A federal judge has ruled that United States Liability Insurance Company (USLI) is not obligated to defend or indemnify a local insurance agency accused of mishandling premium payments, which left a pair of homeowners without coverage when their Arkansas residence was destroyed by fire.
In a detailed opinion issued on March 17, Chief Judge Kristine G. Baker of the US District Court for the Eastern District of Arkansas granted summary judgment to USLI, finding that the insurer was within its rights to deny coverage to Stone County Insurance Agency, Inc., citing a key policy exclusion.
At issue was whether the professional liability policy USLI issued to Stone County Insurance covered claims brought by Ase Gro Lindland and Olav Lindland, who alleged that the agency failed to properly manage their homeowners insurance payments. That failure, they claimed, resulted in the cancelation of their policy shortly before a devastating fire consumed their home.
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The Lindlands, who split their time between Arkansas and Norway, had maintained a years-long relationship with Stone County Insurance, relying on the agency to arrange and process payments for their homeowners coverage. In May 2021, while stranded abroad due to pandemic travel restrictions, they emailed the agency their credit card information and asked that their premium be paid.
The agency’s employee, Janet Nesbitt, processed two payments totaling approximately $1,450. But according to court filings, Nesbitt mistakenly told the Lindlands those payments covered a full year, when they only covered six months.
Complicating matters, notices of a $78 balance and a cancelation warning were sent to the Lindlands’ Arkansas address while they remained in Norway. The agency, which allegedly received copies of the notices, failed to notify them. Their policy lapsed on October 27, 2021, for nonpayment. Less than six months later, the Lindlands' uninsured home was destroyed by fire. Their insurer denied the claim.
The Lindlands sued Stone County Insurance in state court, claiming negligence and breach of an oral contract. A consent judgment was later entered in their favor, awarding nearly $587,000 for property damage, personal belongings and related expenses. Stone County Insurance assigned its rights under its professional liability policy to the Lindlands, who sought to collect the judgment from USLI.
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But USLI argued that its policy contained a clear-cut exclusion that barred coverage. Specifically, Exclusion D excluded claims arising out of “the commingling of, or inability or failure to pay, collect, safeguard or return any money.”
USLI initially funded the agency’s defense under a reservation of rights but later withdrew and filed a declaratory judgment action, seeking confirmation that it owed no duty to defend or indemnify.
Chief Judge Baker sided with the insurer, ruling that the Lindlands’ claims were directly tied to Stone County Insurance’s failure to pay the premiums - precisely the type of risk the policy excluded.
“The plain language of Exclusion D controls,” Judge Baker wrote. She noted that the agency’s alleged negligence in failing to notify the Lindlands of overdue notices or misrepresenting the coverage period was inseparable from the ultimate failure to pay, which caused the policy lapse.
Efforts by Stone County Insurance and the Lindlands to argue that other acts of negligence triggered coverage were rejected. Judge Baker emphasized that Arkansas law interprets policy exclusions broadly when clear, and does not require a proximate cause analysis to enforce them.
The court also dismissed claims that USLI’s initial decision to defend the agency should estop it from later denying coverage. Arkansas law, Judge Baker noted, does not allow estoppel to expand coverage beyond the clear terms of the policy, even when a defense was initially provided without a reservation of rights.
The ruling underscores the strength of carefully drafted exclusions in professional liability policies, particularly in cases involving financial transactions and client funds.
For insurance agents and brokers, the case serves as a warning on the risks associated with informally assuming duties to manage clients’ payments. For insurers, it affirms the enforceability of unambiguous policy language and highlights the importance of early and clear coverage determinations.
Judge Baker’s order denied counterclaims filed by both Stone County Insurance and the Lindlands and affirmed USLI’s position that it owed no duty to defend or indemnify.
