There’s nothing quite like a lawsuit against an insurance agent for $1 million that makes it all the way to your state’s supreme court. These types of suits are precisely why insurance agent Errors and Omissions (E&O) coverage has long been considered a “hard” market by many insurance carriers. While claims against insurance agents may not be frequent, the judgments can be severe when they do arise.

Case in point: a recent decision by the Montana Supreme Court in 2024 affirming a $1,000,000 verdict against Rames, Inc., doing business as Central Insurance Agency, for negligence and negligent misrepresentation.

The Case: Sinking Condominiums

The lawsuit was brought by TCF Enterprises, Inc., doing business as Malmquist Construction (Malmquist), a general contractor engaged in a luxury condominium project in Whitefish, Montana. As part of the construction process, Malmquist hired C&H Engineering and Surveying, Inc. (C&H) to conduct a subsurface soil investigation. C&H’s report stated that if their recommendations were followed, the expected settlement of the building would be “less than ¾-inch.”

Unfortunately, the reality was starkly different—the building settled over four inches, causing extensive delays and costly repairs. What followed was a legal battle, with Malmquist suing C&H, along with additional lawsuits involving other parties, including a second engineering firm and the excavation company.

The Insurance Controversy

Rames, Inc. was the insurance agent for C&H. When Malmquist hired C&H, it required specific language in a certificate of insurance (COI), stating that Malmquist was an additional insured on C&H’s general liability policy. Rames provided a COI confirming this coverage.

However, Rames never actually secured the requested additional insured endorsement for Malmquist on C&H’s Commercial General Liability (CGL) policy with Travelers Insurance. When Malmquist was later sued and sought defense coverage from Travelers, the claim was denied on two key grounds:

1. The policy’s blanket additional insured endorsement required a written contract between C&H and Malmquist, which did not exist.
2. Even if Malmquist had been named as an additional insured, the policy’s professional services exclusion would have barred coverage.

With no coverage available, Malmquist turned to Rames, alleging that the agency had negligently misrepresented coverage and failed to procure the requested endorsement.

The Court’s Findings

Rames’ primary defense was that even if the additional insured endorsement had been properly secured. The claim would have been excluded under the professional services exclusion. The Montana Supreme Court rejected this argument, citing the state’s mixed-action rule, which requires an insurer to defend all claims if at least one of the allegations triggers coverage.

Additionally, the court ruled that Rames had a duty of care to Malmquist, even though Malmquist was not a direct client. Because C&H had instructed Rames to procure a specific insurance endorsement for Malmquist, and Rames agreed to do so, the agency had an obligation to ensure the coverage was in place. The failure to do so constituted negligence and negligent misrepresentation.

The Verdict & Industry Lessons

The Montana Supreme Court upheld a $1 million damages award against Rames, along with $22,257.85 in defense costs. The case serves as a cautionary tale for insurance agents handling COIs and commercial insurance policies.

According to Catherine Kimmey, Senior Underwriter for IBDPro Insurance, claims involving COIs are common in E&O litigation. Agents can face significant exposure when they misrepresent coverage details. Kimmey advises agents to adhere to these best practices:

• Verify coverage before issuing a COI. Never assume an endorsement exists without confirmation from the carrier.
• Understand the nuances of additional insured endorsements. Blanket AI endorsements often require written contracts, and failing to communicate this to clients can lead to disputes.
• Always avoid issuing COIs before coverage is secured. Even if a client pressures you for a fast turnaround, ensure the coverage or endorsement is in place first.
• Educate clients about policy limitations. Clients may mistakenly assume a CGL policy covers professional services, but such exposures typically require E&O insurance.

This case underscores how even small errors can lead to devastating financial consequences for insurance agents. Attention to detail and diligent communication with clients can help mitigate these risks. Stay safe out there!