Articles and Reports

Follow Instructions - or Else!

By Richard Mintzer CLU
5551 Jewel Creek Ct
Boulder, CO 80301
Richard Mintzer Associates LLC
rsm@rmaexperts.com
http://www.rmaexperts.com/

Article appeared in the March 2007 Edition of XPRO News. Any questions please call Dick Mintzer.
  

Following a thirty career as an insurance agent and educator I have been earning my living as an insurance expert witness since 1999. I specialize in standard of care issues and agent company disputes. Despite my experience, a strange tension occurs each time the doorbell rings and the FedEx person is outside with two legal size boxes. My reaction is always the same where do I start? Although this article is written in an insurance context I believe all experts can gain value from my experience.

The method that seems to work best for me is to focus on the instructions
given by the client to the agent and the instructions (if any) given to the agent by the insurer. This technique is an excellent focal point to begin the investigation. The goal is to determine if the insurance professionals involved in this transaction followed their instructions . Insurance professionals and professionals in general who fail to follow instructions do so at their own peril.

Sounds simple, Think again. Unfortunately there are at least three separate sources of instructions to follow. I think we can all agree that the paramount duty of any professional is to follow the instructions of their clients. Most if not all insurance experts would also agree that the duty to follow the instructions of our clients is closely followed by the duty to follow the instructions of the insurance companies they represent. Slightly more obscure is the duty to follow the statutory requirements of the Regulatory Agencies.

I am currently involved in a case where a high asset individual approached his agent and requested higher personal liability limits. The agent understood the instructions and obtained for his client a $10 million personal umbrella policy. The agent however advised that the highest limit of automobile liability he could obtain was $500,000. The reason for the lower limit on the auto liability coverage was the driving record of the client which included a DUI. Relying on this information the client instructed his agent to place the $10 million umbrella policy with a $500,000 single liability limit on autos owned and operated by the client.

To paraphrase "Murphy's Law" if there is an accident waiting to happen it
will. In Act one of our reality drama our client is involved in an "at fault" accident resulting in a trial and a judgment for the injured party in the amount of $750,000, leaving our client out-of-pocket in the amount of $250,000. Act two is a civil suit brought by the insured against the agent to recover the out-of-pocket expense. At my suggestion to support his contention that the agent did not follow instructions, an expert in high insurance limits and difficult risks is retained by the insured who advises that higher limits at a reasonable cost were available to the client prior to the loss. Act three is still to be written but I can tell you that serious settlement negotiations are occurring and will likely result in a substantial judgment in favor of the high asset individual.

Here's a different twist on the issue of following instructions, my client an operator of a successful retail store opens the Yellow Pages and sees the name of an insurance agent who advertises that he specializes in business accounts. He refers to himself as an insurance counselor and in fact is the holder of the prestigious CIC designation. The client calls the agent and after a short discussion they agree to meet. At the end of a very short first meeting the client instructs the agent that he would like to be "fully covered" and also lower the cost of his insurance program. The agent gathers some coverage information, and requests and receives copies of the current insurance contracts. The agent agrees to prepare a proposal and present the proposal one week later. This meeting lasted less than 10 minutes.

This particular agent represents a major insurer which allows him to rate and bind a business owner's policy up to a limit of $1 million. This particular contract has all the bells and whistles and features replacement cost coverage on building and contents. The producer reviews his notes, studies the insurance contracts and prepares an insurance proposal featuring higher limits and lower-cost. The proposal is presented one week hence and the client is thrilled. An agreement is reached a deposit is taken and a few days later confirmation of coverage is received by the retailer. Total time of both meetings less than twenty minutes.

Once again the insurance version of Murphy's Law rears its ugly head. In the city where the retailer is located there is an outbreak of riots and civil commotion and the retail location is completely destroyed. Enter the adjusters and the accountants and a policy limit settlement is offered and all is well except for one small matter the building is 60% underinsured and the contents are about 40% underinsured. Everybody happy not yet!

The client sues the agent because he asked for full coverage and obviously he did not have full coverage. The defense counters that the agent provided more coverage than the retailer had before and that the client was fully aware of the insurance limits as proven by his signature on the application for insurance. Case closed, not quite.

Discovery produces the underwriting manual provided by the insurance company to the agent. The instructions in the manual specifically direct the agent to fully explain the consequences of replacement cost coverage and to inspect the premises to determine proper replacement cost value prior to binding coverage. It is undisputed that neither occurred. The result is a very favorable settlement for the retailer, now its case closed.
Statutory regulations are usually not on the mind of insurance producers but as the familiar axiom states "Ignorance of the Law is no excuse.". In the state of Colorado insurance producers are statutorily required to offer Under Insured Motorists Coverage up to the Policy Bodily Injury limit not to exceed $100,000. The insured may decline the coverage but must sign a statement acknowledging the declination of coverage. I have been involved in several cases where the required offer of coverage has not been made or not properly made. The result almost always is a judgment for the insured.

I am an insurance expert but I believe it is the duty (insurance or not) of any expert to determine if possible what actually happened in any given matter and if there is error or omission to determine who is responsible. In my opinion it is crucial to figure out what was supposed to happen and then determine what went wrong. More often than not this fundamental information can be determined by the instructions given to the agent. Producers who fail to follow instructions do so at their own peril. If any of the readers of this article would like to discuss these issues with me please feel free to contact me.

Intentional Acts or Not?

Algona insurer faces big liability in drug scheme

By S.P. DINNEN
Register Business Writer
11/16/2003

A Missouri pharmacist's deliberate scheme to dilute the drugs sold to thousands of cancer patients has embroiled an Iowa insurance company in the fight of its life.

Pharmacists Mutual Insurance Co. of Algona has been ordered to pay $2.7 million in interest in just one lawsuit. A Kansas City jury will decide soon whether the company is liable for an additional $27 million in compensatory damages that have been awarded to that patient, Georgia Hayes of Harrisonville, Mo., who suffers from ovarian cancer.

About 500 other lawsuits filed by customers of druggist Robert Courtney are making their way through the courts, and each one represents a potential liability claim for the Algona company.

Courtney pleaded guilty in February 2002 to 20 counts of diluting intravenous cancer drugs that he sold from his Research Medical Tower Pharmacy. He admitted to federal investigators that he had fattened his profits by diluting cancer medications for 10 years - affecting as many as 4,200 patients.

Courtney was sentenced to 30 years in prison.

Pharmacists Mutual sold Courtney his business liability insurance coverage. The Algona company was founded in 1909 and is the only insurance company in the United States that specializes in insuring druggists and their businesses. The company is owned by its policyholders and has about 200 employees in Algona.

Pharmacists Mutual contends that it is not liable for the harm caused to Courtney's customers because his actions were deliberate.

"Our position has always been that illegal acts are not insured," said Kenneth Baker, general counsel for Pharmacists Mutual.

That argument did not work last month when the $330 million verdict on behalf of Georgia Hayes was upheld in Jackson County (Mo.) Circuit Court.

Senior Judge Lee Wells ruled that Pharmacists Mutual was not responsible for $300 million in punitive damages again Courtney. But the judge said the company would at least have to pay interest on a $30.1 million compensatory damage award against Courtney - now about $2.7 million.

The amount Pharmacists Mutual has to pay could be even higher because the judge said it is up to a jury to decide whether Courtney intended to harm his victims when he watered down their chemotherapy drugs.

The judge ruled that each of 27 times Courtney provided diluted drugs for Hayes was a separate occurrence under his Pharmacists Mutual liability policy. The policy provides liability coverage for up to $1 million per occurrence - meaning the Iowa company could be found responsible for $27 million of the damage award to the Missouri woman.

Pharmacists Mutual is preparing an appeal of Judge Wells' ruling to the Missouri Supreme Court.

The company also has asked a federal judge in Kansas City to declare that Pharmacists Mutual is free of any obligation to pay damages awarded to Courtney's customers.

"The injuries and damages . . . resulting from those intentional, purposeful and malicious acts are not covered," the company has contended in court documents.

The 500 lawsuits filed against Courtney by cancer patients or their families have been on hold while the parties awaited a ruling in the Hayes case. So the outcome of the Missouri Supreme Court appeal and Pharmacists Mutual's federal court case could have monumental consequences for the Iowa company.

Richard Mintzer, a Boulder, Colo., consultant who specializes in insurance cases, said Pharmacists Mutual would appear to have the law on its side when it argues that it is not liable for a pharmacist's intentional actions. He said Courtney's guilty plea would seem to buttress that argument.

However, Courtney's contention that he did not intend to cause harm to his victims makes Pharmacists Mutual's legal position more challenging, Mintzer said. The insurer also faces a potentially huge battle in trying to persuade judges or juries that Courtney's actions were one large, single occurrence and not a collection of individual acts, Mintzer added.

"I would guess it's separate occurrences," he said - referring to each time Courtney diluted a drug.

If that's the case, Mintzer said, Pharmacists Mutual could be liable for damages each time a prescription was filled. Courtney admitted in his guilty plea that he diluted drugs that were used in approximately 98,000 prescriptions.

"This insurance company is fighting for its life," Mintzer said.

Pharmacists Mutual has financial reserves, as well as reinsurance. Reinsurance is a practice in which an insurance company buys coverage from another insurer to cover portions of its claims risk.

The Algona company's legal and financial position is strong enough that A.M. Best & Co., which rates the soundness of U.S. insurance companies, still gives its second-highest rating to Pharmacists Mutual.

"I expect this will play out over time," said David Blades, a property and casualty insurance specialist at A.M. Best who has been in touch with Pharmacists Mutual officials over the Courtney lawsuits.

"I expect some sort of mediation to come out of this."

The court rulings in Missouri could affect another Iowa insurer, EMC Insurance Cos. The Des Moines company sold some of the reinsurance coverage for Pharmacists Mutual.

A spokeswoman for EMC said her company does not yet know the extent of any exposure it has to Courtney-related reinsurance claims. And Baker, the Pharmacists Mutual lawyer, would not say how much of its coverage for Courtney was reinsured.

Copyright © 2003, The Des Moines Register.