Update: Will Insurance Agents be the Next Target for COVID-Related Business Losses?

Emily Sides Bonds
Partner, Jones Walker LLP

Emily is a partner in the Birmingham office of Jones Walker LLP. Emily is licensed in Alabama and Mississippi and has been handling professional liability litigation, including the defense of insurance agents and brokers, for over 30 years.

 

In October 2020, I authored an article for the PLUS blog that focused on the potential claims that could be made against insurance agents with regard to COVID-19-related business losses. I concluded that, if insurance companies do not pay COVID-19-related losses, then plaintiffs’ attorneys may file claims against their clients’ insurance agents for failure to procure, negligent misrepresentation, breach of fiduciary duty, or other similar torts. My prediction has come to fruition, but so far, insurance agents are being properly dismissed from these cases. Below is a summary of these recent decisions, all of which have occurred after removal of the cases to federal court based upon the fraudulent joinder of the insurance agent.

Casa Colina, Inc. v. Hartford Fire Ins. Co., 2020 U.S. Dist. LEXIS 236698 (C.D. Cal. Dec. 15, 2020).

In this case, certain business entities that provide rehabilitative and medical-surgical services sued their insurance carrier for failure to provide business interruption coverage as a result of the COVID-19 pandemic. The plaintiffs also sued their insurance agents for “failing to obtain the appropriate coverage as requested; failing to accurately represent and report the coverage obtained, and failing to properly warn Plaintiff of potential coverage limitations, gaps, or exclusions.” Id. at *1-2 (quoting the plaintiffs’ complaint). The plaintiffs originally filed the lawsuit in California state court, and the defendants removed the case to federal court based upon the fraudulent joinder of the insurance agents. The district court denied the plaintiffs’ subsequent motion to remand and held that there was no possibility that the plaintiffs could prevail against the insurance agents.

In Casa Colina, the district court analyzed California law in reaching its conclusion. California law generally recognizes that there is no duty of an insurance agent to recommend or advise the insured on differing or other types or amounts of coverage. However, California permitted three exceptions to that rule: “when (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 by either express agreement or by ‘holding himself out’ as having expertise in a given field of insurance being sought by the insured.” Id. at *2. The plaintiffs in Casa Colina pled that all three exceptions applied, but the district court disagreed. The district court found the allegation that the agent promised “full and adequate insurance” was not sufficient to qualify as a misrepresentation under California law because it was not a specific, affirmative representation that coverage would be available during a viral pandemic. Id. at *4-5. In addition, there was no heightened duty to inform plaintiffs that there would be no coverage for a viral pandemic because there were no allegations that the plaintiffs specifically requested a policy to cover business-interruption losses caused by a pandemic. Id. at *5. Finally, the district court found that the agent’s website, which mentioned the agent’s ability to procure business interruption insurance, did not qualify as the agent holding itself out as an expert such that additional duties could be imposed on the agent in procuring the requested coverage. Because there was no possibility of recovery against the agents, the plaintiffs’ motion to remand was denied, and the insurance agent was subsequently dismissed from the case. Id. at *9.

Terry Black’s Barbecue, LLC v. State Auto. Mut. Ins. Co., 2020 U.S. Dist. Lexis 207636 (W. D. Tex. Nov. 5, 2020).

The plaintiffs were companies that owned and operated barbecue restaurants in Texas. State Auto, the plaintiffs’ insurance carrier, denied their claims for business interruption coverage due to the COVID-19 pandemic. The plaintiffs quickly filed suit in state court against both State Auto and the insurance agent who had procured the insurance policies. The plaintiffs contended that the insurance agent was negligent “in failing to evaluate the sufficiency of the coverage limits it was recommending and selling to Plaintiffs.” Id. at *2.

State Auto removed the lawsuit to federal court on the basis that the insurance agent had been fraudulently joined in the case, and accordingly, its citizenship should be disregarded in determining diversity jurisdiction. The magistrate judge recommended to the district court that the plaintiff’s subsequent motion to remand be denied. The magistrate judge’s report and recommendation on plaintiff’s motion to remand focused on the issue of ripeness. As we know, courts do not decide matters that are not ripe, i.e. matters that are premature or speculative. The magistrate judge in that case determined that the allegations of plaintiffs that the insurance agent “was negligent … [i]f Business Income loss coverage is found not to exist under the facts and circumstances of the Cause” presented a claim that was not yet ripe for review. Id. at *9. Accordingly, the magistrate judge concluded and recommended that the motion to remand be denied. Id. Notably, the plaintiffs did not object to the magistrate judge’s report and recommendation and, thus, it was adopted by the district court. See Terry Black’s Barbecue, LLC v. State Auto. Mut. Ins. Co., Case 1:20-cv-00665-RP, Doc. 21 (W.D. Tex. Nov. 23, 2020).

PSG-Mid Cities Med. Ctr., LLC v. Jarrell, 2020 U.S. Dist. Lexis 237119 (N.D. Tex. Dec. 17, 2020).

After having its claim for COVID-19-related business losses denied by Continental Casualty Company, the plaintiff, a hospital providing elective surgeries, filed suit against the carrier and its insurance agents. The plaintiff filed the case in state court in Texas, and the carrier removed the case to federal court based upon fraudulent joinder of the insurance agent. The plaintiff’s motion to remand was denied. Interestingly, the plaintiff pled that the alleged negligent misrepresentation of the insurance broker occurred after the COVID-19-related business losses. Numerous claims were pled, but all failed, essentially based upon lack of reliance or damages caused by the alleged misrepresentation.

Conclusion

As predicted, plaintiffs will include their insurance agent as a defendant in lawsuits related to the denial of insurance coverage for COVID-19-related business losses. Thus far, removal based upon the fraudulent joinder of the insurance agent has been successful. Insurance agents are being dismissed because courts have found that there is no possibility of a claim against the agent. If you are presented with such a case, removal to federal court should be the first consideration by counsel. Analysis of that state’s laws relating to negligent procurement and misrepresentation is crucial. I suspect we will see more crafty pleading in these claims to avoid the results that occurred in the three cases listed above. I will continue to monitor these very interesting claims.  If you have any questions or would like more information, please feel free to email me at ebonds@joneswalker.com.

 

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