Arizona high court decision means more litigationagainst agents
Because malpractice claims are personal, courts will usuallynot allow them to be assigned to a third party. The Supreme Courtof Arizona decided that the general rule does not apply toinsurance agents and that the victim of insurance agent malpracticemay assign the claim to a third party.

The decision will probably increase litigation againstinsurance agents and brokers in Arizona and any other states thatadopt its decision.
Regardless of the possibility of increased litigation againstinsurers, the case suggests that the suits will be difficult forthe plaintiffs to prove. They will not be able to collude insetting high judgments binding on the agent. The agent's duty tothe insured is limited in Arizona to less than that of a fiduciary.The agent owes only a duty of “reasonable care, skill anddiligence” in dealing with clients. In an appeal from theSuperior Court in Maricopa County, Ariz., the Arizona Supreme Courtconcluded that under state law, an insurance agent's clients mayassert claims for professional negligence against the agent and mayassign such claims to third parties.
The case arose after Neal and Gail Berliant bought a liquor storecalled The Liquor Vault in 2000. To insure themselves, theypurchased a business and umbrella liability policy from VictoriaGittlen, a licensed insurance agent. The Berliants alleged thatGittlen did not advise them that they could also purchase liquorliability coverage.
In 2001, The Liquor Vault sold beer to a minor who gave it toanother minor. The second youth drove his car into a cementbarrier, killing his passenger. The passenger's father, D. Jer?Webb, filed a wrongful death claim against the Berliants and TheLiquor Vault. The Berliants tendered the claim to their insurancecompany, which properly refused to defend because the Berliantslacked liquor liability coverage.
To settle the wrongful death claim, the Berliants stipulated to theentry of a $3 million judgment. Webb agreed not to execute on thejudgment, and in exchange the Berliants assigned to Webb theirrights to sue both their insurer and their insurance agent and heremployers. Webb then sued Gittlen, G&G Insurance Service Inc.and CDS Insurance Agency LLC, alleging negligence and breach offiduciary duty. The trial court dismissed these claims, citingPremium Cigars International Ltd. v. Farmer-Butler-LeavittInsurance Agency, which held that claims against an insuranceagent for professional negligence are not assignable.
The court of appeals affirmed in a memorandum decision that alsorelied upon Premium Cigars.
The Arizona Supreme Court, moving in a new direction, consideredstate case law that generally allows the assignment of unliquidatedlegal claims except those involving personal injury. The broadprohibition on assignment exemplified the common law view thatlitigation was vexatious or otherwise socially undesirable. Thereasoning was stated by Lord Coke in 1613:

The Arizona Supreme Court noted that as courts became moreaccessible and litigation a more accepted means for resolvingdisputes, the prohibition on assignment gradually became theexception rather than the rule. Yet one class of unliquidatedclaims was excluded from the emerging rule of assignability:personal injury claims. Since Roman times, such claims wereconsidered “personal” to the claimant and could not be asserted byothers. Many courts concluded that whether a claim would survivethe claimant's death should also determine whether it could beassigned during the claimant's life and applied this test to bothpersonal injury and other claims. This “survivability” test did notitself survive in Arizona after 1955, when the legislature enacteda statute providing for the survival of most causes of action,including personal injury claims.
The Arizona Supreme Court subsequently endorsed and expresslyrelied on public policy considerations in reaffirming the ruleagainst assignment of personal injury claims. (State Farm Fire& Cas. Co. v. Knapp, 107 Ariz. 184, 185, 484 P.2d 180,181, 1971.) Public policy considerations have also guided courts indetermining the assignability of claims not involving personalinjury. For example, the court of appeals has held that legalmalpractice claims cannot be assigned, although the principalpolicy consideration offered has been deference to theattorney-client relationship, not fears about trafficking inlawsuits. The current principles under Arizona law for determiningif an unliquidated claim may be assigned can be summarized asfollows:
1. Claims generally are assignable, except those involving personalinjury.
2. The legislature may specify whether particular claims areassignable.
3. Absent legislative direction, public policy considerationsshould guide courts in determining whether to depart from thegeneral rule.
The agent argued that claims against insurance agents forprofessional negligence cannot be assigned because:
1. Claims against lawyers for legal malpractice are notassignable.
2. The court of appeals in Premium Cigars correctlyextended this rule to insurance agents, as their relationship withclients is analogous to the attorney-client relationship.
3. Although the legislature has not addressed the assignment ofclaims against insurance agents, allowing such assignment wouldviolate public policy.
The Arizona Supreme Court disagreed. The cases prohibitingassignment of legal malpractice claims, it opined, do so because ofthe “uniquely personal” relationship between attorney and client,which gives rise to a “fiduciary relation of the very highestcharacter.”
In Premium Cigars, the court of appeals extended thisrationale to professional negligence claims against insuranceagents. It held that such claims may not be assigned because therelationship of insurance agent and client is similar to that ofattorney and client. An insurance transaction, the court said, “isnot simply a commercial transaction but a transaction personal innature for the benefit of the client.” Furthermore, like attorneys,agents owe a “duty to the insured to exercise reasonable care,skill and diligence” in carrying out the duty to procureinsurance.
The Supreme Court rejected the Premium Cigars rationale.The relationship between an insurance agent and client, whilecertainly important, differs from that between an attorney andclient in several critical respects. Attorneys are fiduciaries withduties of loyalty, care and obedience, whose relationship with theclient must be one of “utmost trust.” By contrast, insurance agentsgenerally are not fiduciaries, but instead owe only a duty of“reasonable care, skill and diligence” in dealing with clients.Similarly, although clients share personal information with boththeir insurance agents and attorneys, they typically share muchless with their agents. While clients often inform their agentsabout their medical history, financial information, prior claimhistory and personal habits, they provide their attorneys moreextensive or sensitive information about their private and publicconduct, including activities that may expose them to civil orcriminal liability.
Furthermore, attorney-client confidentiality protects broaderinterests than does insurance agent-client confidentiality. Itprotects the public interest in accessible legal advice by allowingpeople to consult their attorneys without fear of retribution. Italso ensures that clients are effectively represented, which incriminal cases is essential to a defendant's constitutional rightto assistance of counsel. Once attorneys receive information, theyare also bound by stricter confidentiality duties than areinsurance agents. Attorneys may disclose information only toprevent client crimes. Insurance agents, by contrast, arestatutorily allowed to disclose client information in 17 differentcircumstances, including when an affiliate seeks the informationfor marketing purposes.
Considering the distinctions together, the Arizona Supreme Courtfound they demonstrate that the relationship between insuranceagents and their clients, while perhaps personal, is not “uniquelypersonal” in a sense comparable to an attorney-client relationship.The differences are substantial and the similarities do not justifyholding that claims against agents cannot be assigned.
The Arizona Supreme Court recognized that a stipulated judgmentthat may bind the insurer arises from the insurer's contractualobligations to defend and indemnify its insured. When the insurerbreaches these obligations or reserves the right to deny coverage,insureds are allowed to protect themselves from “the sharp thrustof personal liability.”
In contrast, an insurance agent generally has no contractual dutyto defend and indemnify the client. That an insurer may be bound incertain circumstances by a judgment entered against the insuredarises out of, and is limited to, the insurer-insured relationship.Absent such a relationship, the court did not perceive any basisfor concluding that insurance agents would be bound by stipulatedjudgments to which they were not parties. Indeed, principles ofissue preclusion suggest the opposite conclusion.
Disagreeing with the argument that allowing assignments will floodthe courts with litigation, the court said that although allowingassignment may lead to an increase in the number of professionalnegligence claims that are actually pursued, this is notnecessarily a bad result. Insofar as the claims are meritorious,they will serve the goals of affording compensation for the clientswho are victims of professional negligence. To the extent thatallowing assignment might foster nonmeritorious claims, the courtsaid it believed they will be better deterred by specificallytargeted rules against frivolous suits. In short, the policyconcerns identified by Gittlen do not support a rule generallybarring the assignment of professional negligence claims againstinsurance agents.
Webb v. Gittlen, 174 P.3d 275 (Ariz. 01/10/2008).
Barry Zalma, Esq., CFE, is a California attorney specializingin providing expert witness testimony and consuling with plaintiffsand defendants on insurance coverage, claims handling and badfaith. He founded Zalma Insurance Consultants in 2001 and serves asits senior consultant. He can be reached at [email protected]. Hisconsulting practice's Web site is www.zic.bz.