Ordinarily, errors & omissions claims against insurance agents and brokers come in only a couple of flavors. The most common claim is that the broker or agent did not place the correct coverage that the insured alleges he needed to have for an uncovered loss. However, a recent Superior Court case decision decided an unusual E&O claim.
In this claim, the insured alleged that its national broker had secretly agreed to a post-loss policy endorsement with the policy’s insurer that reduced the policy’s coverage, causing the insured to pay $1.7 million for costs that the unendorsed policy would have paid.
The agent, while not denying that the insured had not been apprised of the endorsements, claimed that the change endorsements increased the coverage available to the insured since, without the change, the insured would have had no coverage.
The Superior Court found for the agent on the insured’s breach of contract and unfair trade practice claims under 93A. Specifically, the decision held that without the agent having changed the endorsement, unilaterally or otherwise, the original form of the policy, contrary to the insured’s allegations, would have provided no coverage, except for the agent’s actions, which provided the insured with $2.4 million of indemnity when the case ultimately settled.
The insured and its insurance broker
This unusual case involves a million-dollar-plus dispute between a Quincy-based international company, Granite Telecommunications, LLC (“Granite”), and its broker, USI Insurance Services, LLC. (“USI”).
Granite provides voice and data telecommunications products and services in the United States and Canada, with its 2,000 employees generating an annual revenue exceeding $1.4 billion. USI is a national insurance broker that generates annually $2 billion in revenue from its insurance and risk consulting services. USI has 8,000 employees who work out of two hundred offices across the country, including USI’s Massachusetts office in Needham.
The employment practice liability policy at issue and its Wage & Hour claim exclusion
Beginning in 2009, USI provided brokerage services to Granite in placing its workers’ compensation, general liability, directors and officers, and employment practices liabilities coverages. USI received its compensation from the insurers with which it placed Granite’s policies.
Effective June 30, 2014, USI placed a policy for Granite with the Arch Insurance Company (“Arch”) entitled “Arch Corporate Canopy Policy, Private Company Management Liability and Crime Insurance.” Granite paid to Arch a premium of $67,329.00 for the policy.
The policy in question had as part of its specified coverages “employment practices liability,” which provided coverage for Granite and its officers from any claims by current and former employees, applicants for employment, and independent contractors under the terms of the insuring agreement.
The original policy as issued had an Endorsement No. 19, which stated that it excluded coverage for any “Wage & Hour Claim,” which the policy defined as:
“Any Claim arising from, based upon, or attributable to any actual or alleged violation of any Wage & Hour Laws, regardless of whether such Claim also includes non-Wage & Hour Laws allegations.”
However, the original Endorsement No. 19 had an exception which stated that the exclusion for a “Wage & Hour Claim” did not apply to “Any Wage & Hour Retaliation Claim,” which was defined as:
“Any Claim whose sole allegation involves any actual or alleged negative treatment of any Executive, Employee or Independent Contractor based upon any such person exercising any rights under any Wage & Hour Laws.”
The Wage & Hour Retaliation lawsuits between Granite and two of its former star salespersons
On May 7, 2014, two salespersons for Granite, Paul Contino and Michael Hawes, who were both earning $1 million per year, resigned their positions at Granite to form a new business. Granite sued these two major sales producers under their nondisclosure and noncompetition obligations in their written employment contracts. Granite obtained a preliminary injunction against Mr. Contino and Mr. Hawes under their noncompetition agreements.
On September 12, 2014, the two salespersons filed an independent lawsuit against Granite asserting a class action for all those salespersons employed by Granite between June 5, 2008, and May 7, 2014 (the date they quit Granite) alleging Granite’s:
- Failure to pay sales commissions promptly and in full as required by the Massachusetts Wages Acts and in breach of Granite’s written compensation plans; and
- Failure to pay overtime compensation for hours worked in excess of 40 hours per week.
The two salespersons, also in the same class action, asserted individual retaliation claims under the specific provisions of the Massachusetts Wage Act and common law claims. Under the Wage Act, for the members of the class and for the retaliation claims, Massachusetts law provided that if the employees or independent contractors prevailed, they “shall be awarded treble damages, as liquidated damages, for any lost wages or other benefits and shall also be awarded the costs of the litigation and reasonable attorney’s fees.”
On October 27, 2014, Granite notified USI of the Wage Act claims and requested USI to notify the relevant insurance carriers, including Arch.
The allocation provision for covered and uncovered claims
After receiving notice of the salesperson’s claims, including their retaliation claims, Arch, before responding to Granite’s request for coverage of the Wage & Hour suit, decided to amend the policy with USI’s agreement.
As alleged by Granite and not disputed by USI, on March 26, 2015, an underwriting manager at Arch called the senior vice president at USI requesting that USI agree on Granite’s behalf to permit Arch to amend the policy “retroactively back to policy inception.”
One focus of the retroactive endorsement proposed by Arch was General Provision § 11, which provided for allocation of covered and uncovered matters in one suit: This provision provided:
“If the insureds incur a Loss that is only partially covered by this Policy because a Claim includes both covered and uncovered matters…Loss shall be allocated between covered Loss and non‑covered Loss based upon the relative legal exposure of all parties to such matters.”
Arch’s policy would seem to have had no coverage for the Wage & Hour exclusion in the policy because the exclusion barred coverage for any claim involving, as a part, a Wage & Hour claim.
Likewise, the policy would have had no coverage for a Wage & Hour retaliation claim because that coverage applied only for:
“[A] Claim whose sole allegation involves any actual or alleged negative treatment of any Executive, Employee or Independent Contractor based upon any such person exercising any rights under any Wage & Hour Laws.”
Since the retaliation claims against Granite were not the sole claims made against Granite but involved other claims beyond the retaliation claims, that coverage did not apply.
However, the retroactive endorsement proposed by Arch seemed to result because Endorsement 19, which became the dispute, in this case, had a provision, stating that General Provision 11, Allocation “shall not apply to any Wage & Hour Claim.”
Since the policy, on the one hand, stated no coverage for Wage & Hour Claims and, on the other hand, stated that the allocation provision for covered and uncovered matters in one claim would not apply to Wage & Hour Claims, the policy had an ambiguity.
The new endorsement Arch proposed and which USI agreed to on behalf of Granite deleted Endorsement 19 and instead added an endorsement stating that Arch:
“shall not pay any Loss that is based upon, arising out of or in any way related to any actual or alleged violation of any Wage & Hour Laws, provided that this exclusion shall not apply to a Loss resulting from retaliation.”
The new endorsement also specified that a covered claim for Wage & Hour retaliation would be subject to allocation between covered and uncovered claims.
Following USI’s agreement to the amendment, Arch sent Granite a coverage letter on April 30, 2015, in which Arch acknowledged coverage for the salespersons’ retaliation claims which would exist under the terms of the policy, if amended, to include the new endorsement.
Granite, prior to the coverage letter, had never seen the new endorsement and claimed that it had no reason to believe that such an endorsement existed. The coverage letter from Arch did not otherwise explain the purpose of the endorsement. While the letter affirmed coverage under those conditions for the salespersons’ retaliation claims, it denied coverage for all other claims made.
Also, based on the now-included allocation provision in the new endorsement, Arch only agreed to pay twenty percent of Granite’s defense costs subject to the policy’s $250,000.00 deductible. Arch based its allocation on the salespersons’ complaint having five counts, of which only one was for retaliation. Thus, Arch limited its obligation to fund defense costs to one-fifth, or 20 percent of Granite’s total defense costs.
Granite pays $5.65 million to settle after incurring $1.7 million in defense costs
Eventually, all the class claims and retaliation claims brought by the salesperson were settled by Granite, paying them $2.15 million to resolve the retaliation claims, $2 million to resolve the class action, and under the retaliation statute, $1.5 million to the salespersons’ legal counsel. On December 5, 2018, as required in class actions, the Superior Court Judge hearing the matter, expressly found that the settlement, including the $2.15 million to Contino and Hawes individually, and the class action settlement was “fair, reasonable and adequate.”
During the litigation, Granite had expended on its own $1,690,212.58 in defense costs.
After paying $2.15 million to the salespersons and $1.5 million to their attorneys, Granite sought coverage of Arch for the $2.15 million liability, $1.5 million in attorney’s fees, and the $1,690,212.58 in defense costs.
USI agrees to add endorsement to Granite’s policy three years after the policy expired
During the litigation, Granite had retained coverage counsel to advocate for Granite’s position that the original policy had provided full coverage for the salespersons’ Wage & Hour Claims and that the post-claim endorsement was not valid.
In August 2018, while the settlement was in process, Granite’s coverage counsel advised Arch that it was Granite’s position that the endorsements that Arch relied upon had never been added to the policy and that the alleged removal of the original endorsement had never been accomplished.
However, in November 2018, notwithstanding Granite’s legal position that the policy as issued did not have any endorsement changing the terms of Endorsement 19, as originally written, USI, acting as Granite’s agent, agreed that Arch could add the two new endorsements to the policy, deleting the original Endorsement 19, and inserting endorsements that USI had originally agreed to add in March 2015 to the policy.
Since Granite had never revoked USI’s agency as its broker of record with Arch, Granite acknowledged that USI had bound it to Arch’s revised policy.
Based on that acknowledgment of USI’s authority, Arch paid the entire $2.15 million payment under the retaliation provision of the amended policy. Arch also paid twenty percent ($300 thousand) of the $1.5 million of the attorney’s fees paid to the salespersons’ lawyers but refused to pay any of Granite’s defense costs.
Granite sues USI for breach of its agency agreement as Granite’s broker
While accepting the amended policy terms from Arch based on USI’s actions in approving the endorsement Arch had proposed, Granite believed that USI’s unilateral actions concerning the policy endorsements had cost it $1.5 million. Granite’s claim against USI was that its defense costs and the plaintiff’s attorney’s fee costs would have been covered under the policy if USI had not agreed to limit, in Granite’s view, its coverage by agreeing to endorse the policy.
On April 26, 2019, Granite sued USI in the Business Litigation Session of the Superior Court in Boston.
Granite’s allegations were that as originally issued, the policy provided coverage for any Wage & Hour Retaliation Claim filed as one count of a multi-count lawsuit. Coverage for the Wage & Hour Retaliation Claim would have required Arch, under Massachusetts law, to defend all the counts or the lawsuit whether covered or not, including the class action count. Thus, Arch would have borne the full costs of defending the lawsuit against Granite, as well as indemnifying for the Wage & Hour Retaliation Claim.
The defense of USI was that it had acted in the best interests of Granite because the policy amendment broadened coverage and benefitted Granite. Its assertion was that without the amendment, there would have been no coverage for any count of the salespersons’ lawsuit.
Court agrees with USI that Granite had no coverage before the new endorsement
After discovery, both parties, Granite and USI, moved for summary judgment. Granite claimed that USI’s actions in agreeing to amend the policy, allegedly in secret with Arch, were a breach of its duties as Granite’s broker because it owed a duty of fidelity and loyalty, which it violated by making an agreement which was against, as Granite alleged, Granite’s best interests.
The Court, however, disagreed with Granite’s position and allowed USI’s summary judgment because it agreed with USI that the disputed policy amendment helped rather than hurt Granite. The Court found that before it was amended, the policy had provided Granite no coverage for any part of the lawsuit by Granite’s former employees.
The Court reasoned that as written, Endorsement 19 referenced the defined term “Claim,” which included, as here, a “civil proceeding…. commenced by the service upon the insured of a complaint.”
The endorsement barred coverage for any Wage & Hour Claim except for a Wage & Hour Retaliation Claim. However, the definitions for Wage & Hour Claims and a Wage & Hour Retaliation Claim both contained within them exclusions for “civil proceedings.”
Under the definition of an excluded Wage & Hour Claim, a civil action, like the salespersons’ complaint, which contains a Wage & Hour Claim, is excluded from coverage by the definition which prohibits coverage “regardless of whether such Claim also includes non-Wage & Hour Laws allegations.”
Similarly, the Wage & Hour Retaliation Claims of the salespersons would have had no coverage because the definition of covered Wage & Hour Retaliation Claims required that the civil action that made up the Claim be sole allegation. The salespersons’ civil action had contract, Wage & Hour Claims for the class members, and common law claims.
Because of the way the policy defined a “Claim,” Endorsement 19 had the effect of barring coverage of the underlying lawsuit against Granite. That lawsuit was an excluded “Wage & Hour Claim” because the employees contended, in part, that Granite had violated the Massachusetts Wage Act. The exception (from the exclusion) for “Wage & Hour Retaliation Claims” did not apply, though the employees also contended they had been retaliated against for exercising their rights under the Wage Act, which was not the “sole allegation” in their counterclaims.
The Court noted, though, that the new endorsement that USI agreed on with Arch did not bar all coverage as Endorsement 19 had. This new endorsement stated that:
“The insurer shall not pay Loss that is based upon, arising out of or in any way related to any actual or alleged violation of any Wage and Hour Laws, provided that this exclusion shall not apply to Loss resulting from Retaliation.”
The new term “Retaliation,” used in the endorsement, is a defined policy term meaning “any actual or alleged negative treatment of an employee for exercising any rights granted under law.”
While the new endorsement still limited coverage by excluding Wage & Hour Claims, other than retaliation claims, it did not reference the defined term “Claim” and did not limit covered retaliation claims to civil actions where the “sole allegation” was retaliation.
By removing from the new endorsement, the defined terms “Wage & Hour Claim” and “Wage & Hour Retaliation Claim” the endorsement created coverage for the Wage & Hour retaliation count in the salespersons’ lawsuit and allowed for Granite to recover the $2.15 million retaliation settlement and the $300 thousand allocation of the salespersons’ legal fees.
Judgment for USI based on Granite being unable to establish any damages
The Superior Court found that USI was entitled to summary judgment as a matter of law because Granite could not prove that it suffered any damages from USI’s actions. As the Court stated:
“In its first claim, Granite contends that USI is liable for breaching a contractual obligation to use the ordinary skill and judgment expected from insurance brokerage professionals because it agreed to a policy amendment that reduced Arch’s EPL coverage…The new endorsement actually broadened the available coverage. Without the amendment, Granite would not have recovered anything from Arch. With the amendment, it recovered millions of dollars. Since Granite was not harmed by the policy amendment, it cannot prove that it suffered any damage from the alleged breach of contract.”
Granite also sued under G.L. c. 93A, § 11 for unfair business practices. However, based on the same lack of any loss caused by USI’s agreement to amend the policy, Granite could not make the required legal showing that it had “suffered a ‘loss of money or property’ which is a required element of any business-to-business claim under c. 93A.
No appeal
Granite elected to accept the Superior Court decision and did not file an appeal within the allotted time to the Appeals Court.
Owen Gallagher
Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists
Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.
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