Although most agents and brokers understand that their dutiesand obligations to an insured are limited, and they do notgenerally have a duty to volunteer to an insured that the clientshould procure additional or different insurance coverage, thatduty changes when brokers hold themselves out to haveexpertise.

In Williams v. Hilb, Rogal & Hobbs Insurance Services ofCalifornia Inc. (No. B203691 [Cal.App. Dist.2 09/09/2009]),the California Court of Appeal determined that an insurance agencywas negligent in advising on, procuring and maintaining aninsurance package for a new business venture that did not includeworkers' compensation insurance. The lack of workers' compensationinsurance was discovered after an employee was injured in acatastrophic fire during the third year of business operations.After a lawsuit in which the employee obtained amulti-million-dollar judgment against the business owners, theowners filed suit against the insurance agency.

The trial court, following a bench trial, found the insuranceagency liable and entered judgment in favor of the owners in theamount of the judgment that remained outstanding in the underlyingcase. The insurance agency unsuccessfully appealed, claiming:

o The evidence was insufficient to support a finding ofnegligence on its part, largely because the evidence did notsupport any duty owed to the insured

o The action was barred by the statute of limitations

o The trial court erred in refusing to find comparativenegligence on the part of the owners, who failed to read theirinsurance policies.

The plaintiff had opened a Rhino Linings dealership. The broker,Robyn Thaw, was described as an expert in insuring Rhino Liningsbusinesses. Thaw sent the plaintiff a blank application form byfax, indicating that the program was “designed specifically forRhino Liners dealers.” Williams filled in basic information,leaving all portions relating to insurance coverages blank. Hesigned the application and returned it to Thaw, who selected theinsurance coverages. Thaw had considerable experience withinsurance for Rhino Linings dealerships. Rhino USA had become aclient of Thaw's in the early to mid-1990, and by 1999, Thaw washandling the insurance needs of 50 to 100 Rhino Liningsdealerships.

Duty imposed on agents and brokers

The court recognized the general rule in California on insuranceagent negligence, which was articulated by Justice Kennard in Jonesv. Grewe ([1987] 189 Cal.App.3d 950):

“It is that, as a general proposition, an insurance agent doesnot have a duty to volunteer to an insured that the latter shouldprocure additional or different insurance coverage.” Thus,ordinarily the insurance agent's duty is “to use reasonable care,diligence, and judgment in procuring the insurance requested by aninsured.”

The rule changes, however, when one of the following threethings happens:

1. The agent misrepresents the nature, extent orscope of the coverage being offered or provided
2. There is a request or inquiry by the insuredfor a particular type or extent of coverage
3. The agent assumes an additional duty byeither express agreement or by “holding himself out” as havingexpertise in a given field of insurance being sought by theinsured.

The agent, who assumes additional duties, may be liable to theinsured for losses that resulted as a breach of that specialduty.

The trial court found that Thaw held herself as an expert in theinsurance needs of Rhino Linings dealerships. In fact, thedefendant's own expert testified that Thaw held herself as havingsome level of expertise with respect to the insurance needs ofRhino Linings dealerships. There was no question that the insuranceneeds of the plaintiff included coverage for bodily injury to anemployee who deals with toxic materials; indeed, the insuranceapplication Thaw provided contained a section on workers'compensation. Thaw knew that workers' compensation insurance ismandatory in California but failed to advise Williams of thenecessity for workers' compensation insurance. Not includingworkers' compensation insurance breached the duty Thaw assumed byholding herself out as the expert on the insurance needs of RhinoLinings dealerships.

Thaw, in fact, claimed her staff calculated workers'compensation insurance premiums and that she spoke with plaintiffWilliams about such insurance before she sent her insuranceproposal. Williams testified that he understood Thaw was “the go-toperson” for the insurance needs of Rhino Linings dealerships andhis reliance on her expertise–because he asked her for “whateverinsurance was needed to operate the business”–and relied on her tocomplete his insurance application by selecting the insurancecoverages he needed.

The agent's misrepresentations

The Court of Appeal found that the pertinent principle toresolve the issues raised by the case was stated in Paper SaversInc. v. Nacsa ([1996] 51 Cal.App.4th 1090), which involvedallegations by the insured (who did not read his insurancepolicies) that the insurance agent misled him regarding the extentof coverage for losses of business personal property. In reversingsummary judgment for the insurer and insurance agent, the courtconcluded there were genuine issues of triable fact as to whetherthe agent made the representations and, if so, whether they weresufficient to impose a special duty on the insurer. An agent'smisrepresentation of the nature, extent or scope of coverage beingoffered or provided is one of the three circumstances in which aheightened duty is imposed on the agent. The trial court correctlyand expressly rejected the contention that the insured's relianceon the agent's alleged representations was unjustifiable as amatter of law because the insured did not read the policy. ThePaper Savers court held:

[T]he issue whether an insured has a duty to read his policy [isresolved]…. If [the agent] held himself out as an adviserto [the insured] and interpreted the coverage in a way differentfrom what the language of the policy indicated, [the insured] issimply saying that [the agent] may be liable for his negligence, ifproved. In this, he is correct. (Emphasis added)

Lessons learned

An agent's duty changes when the broker holds himself to haveexpertise. This case is a perfect example because the agent knewthe business was new, held herself out as an expert in theparticular business (having acted as agent for more than 50 similardealerships), and that the plaintiff relied on her expertise to gethim the insurance needed for his new business. Failing to obtainworkers' compensation insurance–insurance all California businessesare required to acquire as a legal mandate–was clearly negligentand a failure to use the expertise the agent claimed.

Similarly, the agent was unable to convince the court that theinsured's failure to read the policy because of her claim ofexpertise.

Thaw could have avoided a multi-million-dollar verdict againsther and her firm by doing the following:

o Obtaining a written contract with the insured specificallystating the duties and obligations of each

o Explaining the coverages provided in writing

o Repeating the explanation with each renewal

o Explaining all coverages not obtained and the reasons why theywere not obtained (for example, she had no market for workers'compensation insurance) and suggesting the insured go to others

o Never claiming an expertise they did not have.