Editor's note: Peter Biging is a partnerwith the law firm of Goldberg Segalla, LLP

In recent years, fears have been raised that insurance agents'and brokers' “duty to advise” is being so broadly interpreted as toput them at substantial legal risk, in ways no one had previouslyexpected or anticipated.

And a recent court case might be an early indicator that thosefears are well placed.

In the mining industry, before the advent of carbon monoxidedetectors, canaries were used to warn miners when carbon monoxidehad reached dangerous levels. The birds' rapid rate of breathing,tiny bodies and high metabolism conspired to cause them to succumbbefore the miners did, and their death provided advance warning ofthe danger the miners faced.

It may be hyperbole to describe a single recent court decisionas a “canary in the coal mine” for insurance agents and brokerswith regard to the risk they may face, but the recent Floridafederal district court decision in Tiara CondominiumAssociation, Inc. v. Marsh USA, Inc., Civ. No. 08-80254, 2014 U.S.Dist. LEXIS 3677 (S.D. Fla. Jan. 13, 2014) is at the veryleast a clarion call to agents and brokers that a new world is uponus, and if you promote yourself as an expert and promise “riskmanagement” services, you better go in with your eyes wideopen.

The case in question

In Tiara Condominium Association, the plaintiff (Tiara)was the corporate entity that managed the Tiara Condominium, anoceanfront 43-story tower located on Singer Island, in Florida.After the Condominium was severely damaged by two back-to-backhurricanes in September 2004, Tiara incurred costs of approximately$130 million to try to repair the damage and restore theproperties. Through its broker, Marsh, USA, Inc. (Marsh), Tiara hadsecured a windstorm policy prior to the loss with limits of justunder $50 million and managed to obtain an $89 million insurancesettlement from its property insurer, even though the insurer hadargued that the policy only covered a single occurrence, and didnot “reset” to provide an additional $50 million in coverage forthe second hurricane.

However, even with this settlement Tiara was short about $40million to pay for the losses. To try and address this, in additionto suing the various contractors for negligence and fraudulentlyinflated billings, Tiara sued Marsh for the balance, claiming ithad insufficient coverage due to Marsh's breach of contract, breachof the implied covenant of good faith and fair dealing, negligentmisrepresentation, negligence and breach of fiduciary duty.

After discovery was taken, Marsh moved for summary judgmentdismissing all of the claims. Marsh said it had purchased theprecise limits it had been requested to purchase, based on atwo-year-old appraisal Tiara had specifically directed Marsh to usein calculating the limits, and after subtracting out coverage forcertain optional coverages relating to interior unit structures(e.g., cabinets, air conditioning units, etc.) that Tiara hadspecified should be excluded. Marsh argued that Tiara had directedthe broker in this manner knowing full well that this could andwould likely result in lower limits and thus greater uninsuredrisk, because Tiara wanted to reduce its premiums. In fact, therewas evidence that the appraiser had advised Tiara's insurancecommittee that it would likely set a value 7-9% below actualvalue.

Nonetheless two claims, for negligence and breach of fiduciaryduty to the extent based on the “failure to advise,” survived afterit was determined on appeal that these claims were not barred bythe economic loss rule (The claims had initially been dismissed onthis basis, but they were reinstated, after the Eleventh Circuitcertified the question to the Florida Supreme Court and the courtheld that the economic loss rule did not apply in thiscontext).

In renewing its motion after the claims were reinstated onappeal, Marsh noted that while it typically encouraged its clientsto obtain new building appraisals each year in order to ensure thattheir coverages were sufficient, it had agreed to use thetwo-year-old appraisal at the client's specific request. Marshagain pointed out that Tiara had instructed it to reduce theappraisal by backing out the value of the built-in fixtures withineach condominium unit for which Tiara didn't want to purchasecoverage.

And Marsh pointed out that Tiara's Board had an insurancecommittee composed of a number of sophisticatedbusinessmen—including a former life insurance executive, anattorney and an accountant, all of whom were directly privy to theinformation supplied by the appraiser. Furthermore, Marsh'scontract provided that “Marsh will not independently verify orauthenticate information provided by you necessary to prepareunderwriting submissions and other documents relied upon byinsurers, and you will be solely responsible for the accuracy andcompleteness of such information….”

In response, Tiara argued Marsh had a special “duty to advise”Tiara regarding its insurance decisions and had failed to doso.

Tiara pointed to:

• Marsh's promise in its contract to act as Tiara's “exclusiveinsurance, risk-management and risk-financing advisor and insurancebroker.”
• Tiara's several-years-long relationship with Marsh (duringwhich Marsh had an executive regularly participate in Tiarainsurance-committee meetings who allegedly “offer[ed] counsel andadvice on Tiara's insurance requirements and needs”).
• Marsh having held itself out as an expert in the field ofproperty and casualty as justifying Tiara's reliance on Marsh toadvise it with respect to the risks inherent in not having a newappraisal prepared and the risks of underinsuring itself.

Because a subsequent appraisal put the value of the building atalmost $20 million more than it was insured for, Tiara allegedthat, but for Marsh's failure to advise of the necessity ofobtaining an updated appraisal, it would have had more than enoughinsurance available to cover the loss (i.e., $70 million timestwo). Tiara also noted that it settled with its property insurerfor $11 million less than the coverage that it did have in placedue to the threat of having the available insurance dramaticallyreduced by application of the policy's coinsurance provisions.

Tiara argued that Marsh had a duty to not just advise that itcould make do with an old appraisal, but, in its capacity as itsrisk management and risk financing advisor, it had a duty to adviseof the overall risks and potential policy implications of beingunderinsured.

In denying Marsh summary judgment, the court concluded there wasan issue of fact as to whether there was a “special relationship”creating an enhanced duty to advise on Marsh's part, and whetherMarsh had breached that duty regardless of whether Tiara'sinsurance-committee members were aware that using the old appraisalmight well leave Tiara underinsured.

In short, the court stated, to the extentthere was a special relationship, it wasn't enough to argue thatTiara's insurance-committee members had access to the sameinformation or could read the same policy language as Marsh. Thiswould “not relieve Marsh from its obligation to provide arecommendation on what was the most prudent approach to protectTiara's insurance needs, and to warn of the financial consequencesof diverting from that approach. . . . [T]he burden was on Marsh,as the insurance expert in this equation, to share its professionaljudgment with Tiara and allow Tiara to make an informed judgment onthe basis of that advice.” Id. at *31-32.

What does it mean for brokers?

What is the impact of this case? What does it tell us? What arethe lessons to be learned? It is just one case, and it was decidedon its specific facts, but it is still a very loud warning shot forbrokers who promise “risk-management services,” and at the sametime think they can treat their clients as adults. This case says,in big bold letters, “Not so fast.”

If you represent to an insured that you are going to act as theinsured's “exclusive insurance, risk-management and financial-riskadvisor and insurance broker,” you better be aware that your everymove is going to be heavily scrutinized if an insured's coverageeither does not respond to a loss or is insufficient. And evenwhere it seems patently obvious that an insured has made aconscious decision to reduce its coverage limits to generate areduction in premiums, well aware of the fact that it might live toregret the decision in the event of a substantial loss, you need tothink long and hard about whether to just go along or whether topaper your file with advice on the risks such a course of actionmay engender.

Additionally, the case offers a striking argument for givingcareful consideration regarding just how broadly and forcefully youwant to describe and define the nature of your relationship withyour client. The insurance broking business is highly competitiveand you need to add value to stand out from your competitors. Butif you assume the mantle of a risk-management advisor, there issubstantial risk that comes with it.

Lastly, however you may describe the nature of the services youoffer, it may make sense to reconsider your standard disclaimers,and ask whether they would protect you in instances such as this.Because the fact is that when a special relationship may bepresent, it is not necessarily going to be enough to point out thelogical consequences of an insured's conscious and intentionaldecision to reduce its coverages. You may also have to show thatyou specifically identified each of the risks inherent in pursuingthis course, and counseled a more cautious, conservativeapproach.