Insurers may be on the hook for not following broker agreements

Insurance companies that are lax about following the letter of their agreements with brokers may find themselves sharing responsibility and liability with brokers in E&O claims, the audience attending an Insurance Brokers Association of Ontario (IBAO) education panel heard.
This may even be true even in seemingly open-and-shut E&O cases illustrating broker negligence. Insurers need to be careful they arent creating expectations among brokers when they try to help brokers out in certain situations that may technically fall outside the insurer-broker agreement.
For example, insurers might help brokers out by backdating insurance coverage, thus seemingly providing seamless policy coverage back to the point when the policy had expired. Or insurers might allow brokers to bind coverage that technically falls outside limits defined in the insurer-broker agreement.
The point, which arose out of U.S. case law, provided the foundation for a mock E&O trial at the IBAOs annual general meeting held in Toronto.
In the mock trial, Hogan Golf Ltd. v. Noway Insurance Company & Carefree Insurance Brokerage, businessman Glen Hogan, a golf enthusiast, buys a 10,500-square-foot warehouse and arranges coverage for it with his broker, Carla Carefree, on Mar. 1.
Carla asks her assistant, Betty Busy, to send the request for insurance to Hogans insurer of 10 years, Noway Insurance. But through carelessness, the brokerage never actually sends the request for coverage form to Noway Insurance.
On Mar. 16, Hogans new warehouse burns down, and Hogan advises Carla to make a claim to the insurance company. Noway denies the claim because they never received the request for insurance coverage from the broker, never sent out forms to the client or the broker confirming coverage and never collected any premium.
Hogan sues the brokerage and the insurance company.
The audience attending the mock E&O trial acted as the trial jury. The jury found the insurance company 50% responsible; why?
During the trial, it was revealed that Noway routinely backdated policies for Carla Carefree, thereby allowing the insurer to collect premium for the period between the original expiry of the policy and the time the coverage was ultimately backdated. Also, Noway routinely let Carla bind coverage for buildings that were outside the limits of the broker agreement [i.e. let her bind coverage for Hogans new warehouse, even though it was 500 square feet larger than the 10,000-square-foot limit in the broker agreement].
These practices on the part of the insurer were contrary to the agreement between the broker and the insurer.
By allowing this to happen, noted Jeff Bear, the CEO of the Ontario brokers regulatory body RIBO, insurers are creating a reasonable expectation among brokers and clients that a claim will be covered even in circumstances when the insurer never:
knew about the request for coverage;
sent out documents confirming the coverage; and
collected premiums from the brokers or the brokers clients for the coverage.