New court ruling illustrates
dangers of not reporting a claim
by will larson, kaia attorney
T
he Kansas Court of Appeals issued its decision
May 13 in the case of Evergreen Recycle, L.L.C.
v. Indiana Lumbermens Mutual Insurance
Company v. Eck Agency, Inc. The case involved
an insurance policy issued by Lumbermens under which
Evergreen was an additional insured. The policy was written
through the Eck Agency. Evergreen was engaged in the
business of, among other things, turning waste wood into
commercial mulch.
The backstory
In September 2008, Lumbermens issued an insurance
policy covering the mulch stored at Evergreen’s facility with
a limit the Court ultimately determined to be $237,000. On
February 12, 2009, Evergreen discovered wisps of smoke
coming from a small spot on the top of its large shredded,
dried mulch pile. The mulch pile was 60 feet high, 300 feet
wide and 450 feet long. On the day the fire was discovered
Evergreen’s owner called an employee of Eck. Evergreen’s
owner said he was unsure if he wanted to make a claim for
the fire loss at that time, and he did not believe he had to
make an immediate decision on whether to file a claim.
Efforts to put out the fire were initially unsuccessful and
the fire continued to burn into March. In late February or
early March a neighbor of Evergreen’s contacted Evergreen
and threatened to bring a class action on behalf of all the
neighbors claiming smoke damage caused by the fire. The
evidence on when the claim was actually reported was
apparently contradictory, but the court ruled the claim was
reported to Lumbermens around the third week in March.
Lumbermens denied the claim based on late reporting
and a number of exclusions and conditions in the policy.
Evergreen then brought suit against Lumbermens and
Lumbermens in turn brought a third-party claim for
indemnity against Eck, claiming that if it was ultimately
required to pay Evergreen it would be entitled to recover
what it paid from Eck.
the court ruling
In the underlying case the district court granted Evergreen
summary judgment on all of Lumbermens’ policy defenses
except the issue of late reporting. The district court
ruled Lumbermens was entitled to a jury trial on the
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late reporting defense, however, the district court ruled
Lumbermens must prove it was actually prejudiced by the
late reporting. At trial the jury found Evergreen was not
prejudiced by the late reporting and found in favor of
Evergreen.
Following the trial the district court granted Eck’s
motion for summary judgment on Lumbermens’ claim
for indemnity against Eck. The district court found
Lumbermens had no possible claim for indemnity against
Eck because Eck was not acting as the agent. The district
court’s decision was based on the contract between Eck
and Lumbermens. The contract provided, “the broker is
not an appointed agent of [Lumbermens]. The broker
represents the customer; [Lumbermens] will not be bound
by any statement made by the broker to the customer.” [In
this writer’s experience it is unusual for agency contracts to state the
agent is solely the agent of the customer.] The Court of Appeals
affirmed the district court’s rulings and the jury verdict in
all respects.
what it means for agents
Even though Eck won in this case it highlights the problems
that arise when insureds ask their agents to not report a
claim. The agent has conflicting duties. As pointed out in
the E&O classes presented by KAIA, under Kansas law, an
agent can be the agent of the company, the agent of the
insured and in some instances the agent of both, at the
same time, depending on the circumstances. Many, if not
most, agency contracts require agents to report any claims
of which they have knowledge. Every insurance policy
requires prompt reporting as a condition of coverage.
The Big I Virtual University has published an exhaustive
paper on this issue entitled “The Danger of Not Reporting
Claims.” In it several experts respond to questions posed by
agents on the subject and virtually all of them agree it is a
very dangerous practice to not report claims, regardless of
the insured’s wishes. The paper can be accessed from the
Big I website by doing a search for “not reporting a claim.”
If an agent feels compelled to not report a claim, because
the insured adamantly demands it not be reported, then the
agent should at least explain to the insured all the potential
risks of not reporting the claim, preferably in writing.
KANSAS INSURANCE AGENT & BROKER |May-June 2015|