent in the practice of the profession, they would fall within the scope of professional liability coverage. The court further held that Landy’s alleged failures “to act with reasonable care in the solicitation and placement [of insurance policies]” and “to conduct a diligent search of the admitted market” and the allegations that it “filed falsified documentation relating to the search, and evaded scrutiny … by failing to file required statements” were related to the professional activities of a surplus lines broker.

The Utica decision highlights the importance to brokers of carefully considering coverage terms in professional liability policies, both with respect to their own errors and omissions coverage (at both the procurement and claims stages) and in making professional liability placements for clients.  

This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.