In last week’s article we discussed who needs and who provides travel insurance for consumers, travel agents and tour operators. We also examined travel consumer insurance coverage issues that have arisen in several cases. In this article we will examine Travel Agent’s and Tour Operator’s Professional Liability policies also known as Errors and Omissions [E&O] insurance policies [Travel Law § 5.09[1]].
E&O Policies
E&O policies are issued to travel agents, tour operators and informal travel promoters [Travel Law § 5.07] [see Houston Casualty Company v. International Grand Tours, Inc. (insurance claims arising from cancelled Spanish Club educational tour filed against E&O policy)]. These policies may provide coverage, as well as a defense, in lawsuits brought by travelers, which involve any negligent act, error or omission of the insured in the conduct of travel agency operations. In addition, these policies invariably contain exclusionary language denying coverage in the event of the insured’s fraud or unlawful conduct [see JEB Travel, Inc. v. Connecticut Indemnity Company (4,500 Automated Ticket Boarding Forms stolen; Airline Reporting Company (ARC) finds travel agent negligent; nonetheless no coverage under E&O policy)].
The E&O Fraud Exclusion: Two Views
In two travel class actions involving different tour operators, both of which involved allegations of fraudulent or negligent misrepresentation, one Court enforced the fraud exclusion disclaimer and the other Court did not. In American Home Assurance Co. v. Diamond Tours & Travel, Inc., an E&O insurer sought to enforce its fraud exclusion regarding the provision of a defense to a tour operator sued in Guadagno v. Diamond Tours & Travel, Inc., a class action brought by 250 victimized consumers who had purchased tours to a newly opened resort, Club Islandia, on the north shore of Jamaica and which had been grossly misrepresented in brochures as featuring a Club Med like environment. The Guadagno class action alleged breach of contract, fraudulent misrepresentation and demanded rescission of all contracts based upon fraud. Class certification was granted and partial summary judgment on the breach of contract cause of action on the issue of liability was granted as well. The tour operator, Diamond Tours & Travel, Inc. made a claim against its E&O insurer, American Home Assurance Company, for the provision of a defense and, if necessary the payment of any judgment in the Guadagno class action. The insurer sought declaratory relief enforcing its disclaimer of coverage based on the fraud exclusion. The Court held “Excluded from coverage is any act which is willful, dishonest, fraudulent, malicious or in willful violation of penal or criminal statutes, committed with the knowledge of the insured. Clearly, the first and third causes of three causes pleaded in the [Guadagno] complaint sound in fraud, not negligence, and are not within the coverage of the policy…It is concluded that the alleged acts underlying the class action complaint do not sound in negligence and are willful, fraudulent acts within the exclusionary clause of the policy” [see also: Commercial Union Insurance Co. v. Auto Europe, LLC (E&O insurer challenges its duty to defend its insured…in a class action brought by consumers alleging that “Auto Europe engaged in a ‘fraudulent and deceptive scheme’ by misstating that a foreign ‘sales tax’ or ‘value added tax’ was due on the car rental price when no such tax was actually due and Auto Europe retained such ‘tax’ as profits”; no duty to defend)].
The McCafferty Case
Some courts have ruled otherwise and found a duty to defend and indemnify even though intentional misconduct may be alleged. In McCafferty v. Lindblad Travel, a class action brought by several hundred consumers victimized by a defunct tour operator, plaintiffs sought recovery from an insurance company that had issued a $5 million E&O policy to the tour operator, Lindblad Travel. The complaint alleged breach of contract, breach of fiduciary duty, civil RICO violations, negligence and negligent misrepresentation. The insurance company disclaimed both a duty to defend and a duty to indemnify and sought dismissal on the grounds, inter alia, that swindling customers was not within the scope of professional tour operator services and the entire complaint was bottomed on fraud and excluded under the willful misconduct exclusion.
E&O Coverage Found
In finding coverage for some of the claims asserted, the McCafferty Court held that “allegations that Lindblad Travel: (1) misrepresented the financial health of the company; (2) mishandled consumer deposits and failed to use monies for their intended purpose; (3) beached contracts in failing to deliver travel services already paid for; (4) terminated a United States Tour Operators Association (U.S.T.O.A.) …security plan, without indicating such in its advertisements and (5) disregarded instructions from the United States Treasury Department not to sell tours to Vietnam…On the basis (of these claims) I cannot say, as a matter of law…that all of the alleged wrongful acts were necessarily intentional or willful rather than negligent. Although the complaint alleges intentionally fraudulent conduct, its allegations would also cover negligent misrepresentation”.
Misrepresenting Financial Health
The McCafferty decision is very helpful to victimized consumers since it may expand coverage of E&O policies to include common events such as the financial collapse of a tour operator. Charges of negligence in misrepresenting the financial health of the tour operator and failing to reveal information regarding financial difficulties would appear to be covered by E&O policies [see Travel Law § 5.05[4][d][iii][D](some courts have held travel agents liable for failing to investigate and convey to their clients negative financial information about the stability of recommended tour operators; see Marcus v. Zenith Travel, Inc.)].
Conclusion
Next week we will continue our discussion of travel insurance and performance bonds by examining Public Charter Tour Operator surety bonds [14 Code of Federal Regulations 380.34(b)(1)] .
The author, Justice Dickerson, been writing about Travel Law for 38 years including his annually-updated law books, Travel Law, Law Journal Press (2014), and Litigating International Torts in U.S. Courts, Thomson Reuters WestLaw (2014), and over 300 legal articles many of which are available at www.nycourts.gov/courts/9jd/taxcertatd.shtml .
This article may not be reproduced without the permission of Thomas A. Dickerson.
