Insurance brokers can be found to have a fiduciary obligation tothe insured, a duty greater than that of the average agent whoneeds only to get the insurance ordered. Such was the issuein Thomas v. Dion.

In this case, Neil Lansman contacted insurance agency Fetterman,Millinghausen & McNutt Inc. (FMM) to procure General Liabilityinsurance on behalf of his general contractor company, PrestigiousHomes Inc. (Prestigious), which was executed on Dec. 23, 2003. Inthis application, Prestigious answered questions affirming that itobtained certificates of insurance from any subcontractors used;required minimum limits of $1 million from subcontractors; did notuse uninsured subcontractors; obtained written contracts thatincluded a hold harmless clause in Prestigious's favor from all itssubcontractors; and would be listed as an additional insured underany subcontractors' policies.

On Feb. 12, 2004, National Indemnity Insurance Co. issuedPrestigious a General Liability insurance policy starting from Jan.28, 2004. The policy contained an endorsement titled “IndependentContractors and Subcontractors Coverage Requirement — Exclusion”(Subcontractor Endorsement), which states in capital letters at thetop of the page that “THIS ENDORSEMENT CHANGES THE POLICY. PLEASEREAD IT CAREFULLY.”

Accident and underlying litigation

On Aug. 6, 2006, Prestigious entered into a contract with GoldenHands Inc. to perform work at a residential housing project inAtlantic City, N.J.. Golden Hands was one of approximately 15subcontractors retained by Prestigious to work on the project.Michael Thomas, employed by Golden Hands, fell from a scaffold andwas injured. Thomas received Workers' Compensation benefits, andalso brought a negligence action against Prestigious.

National received notice of Thomas's initial claim on Dec. 8,2006. Following its investigation, National disclaimed coverage onMay 30, 2007, because of Prestigious' failure to comply with therequirements of the Subcontractor Endorsement. Specifically,Prestigious failed to procure a written indemnification agreementfrom Golden Hands, and was not named as an additional insured onGolden Hands' policy.

The trial judge determined that Prestigious breached thecontract by failing to abide by the policy's conditions, and thatthere can be no third-party beneficiary to a contract that is nulland void as a result of a breach. Accordingly, the court found nogenuine issue of fact even when viewing all facts in a light mostfavorable to the Thomas, and granted a $750,000 summary judgment tohim. When Thomas was unable to collect on that judgment, he suedFMM and Michael Dion, an insurance producer employed by FMM. Thomasalleged that the defendants “were negligent in failing to makePrestigious aware that it needed to have certain insurance termsand requirements in the contracts it had with itssubcontractors.”

Case analysis

The court noted that a negligence cause of action has fourelements: (1) duty of care, (2) breach of duty, (3) proximatecause, and (4) actual damages. An insurance broker owes a duty tohis principal to exercise diligence in obtaining coverage in thearea his principal seeks to be protected. An insurance produceracts in a fiduciary capacity in the conduct of his or her insurancebusiness. Both agents and brokers are obliged to inform insureds ofavailable coverage.

Thus, the court said, as insurance brokers, defendants wererequired (1) to procure the insurance; (2) to secure a policy thatwas neither void nor materially deficient; and (3) to provide thecoverage the broker undertook to supply. The court found that thedefendants fulfilled this duty by procuring the insurance fromNational through Delaware Valley Underwriting Agency, which was theonly quote tendered because of the lack of a domestic marketinterested in Prestigious's risk. That policy was neither void normaterially deficient.

Moreover, the exclusion set forth in the SubcontractorEndorsement was clear and unambiguous, the court said. Thedefendants provided additional explanations of the policy toLansman and Prestigious beyond the plain language of theendorsement, further fulfilling their fiduciary duties. Dion'sunrebutted testimony was that he explained “the exclusion andwarranty in the policy regarding the contractors and the additionalinsured and the hold harmless agreements … during the quotationprocess” and that Lansman “was made aware of the warranty in thepolicy” that “he had to have certificates of insurance from hissubcontractors and he had to have contracts and hold harmlessagreements, which he said he had in the applications.”

All of these measures demonstrated the defendants' adherence totheir insurance broker fiduciary duties, ruled the court. BecausePrestigious could have no claim against the defendants, Thomas'third-party beneficiary claim based on breach of that relationshipsimilarly failed.

The undisputed documentation, accompanied by agent MichaelDion's unrefuted deposition testimony, clearly established thatPrestigious recognized and was aware of the requirements necessaryto ensure General Liability coverage under the SubcontractorEndorsement, and Prestigious's  material breach of thoserequirements.

The insurance broker who has a fiduciary duty to the insuredmust provide the insurance required by the insured's order andexplain the terms and conditions to the insured as well as warn theinsured to read the policy.

In this case, the insured — with knowledge of the requirementsof the policy — did not obtain an additional insured endorsementnor an agreement from the subcontractor to indemnify it. Thisinsured then went broke, so the only chance the injured employeehad in addition to Workers' Compensation benefits was to sue thebroker. His claim failed because they did nothing wrong.

Barry Zalma, Esq., CFE, is a California attorney, insuranceconsultant and expert witness specializing in insurancecoverage, claims handling, bad faith and fraud. Contacthim at [email protected].

Related: Case analysis: Agent's duty of care islimited