Failure to communicate costs broker $7.8 million
Insurance agents and brokers must be careful in making promises, especially to multiple-party insureds. Failure to accurately communicate with an insured–whether the direct client of the broker or not–can be exceedingly expensive. In the following case, the broker made representations that it knew or should have known were false and failed to follow up with the insured and the multiple subcontractors who became insured under the wrap-up program. The broker raised several important issues on appeal, none of which were effective. The key to the case was that the broker promised to obtain insurance that it had not obtained and compounded the error by advising the beneficiaries of the policy that coverage existed.

Misrepresenting coverage to an insured can make the broker into an all-risk insurer of the person receiving the misrepresentation without the benefit of a policy wording. It is the type of case where the broker–or its E&O insurer–should attempt to hold the plaintiff to what it asks for in damages, for a jury would certainly want to punish the broker as the jury in this case punished Marsh. On March 7, 2008, the U. S. Court of Appeals for the 5th Circuit found that Marsh USA Inc. negligently failed to procure insurance for the plaintiffs SMI, with damage in the amount of $7,839,131. Marsh argued that the judgment in favor of SMI should be reversed and rendered in its favor, or that the case should be remanded for a new trial, because 1) SMI failed to prove the causation element of its negligence claim because the insured v. insured exclusion would have precluded coverage under the professional liability policy issued by St. Paul Fire & Marine Insurance Co.; 2) SMI's negligence claim is barred by Nevada's economic loss doctrine; and 3) SMI's third-party beneficiary and promissory estoppel claims fail as a matter of law because SMI was not an intended beneficiary of any contract, Marsh made no promise that it would procure PL insurance for SMI, and SMI did not detrimentally rely on any promise allegedly made by Marsh regarding PL insurance.
The 5rd Circuit held that SMI's negligence claim was not barred by Nevada's economic loss doctrine, there was a legally sufficient evidentiary basis for a reasonable jury to find that SMI proved the causation element of its negligence claim, and the jury verdict should stand. Marsh found itself in this situation based on the following facts:
1. In 1997, Fluor Daniel Inc. contracted with Aladdin Gaming LLC to redesign and rebuild the Aladdin Hotel and Casino in Las Vegas, Nev.
2. Fluor, the general contractor, retained Marsh to administer the wrap-up insurance scheme for the Aladdin project. The coverage is known as a Controlled Insurance Program (CIP), which involved procuring different insurance policies covering various participants.
3. As compensation, Marsh received a commission from the insurance companies and a flat fee from Fluor.
4. The insurance provided as part of the CIP scheme consisted of several types of policies, including commercial general liability coverage, professional liability coverage, pollution liability coverage, subcontractor default coverage and excess liability coverage.
5. Under the contract between Fluor and Aladdin, PL coverage was required for Fluor, Aladdin and related entities–but not for subcontractors.
6. In May 1998, St. Paul issued a PL policy that listed no subcontractors as additional named insureds.
In December 1997, SMI's winning bid of $38.5 million enabled it to be retained as a subcontractor to design, engineer and install the Aladdin project's structural steel and foundation work. At that time, SMI signed a letter of intent with Fluor. In March 1998, SMI received an insurance information booklet from Marsh stating that enrolled subcontractors of all tiers would be covered by the CIP and provided PL coverage. In June 1998, SMI received the contractor handbook, prepared in part by Marsh, which again stated that enrolled subcontractors would be provided PL coverage under the CIP. However, the handbook cautioned that "if any part of the foregoing is in conflict with a provision of your subcontract agreement, the provisions of the subcontract agreement will govern."
In July 1998, SMI enrolled in the CIP and properly completed all enrollment forms. Although Marsh noted that SMI did not request PL coverage in its CIP enrollment forms, SMI argued that it was not required to complete additional forms to obtain the PL coverage.
In August 1998, SMI signed its subcontract, which was retroactively effective to SMI's December 1997 letter of intent. An attachment to SMI's subcontract with Fluor described the CIP and stated that coverage for off-site work and "design professional errors and omissions insurance" were "not included in the CIP." Under an amendment to SMI's subcontract, SMI was required to provide a certificate of insurance from McNamara/Salvia, SMI's design consultant, showing that McNamara/Salvia had PL coverage and that SMI and Fluor were additional named insureds. This PL coverage, however, only protected SMI for vicarious liability.
In October 1998, Marsh sent certificates of insurance to SMI stating that SMI was an additional named insured on Fluor's PL policy. Unknown to SMI, in December 1998, Marsh's project manager advised his employees to stop sending out certificates for PL coverage to subcontractors and to amend the contractor handbook. Despite this warning, in September 1999, Marsh sent yet another inaccurate certificate stating that SMI had PL coverage under the CIP. These two inaccurate certificates each contained a capitalized caveat: "This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend or alter the coverage afforded by the policies below." SMI argued that the handbook and the two inaccurate certificates led it to detrimentally rely on Marsh to procure PL coverage. Marsh never obtained PL coverage for SMI from St. Paul or any other insurer.
SMI was actually covered by four different insurance policies under the CIP, including a subcontractor default policy. SMI contributed money in the form of bid deductions to purchase this CIP coverage, but SMI never made a bid deduction for PL coverage.
From its inception, the Aladdin project ran behind schedule. In or around June 1999, several of SMI's subcontractors defaulted. As construction continued, other subcontractors defaulted. SMI's claims for subcontractor default coverage were initially denied by St. Paul, which caused SMI to file a lawsuit against St. Paul and Marsh in federal court in Galveston, Texas.
Because of the multiple defaults of SMI's subcontractors, Aladdin filed claims in an arbitration proceeding against Fluor. Subsequently, Fluor filed a related cross-action in the arbitration proceeding against SMI, alleging that SMI breached its contract, failed to properly design and fabricate its portions of the Aladdin project, and failed to perform satisfactorily its professional design and construction duties.
St. Paul and SMI eventually reached a settlement in the Galveston suit. As part of this settlement, SMI released all claims against St. Paul, including claims for coverage under the subcontractor default and PL policies. St. Paul agreed to pay additional amounts if the arbitration among St. Paul, Fluor and SMI settled. Despite its settlement with St. Paul, SMI continued to pursue its claims against Marsh in the Galveston suit.
The arbitration proceeding eventually settled. SMI's share of the settlement was $3.5 million paid to Fluor and Aladdin. St. Paul paid $2.25 million of the amount, and SMI paid the remaining $1.25 million.
SMI was forced to defend itself against Fluor in the arbitration proceeding without any defense or indemnity provided by the PL coverage that SMI believed was provided by the CIP. After SMI settled with St. Paul in the Galveston suit, SMI amended its complaint to assert tort and quasi-contractual claims based on Marsh's alleged failure to procure PL insurance. SMI argued that if Marsh had secured PL coverage for SMI, then SMI would have been reimbursed for the attorneys' fees incurred by SMI in the arbitration proceeding and the $1.25 million it contributed to the settlement with Fluor and Aladdin. SMI sought an additional $6.6 million in damages from Marsh because SMI released its claim for the unpaid subcontract value as part of its settlement with Fluor. These damages were not a part of SMI's settlement with St. Paul.
The case was tried by consent before the magistrate judge. The court ruled that Nevada substantive law applied and the parties did not contest that ruling. During the proceedings, Marsh twice moved for judgment as a matter of law, and the court denied both motions. The jury returned a verdict against Marsh on SMI's claims for negligence, and the jury also found that SMI was a third-party beneficiary of the oral contract between Fluor and Marsh and was entitled to recovery under the theory of promissory estoppel. SMI elected to recover on a theory of negligence, and the damages award was proportionately reduced by Nevada's comparative negligence statute. The jury found SMI comparatively negligent for 12 percent of its damages. On July 31, 2006, SMI was awarded a final judgment of $7,839,131, including interest and costs. The court overruled Marsh's post-judgment motions for judgment as a matter of law and for new trial, and Marsh filed a timely appeal.
Negligent failure to procure insurance: The 5th Circuit stated that in at least three separate cases, the Nevada Supreme Court has recognized the viability of a claim against an insurance broker for negligent failure to procure insurance: Lucini-Parish Ins. Inc. v. Buck, 836 P.2d 627, 629 (Nev. 1992); Keddie v. Beneficial Ins. Inc., 580 P.2d 955, 956 (Nev. 1978); and Havas v. Carter, 515 P.2d 397, 399 (Nev. 1973).
In Havas, the 5th Circuit noted that the Nevada Supreme Court recognized that an insurance broker "who undertakes to procure insurance for another owes an obligation to his client to use reasonable diligence in attempting to place the insurance and to seasonably notify the client if he … is unable to obtain the insurance." Regarding the duty element of the claim, the court stated that insurance brokers are "not obligated to assume the duty of procuring … insurance, but when they [do] so the law impose[s] upon them the duty of performance in the exercise of ordinary care for the rights and interests of the [intended purchasers]." The question of whether a broker exercised "the care and diligence that [the] undertaking required" is a question of fact for the jury. In Havas, the court held that the plaintiff failed to establish negligence because the broker made reasonable efforts to procure the special type of insurance demanded by the plaintiff, and the broker seasonably notified the plaintiff of his inability to procure it.
The 5th Circuit also noted that in Keddie, the Nevada Supreme Court repeated that "[o]nce an agreement to procure insurance has been reached the insurance agent is obliged to use reasonable diligence to place the insurance and seasonably to notify the client if he is unable to do so."
In Buck, two horse owners brought an action against an insurance broker for failure to procure equine mortality insurance. The Bucks had insured several horses through Lucini-Parish Insurance (LPI) and always followed the same procedures. The Bucks decided to purchase a thoroughbred horse named Bluegrass for $75,000. An employee of the Bucks called LPI and spoke with an LPI representative about adding Bluegrass to the Bucks' existing Lloyd's policy. After giving the LPI representative the necessary information and faxing the veterinarian's certificate and bill of sale, the employee believed that Bluegrass was insured. Unknown to the Bucks, LPI lacked binding authority with respect to equine mortality insurance. The LPI representative forwarded the application via regular mail to a local agent with binding authority. Bluegrass died shortly thereafter, and LPI informed the Bucks that the horse was not yet insured at the time of death.
The jury returned a verdict in favor of the Bucks on their breach of contract and negligent failure to procure insurance claims. Affirming the judgment, the Nevada Supreme Court approved the following jury instruction on the negligence claim: