Brokers and their fiduciary duties

Brokers fulfill their fiduciary duty when they secure the requested policy and point out its terms and conditions.
Brokers fulfill their fiduciary duty when they secure the requested policy and point out its terms and conditions.

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

In this case, Neil Lansman contacted insurance agency Fetterman, Millinghausen & McNutt Inc. (FMM) to procure General Liability insurance on behalf of his general contractor company, Prestigious Homes Inc. (Prestigious), which was executed on Dec. 23, 2003. In this application, Prestigious answered questions affirming that it obtained certificates of insurance from any subcontractors used; required minimum limits of $1 million from subcontractors; did not use uninsured subcontractors; obtained written contracts that included a hold harmless clause in Prestigious's favor from all its subcontractors; and would be listed as an additional insured under any subcontractors’ policies.

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

Accident and underlying litigation

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

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

The trial judge determined that Prestigious breached the contract by failing to abide by the policy's conditions, and that there can be no third-party beneficiary to a contract that is null and void as a result of a breach. Accordingly, the court found no genuine issue of fact even when viewing all facts in a light most favorable to the Thomas, and granted a $750,000 summary judgment to him. When Thomas was unable to collect on that judgment, he sued FMM and Michael Dion, an insurance producer employed by FMM. Thomas alleged that the defendants “were negligent in failing to make Prestigious aware that it needed to have certain insurance terms and requirements in the contracts it had with its subcontractors.”

Case analysis

The court noted that a negligence cause of action has four elements: (1) duty of care, (2) breach of duty, (3) proximate cause, and (4) actual damages. An insurance broker owes a duty to his principal to exercise diligence in obtaining coverage in the area his principal seeks to be protected. An insurance producer acts in a fiduciary capacity in the conduct of his or her insurance business. Both agents and brokers are obliged to inform insureds of available coverage.

Thus, the court said, as insurance brokers, defendants were required (1) to procure the insurance; (2) to secure a policy that was neither void nor materially deficient; and (3) to provide the coverage the broker undertook to supply. The court found that the defendants fulfilled this duty by procuring the insurance from National through Delaware Valley Underwriting Agency, which was the only quote tendered because of the lack of a domestic market interested in Prestigious's risk. That policy was neither void nor materially deficient.

Moreover, the exclusion set forth in the Subcontractor Endorsement was clear and unambiguous, the court said. The defendants provided additional explanations of the policy to Lansman and Prestigious beyond the plain language of the endorsement, further fulfilling their fiduciary duties. Dion's unrebutted testimony was that he explained “the exclusion and warranty in the policy regarding the contractors and the additional insured and the hold harmless agreements … during the quotation process” and that Lansman “was made aware of the warranty in the policy” that “he had to have certificates of insurance from his subcontractors and he had to have contracts and hold harmless agreements, which he said he had in the applications.”

All of these measures demonstrated the defendants’ adherence to their insurance broker fiduciary duties, ruled the court. Because Prestigious could have no claim against the defendants, Thomas’ third-party beneficiary claim based on breach of that relationship similarly failed.

The undisputed documentation, accompanied by agent Michael Dion’s unrefuted deposition testimony, clearly established that Prestigious recognized and was aware of the requirements necessary to ensure General Liability coverage under the Subcontractor Endorsement, and Prestigious’s  material breach of those requirements.

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

In this case, the insured — with knowledge of the requirements of the policy — did not obtain an additional insured endorsement nor an agreement from the subcontractor to indemnify it. This insured then went broke, so the only chance the injured employee had in addition to Workers’ Compensation benefits was to sue the broker. His claim failed because they did nothing wrong.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, claims handling, bad faith and fraud. Contact him at zalma@zalma.com.

Related: Case analysis: Agent's duty of care is limited

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