The Don Adams Oil Company requested the Southeastern Insurance Agency to find insurance coverage to protect Adams against any business-related liability. The agency eventually secured and maintained two policies. In 1984 the agency purchased a $1 million commercial umbrella policy from Crum & Forster, and that policy required the insured to maintain primary coverage of $300,000. In 1985 the agent secured for the insured a primary commercial auto liability policy from Lumbermens which provided $300,000 property damage coverage. That policy was ceded to Commonwealth for 100% reinsurance, thereby obligating Commonwealth to reimburse Lumbermens for any payments made under the policy. Southeastern had an agency agreement with Lumbermens, and Lumbermens was a servicing carrier for Commonwealth Automobile Reinsurers.

The Adams Oil Company and the Southeastern Agency agreed that Southeastern would be responsible for making sure that NO gap existed between the underlying and umbrella coverages. In June 1986, the agency was notified by Crum & Forster that the umbrella policy was due to be renewed. The notification included a requirement to increase the primary coverage limit to $500,000. The agency did nothing about this until October 1986, when it asked Lumbermens to increase the primary coverage limit effective January 1, 1987. (Note: records showed that, if requested, Lumbermens would have increased the limits on September 1, 1986. Lumbermens complied with requests from the agency to increase coverage limits on other policies as they were renewed.)

From September 1 through December 31, 1986, the insured did not have the requisite $500,000 primary coverage. This created a gap of $200,000 between the coverage of the primary and umbrella policies.

On December 1, 1986, an Adams Oil Company employee was making an oil delivery to Robert and Jane Sylvia. Unfortunately, the employee pumped oil from his truck into the Sylvia's water well instead of their in-ground oil tank.

The insured notified the agency, and Lumbermens paid $300,000 toward the clean-up expenses. Claim was then made under the umbrella policy, but Crum and Forster denied liability until $500,000 had been expended.

The Sylvias filed suit against the insured, and the court, upon the insured's motion, added Lumbermens as a third-party defendant. The insured then filed a separate action against the agency on the ground it was negligent in failing to provide the required primary coverage. The agency brought in Lumbermens as a third party defendant seeking to have the primary policy reformed to provide the limits of $500,000. The two actions were consolidated.

The trial court found that Southeastern was Lumbermens' agent, so its knowledge of the insured's needs was imputed to Lumbermens. The court was not convinced that the agency's failure to secure the increased limit proximately caused the loss. Therefore, the insured was entitled to have the primary policy reformed to provide $500,000 coverage. Lumbermens appealed the decision.

The appellant court ruled that Lumbermens had to prove that the agency's negligence was the proximate cause of its loss. This meant that Lumbermens, if it had known all the facts, would have refused the risk or canceled the policy. The fact was, had it been asked, Lumbermens would have increased the limit effective September 1, 1986.

The court noted that Lumbermens did not allege bad faith on the part of the agency, nor did it seek to recover the premium it should have been paid for the added coverage. It noted also that the loss of premiums as a result of an agent's negligence is recoverable. Since that was not an issue on appeal, no decision was made.

The judgment entered in the lower court reforming the policy to provide for a limit of $500,000 was affirmed. Further, Lumbermens was not entitled to recover its costs of $25,000 in the defense of the insured.

Southeastern Insurance Agency, Inc. v. Lumbermens Mutual Insurance Company-No. 94-P-462-Appeals Court of Massachusetts, Bristol-June 21, 1995-650 North Eastern Reporter 2d 1285.