Emerging Issues in Professional Liability Claims Involving

Insurance Agents and BrokersSheila M. Burke, Esquire Thomas Paschos, Esquire Burke Cromer Cremonese, LLC Thomas Paschos and Associates, P.C. Pittsburgh, PA Haddonfield, New Jersey

Philadelphia, Pennsylvania

Nicholas A. Gumpel Stephen D. StrausVice President – Claims Traub Lieberman Straus & Shrewsberry LLP The Plus Companies Hawthorne, NY Bridgewater, NJ

                                                                                                                                                                                                                                                                                                                                  

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General Rule--Broker is typically only liable for failing to procure coverage that was available

◦ (i) in the marketplace and

◦ (ii) to the particular would-be Policyholder. 

Overview Of Insurance Broker/Agent Liability Principles

General Rule—Agent of the insurer may be held liable for failing to bind coverage but such liability typically may only be to its principal—i.e., the policy issuing company.

Exceptions

◦ Dual agency relationships 

◦ Certain disclosed principals

Overview Of Insurance Broker/Agent Liability Principles

Duty to Obtain Only Coverage Requested by Insured

Duty to Volunteer Advice◦ The “Special Relationship”◦ Holding Oneself Out as an Expert

Duty to Insured after Delivery of Policy

Trends Regarding Procurement of Coverage

Must use reasonable care, diligence, and judgment in procuring the insurance

No duty to advise on specific insurance matters

Burden on the insured to inform the agent of insurance he requires.

Duty to Obtain Only Coverage Requested by Insured

Barry Wallman et al v. Benjamin Suddock Etc., et al, No. B224601 (Cal.App. Dist.2 11/17/2011)

Sadler v. Loomis Co., 776 A.2d 25 (Md. Ct. App. 2001)◦ an insurance intermediary can neither compel

an insured to provide personal financial information nor verify the accuracy of any information voluntarily provided, so responsibility for the amount of coverage ought to fall on the insured.

Duty to Obtain Only Coverage Requested by Insured

Assume Greater Duty:

◦ by holding himself/herself out to be more than an “ordinary agent” or by misrepresenting policy’s terms or extent of coverage.

◦ If agent responds to inquiries regarding sufficiency of limits, a special duty arises requiring them to use reasonable care.

Duty to Volunteer Advice

Limited duty to provide unsolicited advice where the insured and the agent or broker share a “special relationship.”

Duty to Volunteer Advice

Have an affirmative duty to notify the customer of any premature termination or cancellation of the policy.

Must notify the customer of any financial problems with the company issuing the policy, such as insolvency, the placement of the insurance company in rehabilitation or other questionable financial information subsequently received.

Duty to Insured after Delivery of Policy

Specify desired coverage to broker

Reading the policy to ensure requested coverage obtained

Trends Regarding Duties of Policyholder for Purchase of Coverage

Majority Rule : Insurance Agent/Broker Can be Liable to Insured Who Failed to Read Policy

  Cannot avoid liability for failure to procure the

correct insurance by claiming that the insureds have a duty to read their insurance policies. 

Comparative fault defense is unavailable.

Failure to Read Policy

Majority Rule : Morrison v. Allen, 338 S.W.3d 417 (Tenn. 2011)

Claim on life insurance policy denied because application was improperly filled out.

Insured alleged agents negligently failed to properly

procure insurance. Agent argued insureds did not read application.

  Court would not allow agents to shield their own

negligence with the fact that clients didn’t catch their mistakes.

Failure to Read Policy

Majority Rule : Aden v. Fortsh 169 N.J. 64, 776 A.2d 792 (2011)

Court held broker, not the insured, is the expert and the client is entitled to rely on that expertise

Comparative negligence principles could be applied where client’s alleged negligence contributed to or affected the professional’s failure to perform according to the standard of care of the profession.

Failure to Read Policy

Failure to Read May Amount to Comparative Negligence

Some jurisdictions recognize.

Was it unreasonable for the insureds not to have read the policy?

Fillinger v. Northwestern Agency, Inc. of Great Falls, 283 Mont. 71, 938 P.2d 1347 (1999).◦ held insureds do not have an “absolute” duty to read their

policy, but their failure to do so may amount to contributory negligence.

Failure to Read Policy

Minority View:Insurance Agent/Broker Not Liable to

Insured Who Failed to Read Policy Insured’s duty to read an insurance policy is

absolute and may protect an insurance broker from a claim for failure to procure adequate insurance.

Failure to Read Policy

Minority View:MacIntyre & Edwards v. Rich, 599 S.E.2d 15

(Ga.App. 2004)

Court held insured had a duty to read policy and barred recovery against agent.

If insured had reviewed the documents they would have been aware that they did not have the coverage they had requested.

Failure to Read Policy

Minority View:Canales v. Wilson Southland Ins. Agency 583 S.E.2d 203 (Ga.

App. 2003)

Exception to the minority view that insured is obligated to examine an insurance policy

Rule does not apply when:◦ (1) broker has held himself out as an expert and the insured has

reasonably relied on broker’s expertise to procure the requisite insurance or

◦ (2) there is a “special relationship” of trust which would prevent or excuse the insured of his duty to exercise ordinary diligence.

Failure to Read Policy

First Reaction…. No!

Agents are not personal financial counselors, risk managers or guarantors of their client’s liabilities;

Agents are not uniquely aware of their client’s personal assets or liabilities;

Agents do not have the ability to bind the insured to a particular coverage or policy without the insured’s consent (i.e purchasing power)

Trends Regarding Agents Owing Fiduciary Duty

However…  Is there a “Special Relationship”?

Agents Owe Fiduciary Duty?

Agent receives compensation direct from insured, not just commission;

Agent performs tasks outside of just procuring coverage (provides opinions on coverage, risk management, claim management etc…);

◦ Stephens v. Hickey – Finn & Co, Inc., 691 N.Y.S.2d 411 (N.Y. App. Div. 1st Dep’t 1999)

◦ Stern Family Real Estate Partnership v. Pharmacists Mutual Ins. Co., Civ. No. 09-130, 2007 U.S. Dist. LEXIS 2296 (D. Pa. Mar. 27, 2007)

Special Relationship Examples

Repeated representations by Agent that they are “specialized” or “highly skilled” & insured’s reliance on statements;

Course of dealing over extended period in which Agent placed on notice that their advice is being specifically relied on.

 

Special Relationship Examples

Agent procures coverage out of his/her normal expertise or highly specialized area

 ◦ AAS – DMP Management L.P. Liquidating Trust v. Acordia

Northwest, Inc., 63 P.3d 860 (Wash. App. Div. 1, 2003), review denied, 79 P.3d 445 (Wash. 2004);

◦ Wanner Metal Worx, Inc. v. Hylant – Maclean, Inc., 2003 WL 1826558 (Ohio App. 5 Dist. Apr. 7, 2003) appeal denied, 792 N.E.2d 201 (Ohio 2003);

◦ Ray v. State Farm Mutual Automobile Ins. Co., 2007 U.S. Dist. Lexis 4176 (D. Minn. Jan. 1, 2007)

Special Relationship Examples

Agents have fiduciary-like qualities but will not impose true fiduciary standard…

 ◦ Workman's Auto Insurance Co. v. Guy Carpenter & Co.,

Inc., No. B211660 (Cal. Ct. App. 2nd District May 4, 2011);

 ◦ Murphy v. Kuhn, 682 N.E. 2d 972 (NY 1997).

Majority of Courts Rule

Eliminates need for Plaintiff to prove breach of contract for failure to procure coverage if establish special relationship established;

  May eliminate contributory negligence defense in otherwise

pure negligence case;

In “duty to read” states, lower standard of proof against agent;

  Complicates case with additional causes of action;  No longer equal “arm’s length” relationship – Agent is

“expert” - insured is unknowing buyer.

Why Does It Matter?

Broker’s E&O insurer as de facto underlying insurer

◦ Failure to procure

◦ Special concerns regarding long-tail claims (e.g., failure to obtain worker’s compensation insurance for business client)  

Trends Regarding Remedies vs. Brokers and Agents

Policyholder claims against insurance agents

◦ Standing issues agent of disclosed principal (the insurer) liability where intermediary acts in dual

capacities as agent and broker

◦ Misrepresentations regarding coverage by insurer’s agent

Remedies vs. Brokers and Agents

“Typical” E&O claims remain steady ◦ Failure to obtain proper coverage◦ Failure to obtain adequate limits◦ Failure to include location, driver, car etc..

Mother’s Nature’s Effect ◦ Superstorm Sandy◦ Regulatory Issues

Trends Regarding Claim Volume, Level of Complexity & Damages

Level of Complexity Has Increased…

◦ Claims In Addition to Negligence/Breach of Contract

◦ Parties Involved (E&S Broker, Captive, Multiple Carriers)

◦ Assignment of Claims After Settlement or Verdict ◦ Declaratory Judgment Actions

Trends Regarding Claim Volume, Level of Complexity & Damages

Potential Damages Have Increased

◦ Amount of Coverage +◦ Additional Economic Losses + ◦ Attorney Fees =

Mediation/ADR/Early Resolutions

Trends Regarding Claim Volume, Level of Complexity & Damages