From the PLUS Journal article “The Insurance Broker’s Duties and Potential Liabilities in the Insurance Coverage Dispute” (December 2011) by Michael J. Cawley.
Broker as Agent of the Insured
The broker is most commonly the “agent” of the insured, in the principal/agent sense, and it is within this relationship that most claims arise against the broker. A broker can be sued under several theories, including breach of contract, fraud or misrepresentation; but the two most common assertions are common law negligence and breach of fiduciary duty.
Negligence. Most courts start “from the basis that insurance agents have a duty to exercise the skill and care that a reasonably prudent person engaged in the insurance business would use under similar circumstances.” Under this standard, a broker must act reasonably and in good faith with the skill of a reasonable broker. [Skall, Daniel, (Note that for statute of limitations purposes, New York has held that insurance brokers are not held to a professional duty of care, only to a level of ordinary care.) Chase Scientific Research, Inc. v. NIA Group, Inc.,96 N.Y.2D 20 (2001)].
Under the professional duty of care, “reasonable conduct” includes (1) securing the coverage sought by the insured within a reasonable period of time; (2) if no coverage can be obtained (i.e., none is available), the broker must notify the insured; (3) notifying an insured if and when the requested coverage has been denied; (4) securing adequate coverage for the risk, assuming that the broker was given sufficient information to understand the amount needed (However, a broker is not necessarily required to procure coverage for every conceivable loss.) [See, e.g., Jones v. Grewe, 189 Cal. App. 3d 950 (1987)]; (5) placing coverage with a carrier that the broker knows or should have known to be financially stable and not nearing insolvency, though there is California authority that insurance placements with admitted carriers that later become insolvent do not impose liability on the broker [ See,Wilson vs. All Services Ins. Corp.,91 Cal.App.3d 793 (1979)]; and (6) although different jurisdictions treat the following duties differently, a broker should notify the insured of cancellation, expiration and renewal or non-renewal of a placed policy.
Breach of fiduciary duty. The courts are split on whether a broker can be liable for breach of fiduciary duty. While most courts will recognize that a broker has many fiduciary-like duties, the majority of courts will not go so far as to impose a true fiduciary duty standard on a broker. For example, California has recently confirmed that an insurance broker cannot be sued for breach of fiduciary duty. [ Workman’s Auto Insurance Co. v. Guy Carpenter & Co., Inc., No. B211660 (Cal. Ct. App. 2nd District May 4, 2011)] Likewise, New York does not recognize a cause of action for breach of fiduciary duty, but New York does follow the premise that under “special circumstance” a broker may acquire duties that go beyond those affixed under common law. [ Murphy v. Kuhn, 682 N.E. 2d 972 (NY 1997)].
A majority of jurisdictions likewise conclude that a broker does not have duties higher than the “negligence” standard, such as a duty to advise or counsel, unless special circumstances exist that would then impose a higher duty. This concept is well established, with a discussion as early as 1961 in Hardt v. Brink, 192 F. Supp. 879 (W.D. Wash. 1961). The Court determined that there are factual circumstances when a broker should be considered a “professional” and as such assumes heightened duties and responsibilities to the insured.
Since Hardt, courts around the country have decided cases and addressed factual scenarios that have transformed a broker’s traditional capacity under common law to that of a professional insurance counselor with a higher standard of care owed to the insured:
- “Thus, ordinarily the insurance broker’s duty is to use reasonable care, diligence, and judgment in procuring the insurance requested by the insured.” (Jones, at p. 954)
- “The rule changes, however, when – but only when – one of the following three things happens: (1) the agent misrepresents the nature, extent or scope of the coverage being offered or provided; (2) there is a request or inquiry by the insured for a particular type or extent of coverage; or (3) the agent assumes an additional duty either by express agreement or by ‘holding himself out’ as having expertise in a given field of insurance being sought by the insured” ( Fitzpatrick, supra, 57 Cal. App. 4th at p. 927). See also, Williams V. HRH, 177 Cal. App. 4th 624, 635 (Ca. App. Ct. 2nd Dist.).
Whether the “special circumstances” standard will be applied in a particular case is based on the specific facts of the case and the actions of the broker. For example, in Williams, (1) the broker was specifically referred to the insured as the “go to” person for procuring coverage for his business, (2) the broker actually created specific insurance packages for other, similar franchises and (3) the broker declined to meet with the insured because she was familiar with the franchise and claimed to be “the expert on the products necessary to satisfy” the insured’s insurance needs. [177 Cal. App 4th 624, 628] Moreover, the broker was aware that certain jobs with respect to the business were considered dangerous and that it would be important that the insured be covered for any injuries arising from the position. Further, the broker was aware that workers’ compensation insurance was required by California law and yet the insured had no such coverage nor did the broker procure it. Based on these facts, the Court held that the broker did hold herself out as an expert, but failed to satisfy this higher standard by not procuring workers’ compensation insurance. [ Williams, 177 Cal. App. 4th at 641]
By way of further example, in Murphy v. Kuhn,supra, the Court held that a broker has a duty to advise when the agent expressly agrees to advise the client and accepts additional compensation. [682 N.E. 2d 972 (NY, 1997)] Additionally, in Hardt,supra, the Court concluded that the broker held himself out as an expert because (1) he selected insurance and settled claims for the insured, (2) the client placed great confidence in the broker and relied on his recommendations, and (3) the broker’s letterhead contained notations representing him as an insurance expert. [192 F. Supp. at 881] It should be mentioned, though, that brokers are only liable for holding themselves out as experts when they make specific representations about their abilities, not simply when they engage in general “puffing” or advertising. [42 Ariz. L. Rev. 991, 999]
At their core, most error and omission claims involve some form of alleged miscommunication. The best protection the broker has from such “miscommunication” claims are the actual written communications maintained by the broker on the account.
A recent and very demonstrative example of the importance of documentation is the Williams, supra, case. The agent in Williams claimed that she informed the insured about the need for workers’ compensation insurance and that she was not securing it for the insured. Specifically, she claimed that (1) her staff calculated premiums for the coverage, (2) she called the insured to discuss the coverage (and informed the insured that workers’ compensation insurance is required in CA), and (3) the insured “declined to purchase workers’ compensation insurance.” [177 Cal. App 4th at 630] However, the agent admitted that she (1) never provided the insured with a written quote for the insurance, (2) wrote no memorandum to the file or to the insured to indicate that workers’ compensation insurance was offered and denied, and (3) made no written record of her telephone call about such insurance. The court found that absent any documentation, the broker’s version of the facts was not credible. [177 Cal.App.4th at 641]
Because brokers are increasingly being sued by clients, it is more important than ever not only to document communications but also to retain such records as potential evidence of the relationship. As set forth above, many elements, and certainly the outcome, of the broker suits turn on the facts of the case. Documents are the best evidence of the events that took place, often months or years in the past.