Mississippi Court Holds Insurance Broker Testimony Not Professional Services

In its recent decision in Henson v. United States Liability Insurance Company, 2012 U.S. Dist. LEXIS 101963 (N.D. Miss. July 23, 2012), the United States District Court for the Northern District of Mississippi had occasion to consider the boundaries of what constitutes professional services under an insurance broker’s errors and omissions policy; in particular, whether giving deposition testimony constitutes “professional services.”

The insured, Mid-Delta Insurance Agency, was insured under a professional liability policy issued by Lloyd’s for the period October 8, 2009 to October 8, 2010.  The policy had a retroactive date concurrent with the policy’s inception, meaning that the insured had no coverage for wrongful acts committed prior to October 8, 2009.  

At issue was coverage for the insured’s alleged error in applying for a client’s insurance policy in June 2009.  The coverage was placed with Republic Insurance Company, but Republic later denied coverage for a significant loss on the basis of misrepresentations contained in the policy application.  Mid-Delta was sued by its client for its alleged errors, and Mid-Delta thereafter sought a defense under the Lloyd’s policy.  Lloyd’s denied coverage on the basis that the wrongful act happened prior to the policy’s retroactive date.  Mid-Delta nevertheless argued coverage was triggered because the individual broker responsible for completing the application with Republic made statements in a January 2010 examination under oath (“EUO”) taken by Republic that formed part of the basis for Republic’s decision to deny coverage.  Mid-Delta, therefore, contended that it was the examination under oath that was the “wrongful act” and that the broker’s testimony at the EUO constituted “professional services.”  Lloyd’s argued, on the other hand, that it was the June 2009 completion of the Republic application that was the “wrongful act,” not testimony given at an EUO used to confirm a “wrongful act.”

In analyzing this issue, the court looked to the policy definition of “professional services,” which was defined in pertinent part as “services the Insured performs for others in their capacity as a licensed agent or broker, general agent, managing general agent or underwriter, program administrator …” and included specific services such as consulting, appraising real estate, benefits counseling, premium financing, notary public, serving as an expert witness, e-commerce services, and risk management.  Noting that this definition was specifically detailed, the court concluded that giving testimony in an EUO did not constitute professional services, stating:

Henson did not give his sworn statement while marketing, selling, or serving insurance products.  Instead Henson answered questions regarding his alleged errors in completing  [the] insurance application.   Henson was not providing professional services; he was making statements about events which transpired in June 2009.  The court cannot conclude that testifying about an insured’s allegedly wrongful act is in itself a wrongful act or professional service covered by the E&O policy.

Having concluded as such, the court went on to address whether the October 8, 2009 retroactive date in the policy was proper.  Mid-Delta showed evidence that it had requested to purchase prior acts coverage.  Lloyd’s, however, had rejected this request since Mid-Delta had allowed its prior professional liability to lapse.  The court found Lloyd’s decision in this regard reasonable, and observed that Mid-Delta could have avoided a gap in its coverage by purchasing an extended reporting period from its prior carrier.  In passing, the court noted that as an insurance-related company, Mid-Delta “should have known that the [Lloyd’s] E&O policy did not provide coverage for prior acts.”

Pennsylvania Court Addresses Application of Retroactive Date

In its recent decision in A.P. Pino & Associates, Inc. v. Utica Mutual Ins. Co., 2012 U.S. Dist. LEXIS 92472 (E.D.Pa. July 3, 2012), the United States District Court for the Eastern District of Pennsylvania had occasion to consider the application and enforceability of a retroactive date in a professional liability policy.

Utica Mutual insured A.P. Pino & Associates (“APA”) under two consecutive Life Insurance Agents and Brokers Errors and Omissions policies for the periods October 15, 2009 through 2010 and October 15, 2010 through 2011.  Both policies contained an October 15, 2009 retroactive date and stated that coverage was unavailable for wrongful acts that took place prior to this date.  

Prior to October 15, 2009, APA’s principal, Pino, was insured under a professional liability policy issued by a different carrier.  The named insured was Pino rather than APA.  It was only when Pino decided to grow his business and hire a number of producers that he decided to switch carriers and purchase a policy in APA’s name.  He claimed to have selected Utica because Utica offered prior acts coverage.  Such coverage, however, was not automatically granted.  Utica determined whether to offer prior acts coverage, or use a retroactive date, based on whether the insured was a new business entity or an entity with prior errors and omissions coverage.  Because APA had not previously been insured under a professional liability policy (i.e., because Pino’s prior coverage was in his name only), Utica decided to treat APA as a new business and thus issued the policies with a retroactive date concurrent with the inception of the first policy issued to APA, i.e., October 15, 2009. 

Although the retroactive date was fully disclosed in all phases of the underwriting for both policies (i.e., the quotes, binders, etc.) and was clearly identifiable in the policies themselves, Pino later claimed that he was not aware of the retroactive date, or its effect, until he later sought coverage for a loss.  The loss involved a lawsuit filed in November 2010 by an APA client arising out of Pino’s advice concerning life insurance.  Because the advice was given in Spring 2009, Utica denied coverage based on the October 15, 2009 retroactive date.  APA, nevertheless, argued that Utica had a duty to defend and indemnify APA based on its reasonable expectations that the policies issued by Utica provided prior acts coverage, or in the alternative, that the policies should be reformed to reflect these expectations.

The court agreed as an initial proposition that the retroactive date was clearly and unambiguously stated in the policy.  Pino’s assertion that he “did not read the policies” did not require the conclusion that Utica could not enforce the retroactive date.  As the court explained, “if a policy is ‘plain and free of ambiguity, and could have been readily comprehended by [an insured] had he chosen to read them,’ then the parties are bound by the signed agreement.” The court further held that the doctrine of reasonable expectations did not compel a different result, since the doctrine is limited to “unsophisticated non-commercial insureds” and only to protect insureds from deceptive language.  Noting that Pino was not an unsophisticated insured and that the retroactive date was not the result of insurer deception, the court found the doctrine inapplicable.

APA also argued that the policies should be reformed to provide the prior acts coverage it had requested when it applied for the initial policy.  Specifically, APA argued that a mutual mistake existed because APA was mistakenly treated by Utica as a new business enterprise.  The court rejected this argument on the basis that Utica’s treatment of APA as a new business was not based on a mistake, but rather based on APA’s lack of prior insurance coverage.  The court further rejected APA’s argument that there was a unilateral mistake on Utica’s part, explaining that:

While Plaintiffs may have been unilaterally mistaken that APA would receive prior acts coverage, Plaintiffs have not presented a scintilla of evidence that Utica engaged in either active fraud or had good reason to know of Plaintiff’s unilateral mistake, thereby precluding reformation of the policy.