An insurer’s claim for breach of contract against Travelers Cos. Inc.  in a dispute over an unissued workers compensation policy may proceed, a district court held Friday.

The U.S. District Court for the Northern District of Illinois dismissed Westport Insurance Co.’s claims for promissory estoppel and reformation, but found that a jury would need to decide whether an exchange between an agent and an underwriter for New York City-based Travelers constituted a valid contract in Westport Insurance Corp. v. Travelers Indemnity Co.

Overland Park, Kansas-based Westport, now a subsidiary of Swiss Re Corporate Solutions, filed a complaint against Travelers after it settled a confidential lawsuit with an injured employee of R&H Muffler Co., a Midas franchise in Crest Hill, Illinois, as its errors and omissions insurer, in exchange for an assignment from R&H of any claims against Travelers.

When R&H realized its workers comp coverage had lapsed in 2013, it contacted an agent who, on Oct. 9, 2013, submitted the company’s request for comp coverage and supporting rating information for a policy with an immediate effective date through Travelers’ I-enet system. The I-enet system generates a draft proposal for an insurance policy at a quoted premium. For proposals covering small risks, the system will allow the agent to issue the policy and bind Travelers, but larger risk proposals were referred to an underwriter.

The agent’s submission generated a draft proposal with an annual premium of almost $20,000, and the policy was referred to an underwriter. The agent claimed that I-enet allows agents to mark proposals “for issue,” meaning that a policy would immediately issue once an underwriter approved the proposal. However, a Travelers underwriter testified that a policy would never issue until an agent explicitly placed an order to bind coverage. An underwriter can do so through the system or verbally. Travelers underwriters use a separate system to track proposals that had been approved but not issued as a reminder to follow up with agents about their proposals.

The underwriter sent the agent back a six-page proposal identical to the draft proposal except for a correction to R&H’s legal name. The agent thanked her via email and notified R&H that he had secured coverage from Travelers. However, no policy was issued and R&H was never billed for a premium.

On Nov. 15, 2013, one of R&H’s employees was injured on the job. The company tendered the claim to Travelers, which denied it because there was no policy. The agent reached out to Travelers and insisted that the agency had bound the workers comp policy in October. The underwriter said that the agent had not bound coverage, but offered to provide retroactive coverage if the agent submitted a “no known loss” letter affirming that R&H had not incurred any workers compensation losses between Oct. 9 and Nov. 18, which the agent could not submit. Travelers issued R&H an insurance policy effective Dec. 13 after the agency submitted a new draft proposal and the agent instructed the underwriter to issue the proposal along with a commencement date and provided billing instructions.

Westport argued that the Oct. 9, 2013, exchange between the agent and the Travelers underwriter formed a contract, and that Travelers had therefore breached that by failing to issue the policy. 

Travelers argued that for high-risk policies like the one for R&H, the agent receives a draft proposal, which is then referred to an underwriter who responds with an authorized proposal, and that the agent must agree to the proposal by ordering Travelers to bind coverage. Travelers argued that the underwriter emailed the offered proposal, but that the agent failed to accept and order the issuance of the policy.

The district court noted that in Illinois, in order to constitute a contract by offer and acceptance, “the acceptance must conform exactly to the offer.” The court found it undisputed that the underwriter’s proposal did not match the agent’s original draft proposal because she corrected the business’ name. The court noted that a jury viewing the evidence could find that the agent’s response of “Ok thanks” to the underwriter’s coverage proposal could determine that his email constituted acceptance of the policy, but also found that too many other questions of fact remained that precluded the district court from granting Travelers summary judgment on this charge.

The court, however, granted Travelers motions for summary judgment on Westport’s claims of promissory estoppel and reformation.

Neither Travelers nor Westport could be reached for comment.