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Case Study - Operations Not Covered

The Agency Relationship

Case Study: Operations Not Covered


As independent agents, there is always a requirement to act in a prudent manner, a careful practice and disclose all material information when writing business. No matter what state you write business in, negligence could affect the insured, the insurer, and the agent. This is true in the following case where the agent felt his legal responsibility ended when the insurer agreed to issue the policy.


In this 1978 court case, the agent failed to complete his duty of notifying the insurer of additional exposures (albeit a separate company) operating on the premises.


Scenario: An agent was issuing a policy for a business owner who owned two corporations that operated at the same location. One was a metal and machine part fabricating business (Company A); the other was a semiconductor company (Company B).


Policy Issuance: The agent issued a fire insurance policy to Company A but made no mention of Company B in any of the documentation submitted to the insured.


Uncovered Loss: Company B suffered a fire in its warehouse and filed a claim with the insurer. The insurer denied the claim because Company B was not a named insured on the policy.


Court Decisions: The insured went to court and the insurer was found liable for $385,000. The insurer then sued the agent to recover the money, arguing that the agent had failed to promptly inform the insurer either of the existence of Company B as a corporate entity or of the exact nature of its business. Although the court found both sides to be negligent, it awarded the insurer $52,000.


The Insurer’s Position: The insurer claimed that, had it known that Company B was engaged in the business of distributing electronic components, it would have declined to issue coverage. The insurer believed the agent was obligated to indemnify the company because he breached his duties as its agent.


“It reasonably could be concluded that as an experienced insurance agent, [the agent defendant] . . . should have known that for purposes of business interruption coverage, a distributorship of electronic components may be a materially different risk than a manufacturer of metal machine parts and that he should have communicated such facts promptly to [the insurer].” (New Hampshire Insurance Co. v. Sauer, 83 CA3d 454 (1978).)

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