Ten Things You Don’t Want to See in Your E&O Policy – #5

(This is the fifth of a ten-part series highlighting significant coverage issues in agents’ E&O policies. Take a look at your E&O policy. If it includes the wording described below or something similar, you may need an E&O makeover. Contact Gunnar Kephart at IIAT Advantage E&O at 800.880.7428)

No Coverage for Punitive or Multiplied Damages

Look for this language:

“Damages means a monetary judgment, award or settlement, but shall not include any punitive or exemplary damages, or any multiplied portion of any multiplied damages award,” or a specific exclusion in the exclusions section for punitive and multiplied damages, or an exclusion for “fines and penalties.”

In Texas, punitive damages may be awarded in cases where there is evidence of fraud, malice or gross negligence. Multiplied damages are statutory penalties allowed under the Deceptive Trade Practices Act and the deceptive practices section of the Insurance Code. While we are not aware of any final award of punitive or multiplied damages against an insurance agent in Texas, virtually every lawsuit against agents demands such damages.

We have seen these damages awarded by juries. For example, in one case, an agent failed to place a CGL policy for a contractor and failed to advise the customer no CGL coverage was in force. The contractor sued the agent for negligence and also demanded additional damages for violations of the Deceptive Trade Practices Act.

The jury awarded damages against the agent of $175,000 for negligence, actual damages of $200,000 under the DTPA, and additional damages of $300,000 for knowingly violating the DTPA. The trial court judge granted the E&O carrier’s motion to reject the jury’s decision and rendered judgment in favor of the agent.

The contractor appealed this decision and it was overturned by the Houston Court of Appeals but ultimately upheld by the Texas Supreme Court. The E&O carrier spent more than $135,000 to defend the case all the way to the Supreme Court in order to obtain a favorable decision. The agent’s failure to procure a CGL policy complicated and extended this case, and his failure to disclose that fact to the customer in a timely manner exposed him to multiplied damages under Texas consumer protection laws.

The next agency facing a similar claim may not be so lucky or well-defended. If your E&O policy excludes punitive or multiplied damages, ask your E&O agent or carrier if coverage is available. If not, ask for alternate quotes from other markets the next time your policy is up for renewal.

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