Business owners and other executives often rely on an insurance broker to secure coverage for their business. But if the insurance broker makes an error and a loss occurs, the business could find itself underinsured or completely exposed. Fortunately, recovery may still be possible in some situations.
Broker Mistakes
Insurance brokers could potentially make various kinds of errors or oversights when servicing your business. The broker may fail to include the requested coverages, miss a deadline for renewing a policy, fail to notify you of a policy cancellation or misrepresent what a policy covers. If your insurance broker fails to perform these duties or others, and you suffer a loss as a result, you may be able to bring a claim against your broker for professional negligence, breach of fiduciary duty, breach of contract, or negligent or fraudulent misrepresentation.
Broker Responsibilities
When you hire a broker to obtain insurance on your behalf, the broker has a common law duty to either obtain the requested overage within a reasonable time frame or inform you that it is unable to do so. For instance, if the broker advises you that the coverage you requested is in effect while knowing the insurance company has not yet agreed to provide the coverage, the broker incurs personal liability as an insurer.1 Put another way, a broker who negligently fails to procure insurance “stands in the shoes of the insurer” up to the limit of the insurance policy had it been in force.2
However, absent special circumstances, the broker does not have an obligation to “advise, guide or direct a client to obtain additional coverage.”3 For instance, a Louisiana court held that the broker’s duty to procure insurance coverage requested by the policyholder does not include “a duty to spontaneously identify [the policyholder’s] needs and advise it regarding additional coverage.”4 The Sixth Circuit stated that a broker’s duty to provide coverage advice arises under three circumstances: (1) when the client pays consideration beyond the premium; (2) when the parties’ extended course of dealing would put an objectively reasonable broker on notice that his advice is being relied upon; and (3) when the client makes a specific request for advice.5
When a broker fails to secure the coverage requested by the insured, claims against the broker can be asserted under several theories.
Professional Negligence
As professionals, insurance brokers are expected to have reasonable knowledge of the types of policies, their different terms and the coverage available in the area in which a potential policyholder seeks coverage. For instance, a broker was found liable for failure to obtain “loss of use and occupancy” coverage for a building subsequently destroyed by fire, based on the broker’s “failure to exercise the care that a reasonable and prudent insurance broker would have exercised under the circumstances.”6 When a broker allegedly misinformed the insured about the dates of a policy’s coverage, a court held this oversight was sufficient for the insured to bring claims for negligence as well as breach of the fiduciary relationship.7 When a broker failed to notify insureds that insurance on their truck would not be renewed, an Oregon court found that the broker was negligent.8
Breach of Fiduciary Duty
Many jurisdictions recognize that insurance brokers have a fiduciary duty to their clients. A fiduciary relationship arises when a client places trust and confidence in the superior knowledge, skill or judgment of a professional, imposing upon the professional a heightened duty to exercise good faith and skill. In certain jurisdictions, insureds can assert breach of fiduciary duty claims against a broker in addition to negligence claims. For instance, a Florida court held that the fiduciary relationship between a broker and insured allowed a claim of breach of fiduciary duty for the broker’s failure to explain all the material terms of coverage.9 However, some states do not recognize that there is a fiduciary relationship between insurance brokers and insureds, and courts in several others have issued conflicting or unclear opinions regarding the existence and/or scope of a fiduciary relationship between the two parties.
Breach of Contract
Some jurisdictions allow insureds to bring an action against a broker for breach of contract. Therefore, if a broker fails to execute the duty it assumed, such as procuring coverage, the insured may bring a claim of breach of contract.
Negligent Misrepresentation and Fraud
A broker may be found liable for negligently or fraudulently misrepresenting to the insured the coverage obtained on the insured’s behalf. Unlike fraud, a claim for negligent misrepresentation does not require a showing of intent. Therefore, negligent misrepresentation claims are asserted more often than claims of fraud.
If your business is involved in an insurance dispute, contact Schwartz, Conroy and Hack, PC for assistance. We have the expertise and tenacity to make insurance companies keep the promises they make to you and your business.
1 Accord Clements v. Ohio State Life Ins. Co., 33 Ohio App. 3d 80, 84, 514 N.E.2d 876, 881 (1986)
2 Thompson & Bailey, LLC v. Whitmore Grp., Ltd., 34 A.D.3d 1001, 1002, 825 N.Y.S.2d 546, 548 (3d Dep’t 2006)
31 Murphy v. Kuhn, supra, 90 N.Y.2d at 270, 660 N.Y.S.2d at 373.
4 JSB Interests, LLC v. Hanover Ins. Co., 62 So.3d 211 (La. Ct. App. 2011)
5 Hardy Oil Co., Inc. v. Nationwide Fargo Ins.-Indiana, 2014 WL 4693816 (6th Cir. Sept. 22, 2014).
6 Consolidated Sun Ray, Inc. v. Lea, 401 F.2d 650, 657 (3d Cir. 1968),
7 Southtrust Bank v. Export Ins. Servs., Inc., 190 F. Supp. 2d 1304, 1310-12 (M.D. Fla. 2002)
8 Scott v. Northwestern Agencies, Inc., 75 Or. App. 187, 706 P.2d 195 (1985)
9 Southtrust Bank v. Export Ins. Servs., Inc., 190 F. Supp. 2d 1304, 1308-09 (M.D. Fla. 2002)
