In the case of Auto-Owners Ins. Co. v. Forest Ins. Center Agency, Inc., Auto-Own Ins. Co. v. Forest Ins. Ctr. Agency, No. 366123 (Mich. Ct. App. Oct. 25, 2024), the Michigan Court of Appeals addressed the intersection of professional liability insurance and negligence claims in the context of a catastrophic fire at a Michigan lumber business. The fire, which caused over $22 million in damages and losses, exposed alleged shortcomings in the business's commercial insurance coverage. This case highlights the ongoing duty of insurance agents to determine accurate coverage and the expansive nature of an insurer's duty to defend under claims-made policies.
Background Facts
Kamps Hardwoods Inc.'s (Kamps) facilities caught fire on July 2, 2019. The incident was serious and resulted in over $22 million in property damage and business losses. Kamps is a lumber business that is owned and operated in Michigan. The business had commercial insurance with Forest Insurance, Mauck Insurance and two independent insurance agents. A sawmill destroyed in the fire was included in the coverage except for business interruption portion. Otherwise, the policy provided $1,250,000 for building replacement coverage and $2,133, 500 for business personal property coverage.
The Kamps brought a lawsuit against Forest claiming that they "negligently procured inadequate commercial insurance coverage for the sawmill" and as a result, they suffered a $19 million loss due to the fire. Kamp brought evidence that their business personal property coverage was reduced even though they had previously requested additional coverage.
Forest carried primary professional liability insurance with Westport Insurance Company, offering $6 million in coverage, and secondary liability insurance through an Auto Owners commercial umbrella policy, providing an additional $5 million upon exhaustion of the Westport policy. The Auto Owners policy included a claims-made endorsement effective June 27, 2019, to June 27, 2020, covering negligent acts, errors, or omissions occurring within this period, provided a claim was first made during the policy term. The endorsement explicitly excluded incidents occurring before June 27, 2019.
Westport tendered its policy limits to Kamps on behalf of Forest. Auto Owners argued that no negligent act or omission occurred during the policy term. Kamps disagreed and asserted that Forest negligently procured inadequate coverage and failed to correct the alleged error before the fire. Both sides filed motions for summary disposition. The trial court denied Auto Owners' motion and granted summary disposition for Kamps and Forest under MCR 2.116 (c)(10). The court held that the alleged negligence spanned into the Auto Owners policy period, as the fire occurred just five days after the umbrella policy's inception. Consequently, Auto Owners was obligated to defend Forest and indemnify Kamps if liability was established in the underlying case.
Declaratory Judgment and Duty to Defend
Under MCR 2.605, Michigan courts may issue declaratory judgments in cases of actual controversy, with discretion to determine an insurer's duty to defend or indemnify. In insurance disputes, the duty to defend is based on allegations in the underlying complaint and is broader than the duty to indemnify. Allstate Ins Co. v Freeman, 432 Mich. 656, 662; 443 N.W.2d 734 (1989).
Negligence and Insurance Agents' Duties
A negligence claim requires proving the existence of a duty, breach of that duty, causation and damages. Bialick v Megan Mary, Inc, 286 Mich.App. 359, 362; 780 N.W.2d 599 (2009). Insurance agents generally owe a duty to procure requested coverage but not to advise on adequacy unless a special relationship arises. Harts v. Farmers Ins. Exchange, 461 Mich. 1 (Mich. 1999). In Harts, the Supreme Court identified four events that give rise to a "special relationship" requiring an insurance agent to advise an insured as to the adequacy of their insurance coverage:
- The agent misrepresents the nature or extent of the coverage offered or provided.
- An ambiguous request is made that requires a clarification.
- An inquiry is made that may require advice and the agent gives advice that is inaccurate, or
- The agent assumes an additional duty by either express agreement with or promise to the insured. Id.
Application to the Case at Hand
Auto Owners and Kamps agreed that Forest negligently reduced Kamps' business personal property coverage in January 2018, despite a request for additional coverage. Additionally, in January 2019, Forest incorrectly assured Kamps that their sawmill had blanket business interruption coverage. These actions established Forest's duty to procure proper coverage and provide accurate advice under the special relationship standard in the Harts case. The trial court concluded that these duties were ongoing and extended into the Auto Owners policy period starting June 27, 2019. Thus, the trial court determined that Auto Owners was required to defend Forest and potentially indemnify Kamps, as the alleged breached occurred within the policy term.
In P. L. Kanter Agency, Inc v Continental Cas Co, 541 F.2d 519 (CA 6, 1976) the United States Court of Appeals for the Sixth Circuit addressed similar circumstances involving inadequate insurance coverage. A fire damaged a cocktail lounge in Michigan, and errors and omissions by P.L. Kanter Insurance agency left the property underinsured. Kanter had two professional liability insurance policies: one in effect when the errors occurred and another when the fire and related claim arose. The court held that Kanter's errors were not isolated but were ongoing omissions that persisted until the fire. Kanter had a duty to either procure adequate insurance or give notice to the lounge owners to seek appropriate coverage elsewhere. This duty remained binding on the date of the fire, making the liability policy on effect at that time the primary coverage for the loss.
Similarly, Forest had an ongoing duty to procure adequate insurance for Kamps and to advise them about the absence of business interruption coverage on the sawmill facility. Auto Owners' commercial umbrella policy, effective June 27, 2019 to June 27, 2020, explicitly covered negligent acts, errors, omissions, or breaches of duty occurring during the policy term.
Since Forest's duties continued through July 2, 2019 sawmill fire, Auto Owners was contractually obligated to defend Forest and potentially indemnify Kamps. The trial court did not err in its grant of summary disposition pursuant to MCR 2.116(c)(10) in favor of both the Forest and Kamps. On appeal, this decision was affirmed.
Key Takeaways
The court found that insurance agents' ongoing duties to procure adequate coverage and correct prior errors extended into the policy period of Auto-Owners' umbrella liability coverage, triggering its defense and indemnity obligations.
An insurer's duty to defend is broader than its duty to indemnify, based on the allegations in the underlying complaint rather than the eventual determination of liability.
Insurance agents owe a duty to procure requested coverage and may owe a heightened duty to advise on adequacy when a "special relationship" exists. Forest's actions, including reducing coverage and providing inaccurate assurances, demonstrated such negligence.
Courts strictly enforce unambiguous insurance policy terms. Here. Auto-Owners claims-made endorsement covering negligent acts during the policy term applied due to the ongoing nature of the alleged negligence.
The ruling aligns with past decisions that errors or omissions persisting until the time of a loss fall under the coverage of liability policies in effect when the loss occurred.
Conclusion
The Michigan Court of Appeals' decision in this case reaffirms the principle that insurance agents' duties to their clients can span policy periods, creating significant implications for claims-made liability coverage. By emphasizing the ongoing nature of negligence in procuring and managing insurance policies, the court held that insurers may be obligated to defend and potentially indemnify their insureds when allegations of error continue into the effective policy period. This case serves as a critical reminder to insurance professionals of their continuous responsibilities and highlights the expansive scope of an insurer's duty to defend, which often outweighs its obligation to indemnify.