It is Always a Good Idea to Read Your Insurance Policy

Over the weekend, I saw a headline about a councilman in the Northern California city of Clayton who was convicted of felony embezzlement this past week… I thought the conviction would certainly not help his chances for re-election in November, but then I read further. This councilman’s day job is as an insurance broker. Apparently he took $159,000 in premiums from a Silicon Valley company but never forwarded the money to the insurance agency. I did not see any details about how this all transpired, but aside from being an anecdote for the “What Were You Thinking?” category, I asked myself, how did the insured not know it paid for insurance it was not getting? Did the insured not see or review a policy? Certainly, aside from the criminal aspects of this case, there are some civil implications as well.

An insurance broker owes a duty to the client “to use reasonable care, diligence and judgment in procuring the insurance requested by the insured.”¹

Looking at the above scenario it would certainly seem that the councilman/broker has liability. It sounds like the company being defrauded never got the insurance at all. However, if the situation were slightly different and the insured had a policy but never took the time to read it to verify terms and coverage, could that be used as an affirmative defense against the insured? Depending on the jurisdiction, the answer is yes.

Some jurisdictions allow comparative or contributory negligence on the part of the insured to bar an action entirely against a broker. Others reject the defense as a matter of law, and a few jurisdictions offer a middle ground that gauges whether the insured acted reasonably in not reading its policy.

The bottom line, it is always important to read a contract thoroughly (which can be exhaustive at times) to avoid unpleasant surprises. An insurance policy is no different.