No Coverage Under E&O Policy For Breach of Agency Agreement

Boris, Andrew S.; | May 26, 2008

On appeal, the First Circuit affirmed the decision of the district court. The First Circuit agreed that the gravaman of the arbitration demand was the breach of the exclusivity provision. Although there were charges of negligent operation in the background section of the demand, the First Circuit found that both the claim and ad damnum of the arbitration demand were directed to the alleged breach of the exclusivity provision. The First Circuit also noted that the arbitrator’s award, which stated that the agency had violated the agreement, supported Utica Mutual’s position with respect to its duty to indemnify the agency. Further, the First Circuit found that neither a promise by an agent to represent one insurer exclusively nor a diversion of business in breach of a contract relating to such an exclusivity provision amounts to a professional service.

To support its position, the agency argued that its alleged mismanagement of the program played a causal role in the eventual alleged diversion of business. However, the First Circuit ruled that a mere remote causal connection in this type of situation was not enough. The agency also argued that Utica Mutual violated governing law by looking outside the four corners of the arbitration demand to deny coverage. The First Circuit was unpersuaded, finding that there was no duty to defend after comparing the arbitration demand with the policy’s language.

This case highlights that certain businesses are required to perform functions that may not be covered by their professional liability insurer. Thus, it becomes incumbent on businesses, such as insurance agencies, to closely analyze the functions that they must perform (and the business risks those functions create) in conjunction with the coverages that are in force to protect their business. Undoubtedly, it is easier to discuss potential coverage questions as well as potentially frame language within a policy with an E&O carrier before there is an actual claim.