When reviewing allegations of wrongdoing in comparison to the terms of an errors and omission liability policy, there is always a question as to whether the alleged wrongful act was related to the exercise of professional skills. A recent decision from the United States Court of Appeals for the First Circuit highlights that an insurer will not be responsible for its insured's liability where the liability does not arise out of the failure to provide professional services. See Massamont Insurance Agency, Inc. v. Utica Mutual Insurance Company, 489 F.3d 71 (1st Cir. 2007).
In Massamont, an insurance agency had entered into an agreement with the corporate parent of Westchester Fire Insurance Co. ("Westchester") to act as a managing general agent and perform certain underwriting activities related to the marketing of a specialty lines insurance program. Of principal importance, the agreement included an exclusivity clause, which prohibited the insurance agency from soliciting business subject to the program for any other insurance carrier unless Westchester first elected to not write the business.
During the term of the agreement but after a series of disagreements with Westchester, the insurance agency placed a new business opportunity with a carrier other than Westchester under the purported understanding that Westchester no longer wanted the business. Shortly after the business was placed with the other carrier, Westchester terminated the agency agreement contending that there had been a breach of the exclusivity clause.
Pursuant to a clause in the agreement, Westchester initiated arbitration and sought damages under the theory that the agency had diverted business away from Westchester before first giving Westchester the opportunity to accept the business in violation of the agreement. In turn, the agency sought coverage from Utica Mutual Insurance Company ("Utica Mutual") under an Insurance Agents and Brokers Errors and Omissions Liability Insurance Policy. The policy provided in relevant part ... to defend against claims of and indemnification for, "loss" that "arises out of" a "wrongful act(s)" allegedly "committed in the conduct of the insured's business ... in rendering or failing to render professional services" as an insurance agent.
Utica Mutual refused to defend the agency in the arbitration, contending that the arbitration demand sought damages not covered by the policy. The agency defended itself in the arbitration and an award was entered in Westchester's favor in an amount of $2.6 million. The agency subsequently filed an action in the U.S. District Court for the District of Massachusetts seeking coverage under the policy issued by Utica Mutual. The district court held under a summary judgment standard that the arbitration demand sought damages for breach of the exclusivity agreement and the transfer of accounts that served as the foundation for this breach was not a "professional" act but a business decision. Thus, the district court found in favor of Utica Mutual.
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.
Andrew Boris is a Partner with Tressler Soderstrom Maloney & Priess, LLP.
aboris@tsmp.com
