Presented by the Insurance Agents & Brokers Liability Practice Group

A Funny Thing Happened on the Way to the Courthouse – An Agent Jumped Into the Suit

December 11, 2018

By David W. Henry, Esq.*

It is not uncommon for insurance agent errors and omissions claims to be asserted while there is pending coverage litigation. As we all know, if the court determines there is insurance coverage, the issue of the agent’s negligence becomes largely moot (except for some residual liability under the wrongful act doctrine in some states). If the agent has concerns that the coverage litigation may be resolved in favor of the carrier and that the insured or underlying claimant in the coverage litigation is not well-positioned to defend the coverage litigation, may the agent intervene in the coverage lawsuit to argue that there is coverage? The answer is likely yes.

This is precisely what happened in Western World v. Eastside Community Resource Center, 2006 U.S. LEXIS 20657 (S.D. Mich. 2006). The case was decided based on the federal rules, but most state courts have similar intervention rules, so the case could have precedential value in any federal or state court beyond Michigan where it was decided. The agency, Bourdeau, moved to intervene in the declaratory judgment action filed by Western World Insurance Company. Bourdeau argued in the pending E&O claim that the agency client claimed there was no coverage due to the agent’s negligence and, therefore, it should be permitted to intervene as a defendant in the coverage suit because, if the coverage issues were decided against Western World, the E&O claims against the agent would be subject to dismissal in state court. The rules are written with expansive language. Federal Rule of Civil Procedure 24 states, in pertinent part:

a) Intervention of Right. Upon timely application anyone shall be permitted to intervene in an action: . . . (2) when the applicant claims an interest relating to the property or transaction which is the subject of the action and the applicant is so situated that the disposition of the action may as a practical matter impair or impede the applicant’s ability to protect that interest, unless the applicant’s interest is adequately represented by existing parties.

The court concluded that Bordeau had a substantial interest because, in the coverage litigation, Eastside had alleged that coverage existed in federal court and took a contrary position in its negligence claim against Bourdeau in state court. In some jurisdictions the claim against the agent might be stayed or abated until the coverage litigation is resolved. The Western World case suggests a second, albeit unconventional, strategy, where the agent intervenes to help defend against or perhaps attack the carrier’s coverage position. Why would an agent stick his neck into federal court litigation voluntarily? Because the agent and its attorney may be better able to bear the cost and may have expert knowledge that could affect resolution in the insured’s favor or prompt a settlement by the carrier. The court also found that permissive intervention was proper under Rule 24(b), affording a second basis for its decision. Under the “common questions of law and fact” principle, the court ruled Bourdeau’s intervention was also justified.

While the agent’s tactics in Western World are unconventional, the case also highlights the importance of strategic decision making when coverage issues are being litigated. It will often be the case that a finding of coverage affords the agent a key defense to negligence or a failure-to-procure claim. Less obvious strategies might be to ghost write papers, assist the insured or claimant in developing legal arguments, suggest avenues of discovery to pursue from the carrier, and provide legal research in the form of attorney work-product to the agency client or the underlying claimant. If there is significant exposure, intervention might warrant consideration. The agent (by intervening, of course) would be bound by the coverage determination and, under collateral estoppel principles, would be precluded from relitigating that issue in the state court litigation if coverage was determined not to exist in the coverage litigation.

*David is a shareholder in our Orlando, Florida office who can be contacted at dwhenry@mdwcg.com or 407.420.4418.

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