Producer's EdgeBy Isaac Peck, Publisher
There’s nothing like a lawsuit against an insurance agent for $1 million dollars that makes it all the way to your state’s supreme court.
These types of suits are why insurance agent E&O has long been regarded as a “hard” market by many insurance carriers. It is not that claims against insurance agents are particularly frequent, but when claims do come, the judgements can be severe.
Case in point is a recent decision by the Montana Supreme Court in 2024 to affirm a $1,000,000 verdict against an insurance agency, Rames, Inc., doing business as the Central Insurance Agency for negligence and negligent misrepresentation.
The case involves a contractor, an engineering firm, and a certificate of insurance that contained false information.
Here is the story behind this very public insurance dispute.
Background: Sinking Condominiums
The lawsuit against the insurance agency, Rames, Inc., was brought by TCF ENTERPRISES, INC., doing business as Malmquist Construction (Malmquist), as part of a construction defect litigation dispute.
Malmquist, a general contractor, was building a new condominium project in downtown Whitefish, Montana, one of the most expensive cities in Montana with a median home price of over $1 million dollars.
As part of its new construction project, Malmquist hired C&H Engineering and Surveying, Inc. (C&H) to conduct “subsurface soils investigation” at the site of the proposed condominiums. C&H conducted its soil investigation and included recommendations regarding subgrade preparation and structural fill, writing that if its directions were followed, the expected total settlement of the building would be “less than ¾-inch.” Much to everyone’s dismay, the condominium building began “sinking” during construction and ended up settling over four inches, according to the Montana Supreme Court’s summary. This caused substantial delays in construction and was very costly to repair.
The ensuing controversy then resulted in a litigation free-for-all, with the developers suing Malmquist (the general contractor) and Malmquist suing C&H (Rames’ insured). Additional suits were also brought against a second engineering firm and the excavation company.
Additional Insured Controversy
Rames was the insurance agent for C&H Engineering and Surveying. When Malmquist originally engaged C&H, Malmquist sent a sample certificate of liability insurance which contained the following required language:
TCF Enterprises Inc. DBA Malmquist Construction is named as an Additional Insured with respect to General Liability, including Primary/Non-Contributory and Completed Operations coverage, per forms CG2010 0413 and GC2037 0413 or equivalent. Waiver of Subrogation in favor of TCF Enterprises Inc. DBA Malmquist Construction on General Liability.
At C&H’s request, Rames then sent a certificate of liability insurance to Malmquist that showed Malmquist listed as an additional insured on C&H’s commercial general liability (CGL) policy, including primary and noncontributory, as well as waiver of subrogation wording.
The problem? Rames did not actually procure the requested coverage and C&H’s CGL policy with Travelers Insurance Company was never endorsed to add Malmquist as an additional insured.
When Malmquist was sued by its developer for negligence and breach of contract relating to the construction of the condominiums, Malmquist tendered the suit to Travelers Insurance, seeking defense and indemnity as an additional insured under C&H’s CGL policy.
The catch? C&H’s CGL policy included a blanket additional insured endorsement, which required a written contract between C&H and Malmquist for additional insured status to apply. No such contract existed.
Travelers subsequently denied coverage to Malmquist, arguing that (1) Malmquist was not covered as an additional insured under the blanket additional insured endorsement because there was no written contract reflecting such between C&H and Malmquist, and (2) separately, even if Malmquist was named as an additional insured, the policy’s professional services exclusion would bar coverage.
Malmquist subsequently sued Rames for misrepresenting the coverage procured and breaching the standard of care owed by an insurance agent.
In Rames’ Defense
Insurance agents familiar with commercial insurance are likely scratching their heads regarding Malmquist’s initial claim against the insurance agency.
After all, the core argument for damages in this case revolves around C&H’s allegedly erroneous professional services—specifically that it mishandled its subsoil investigation and it was negligent in its evaluation of how much the building would “settle” once construction began.
And yet, Malmquist’s insurance requirement was strictly for CGL coverage. Coverage for professional services, such as engineering and surveying services, is not found in CGL policies. This exposure would be properly covered under a professional liability, also known as an errors and omissions (E&O) policy. This type of root-level misunderstanding of coverage and policy is not uncommon in contractor circles (and even amongst some insurance agents that strictly specialize in personal lines).
The point is that Malmquist might have been better served by requiring proof of E&O coverage and being listed as an additional insured on the E&O policy.
So if this claim revolves around an E&O exposure, why does being listed as additional insured on C&H’s CGL policy even matter?
Rames argued exactly this. Rames asserted that even if Malmquist had been listed as an additional insured under C&H’s CGL policy, the policy’s professional services exclusion would have barred coverage.
C&H’s CGL policy, like nearly all CGL policies on the market today, had a professional services exclusion which expressly excluded bodily injury and property damage “arising from” engineering and surveying activities, as well as “any service requiring specialized skill or training.”
The catch lies in the fact that Malmquist was sued for both general negligence and professional negligence. The laws around an insurance carrier’s duty to defend broadly indicate that if a lawsuit is filed and any of the allegations trigger coverage, even if most other allegations are excluded, then the carrier has a duty to defend the insured.
The Montana Supreme Court cites precedent at length here:
If a complaint states multiple claims, some of which are covered by the insurance policy and some of which are not, it is a mixed action. In these cases, Montana follows what is known as the mixed action rule, which requires an insurer to defend all counts in a complaint so long as one count triggers coverage, even if the remaining counts do not trigger coverage.
Here, the court found that because the exclusion for services “requiring specialized skill or training” does not unequivocally exclude coverage for Malmquist’s role as a general contractor, such as the furnishing of labor, materials, tools, and equipment, which clearly do not require specialized skill or training, that a trigger for coverage was possible. Additionally, the court found that were all coverage excluded for a general contractor which, as one portion of its duties, provides services which could be deemed “professional services” on a project, coverage would be illusory under the policy and “policy language which renders coverage illusory is against public policy,” the court wrote.
Consequently, Rames’ argument about the professional services exclusion was rejected by the court.
Duty of Care
Another defense raised by Rames was that it did not owe a duty to Malmquist and that it was unreasonable for Malmquist to rely on the certificate of insurance.
Malmquist was a third-party, not a client or an insured of Rames, and Rames didn’t owe a duty of care to Malmquist—so the argument goes.
The court found that under Montana law, a “client’s request to procure certain insurance, followed by an agent’s commitment to do the same to put the agent under a ‘duty’ to procure.”
“If an insurance agent is instructed to procure specific insurance and fails to do so, he is liable for damages suffered due to the absence of such insurance. The breach of an agreement to procure coverage for a third party is actionable; C&H requested Rames to procure specific additional insured coverage for Malmquist’s benefit, and Rames agreed to do so. Rames, therefore, had an absolute duty to procure the coverage and is liable for damages for failing to do so,” the court concluded.
Consequently, the court found Rames had a duty to Malmquist and was liable for negligence because it failed to procure the coverage requested, and negligent misrepresentation because it “falsely” represented that Malmquist was listed as an additional insured on the policy when it was not.
Verdict
Ultimately, the Montana Supreme Court upheld the lower court’s jury verdict that Rames was liable to Malmquist for $1 million dollars in damages and $22,257.85 in defense costs.
Liability Lessons
Catherine Kimmey, Senior Underwriter for IBDPro Insurance, a national insurance agency that specializes in insurance agent E&O, says that claims involving certificates of insurance (COIs) are fairly common against insurance agents. “We’ve seen a variety of claims involving agents incorrectly reporting coverage on a COI. It’s a common claim against agencies. In one case, an insurance agent issued a COI before a policy was even procured and the agent’s client (a contractor) presented the COI to the developer and never paid for the policy— so no coverage ever existed. A wrongful death claim arose months later and the insurance agent ended up being sued for fraud and negligent misrepresentation,” Kimmey reports.
Insurance agents should be particularly careful when dealing with commercial insurance policies because clients often require very specific endorsements and coverages, advises Kimmey. “As an independent agent, you want to be absolutely sure that if your insured needs specific wording on their COI, like primary and noncontributory, a waiver of subrogation, or an additional insured endorsement, that the coverage is actually in the policy. Additionally, a blanket additional insured endorsement can be materially different than adding a company specifically to a policy as an additional insured, as we’ve seen in this case,” Kimmey says.
Sometimes an insurance agent can issue a COI with the intention of requesting the endorsement or coverage enhancement later, in an effort to satisfy a customer who often is under tight deadlines to compete for business and is looking to their insurance agent to help. “As much as you might want to help your client and provide fast service, we highly recommend you have a hard rule to never issue a COI unless you verify the specific coverage or endorsement has been issued by the insurance carrier. The coverage or endorsement need to exist before you represent to your client or third-parties that it exists. We’ve seen too many cases where a COI is issued but something falls through the cracks and the coverage never gets added,” relates Kimmey.
This case also highlights the need to explain to clients in writing the specific requirements of coverage. For example, it’s not uncommon for more general Additional Insured (AI) endorsements to require a written contract between the Named Insured on the policy and their third-party client. All too often, insurance agents can assume that a general AI endorsement on a policy “does the job,” but fail to take the time to explain or disclose the specific requirement to their client.
As we see with this case, even small mistakes can be incredibly costly. Stay safe out there!
