Flag: Not So Fast

Agent E&O Cases Dismissed

By Peter J. Biging

A basic duty of an insurance agent or broker is to provide requested coverage within a reasonable time period, but the duty doesn't exist until the producer agrees to procure the coverage, a court ruled last year.

This may seem like a fairly straightforward proposition.

However, in Avery v. Diedrich, the question of exactly when an agent has a duty to procure coverage was considered by the Wisconsin Supreme Court in the following context: a very specific request was made for an agent to procure a certain level of coverage; there was uncontradicted evidence of this request; but the agent, nevertheless, failed to obtain the coverage.

Arguably, is that not the very essence of a failure-to-procure claim? Not so fast.

In Avery, the insureds were owners of a summer home they had procured property insurance for through an agent they had used as their insurance agent in purchasing various coverages for six years.

After initially placing property coverage for the home in the agreed amount of $150,000, they requested on renewal that he increase the coverage by $100,000.

The agent was unsure whether the proposed increase in the insured value was appropriate, thought the carrier would view the increase with suspicion, and suggested that the insureds have a property appraisal prepared before the increase was requested. In the meantime, the property remained insured at the $150,000 level.

While the insureds did, in fact, receive a verbal appraisal in excess of $250,000, they never received a written appraisal, and never advised the agent of the appraisal.

The house was then destroyed by fire, and the cost of replacing it ended up exceeding $250,000, while coverage was limited to the $150,000 in place.

The insureds, finding themselves without sufficient coverage, sued the agent, claiming he had acted negligently in failing to procure the coverage they requested. They argued that he had a duty to do so once they had determined the value they wanted insured and instructed him to obtain the coverage–notwithstanding his disagreement about the value at which to insure the property.

Noting that this was a case of first impression, the Wisconsin Supreme Court concluded that an agent cannot have a duty imposed on it unilaterally by the insured. The duty can only arise when the agent has actually agreed to procure the coverage.

Accordingly, because there was no dispute that the agent had not agreed to procure the coverage at the requested $250,000 limit, the agent was entitled to summary judgment dismissing the claims asserted against him.

TRADITIONAL ARGUMENTS

In other notable court decisions in 2007, lawyers successfully defended insurance agents and brokers facing errors and omissions claims by relying on long-standing arguments that continued to shield producers from liability.

One typical issue arising in E&O cases relates to the duties of insureds to read their policies.

In most states, there is a presumption that if an insured received a policy, then he or she knows the contents of it, and a further presumption that the insured has assented to the policy's contents if he or she does not complain about coverage after receiving it.

In 2007, brokers relying on this defense were generally successful. Examples are Stone v. Rullo Agency Inc., decided by the Appellate Division of New York, Third Department, and W. N. McMurry Construction Co. v. Community First Insurance Inc., decided by the Wyoming Supreme Court.

The defense failed, however, in one notable instance where an insured was able to show that it had not, in fact, received the policy until after the accident giving rise to the claim in issue. In that case, Aspen Specialty Ins. Co. v. Muniz Engineering Co. Inc., a Texas district court, in refusing to hold the insured responsible for the coverage in place as a matter of law, noted that an insured could logically have “no duty to read a policy it did not have.”

Another typical issue arising in agent or broker E&O cases is the issue of “proximate cause.” In order to have a finding of agent or broker malpractice, there must be a showing that the insured would have been in a better situation “but for” the claimed malpractice.

In recent cases considering proximate cause, courts in US Pack Network Corp. v. Travelers Property Casualty (App. Div. 1st Dep't 2007) and Royal Indemnity Co. v. King (D. Conn. 2007), each granted summary judgment motions by brokers dismissing E&O claims.

In each case, the question of whether or not a duty of care had been breached by the broker was trumped by a conclusion that any breach by them did not matter. There would not have been coverage anyway, so there was no proximately caused harm to plaintiffs as a result.

WHOLESALER PREVAILS

Turning to claims by retail brokers against wholesale brokers, in Bleecker Street Health & Beauty Aids Inc. v. Granite State Ins. Co. (App. Div. 1st Dep't Mar. 6, 2007), the court found that the retail broker, with nothing more than a breach-of-contract claim against a wholesale broker, could not seek common-law indemnity or contribution from the wholesaler.

In this case, the insured was denied coverage for a fire loss claim based upon an alleged misrepresentation in its policy application that there was no establishment in the building utilizing a deep fryer. In fact, there was.

The insured blamed the retail broker, claiming he only saw the signature page of the application.

The retail broker, in turn, sued the wholesale broker, trying to get contribution or indemnity from the wholesaler.

The wholesale broker, however, procured coverage based upon the application it was provided by the retail broker. Therefore, it could not have been responsible for any lack of coverage resulting from misrepresentations in the application.

Even though the retail broker tried to couch its claims against the wholesaler in terms of negligence, the fact was that however it might try to characterize it, a breach-of-contract claim was all it had.

Peter J. Biging, Esq. is a partner in the New York office of Lewis Brisbois Bisgaard & Smith LLP. He can be reached at BIGING@lbbslaw.com

See related article, “What Can Insurance Customers Expect?” for a discussion of agents' duties.

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