Although most agents and brokers understand that their duties and obligations to an insured are limited, and they do not generally have a duty to volunteer to an insured that the client should procure additional or different insurance coverage, that duty changes when brokers hold themselves out to have expertise.

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

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

o The evidence was insufficient to support a finding of negligence on its part, largely because the evidence did not support 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 comparative negligence on the part of the owners, who failed to read their insurance policies.

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

Duty imposed on agents and brokers

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

“It is that, as a general proposition, an insurance agent does not have a duty to volunteer to an insured that the latter should procure 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 an insured.”

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

The agent misrepresents the nature, extent or scope of the coverage being offered or provided
There is a request or inquiry by the insured for a particular type or extent of coverage
The agent assumes an additional duty by either express agreement or by “holding himself out” as having expertise in a given field of insurance being sought by the insured.

The agent, who assumes additional duties, may be liable to the insured for losses that resulted as a breach of that special duty.

The trial court found that Thaw held herself as an expert in the insurance needs of Rhino Linings dealerships. In fact, the defendant's own expert testified that Thaw held herself as having some level of expertise with respect to the insurance needs of Rhino Linings dealerships. There was no question that the insurance needs of the plaintiff included coverage for bodily injury to an employee who deals with toxic materials; indeed, the insurance application Thaw provided contained a section on workers' compensation. Thaw knew that workers' compensation insurance is mandatory in California but failed to advise Williams of the necessity for workers' compensation insurance. Not including workers' compensation insurance breached the duty Thaw assumed by holding herself out as the expert on the insurance needs of Rhino Linings dealerships.

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

The agent's misrepresentations

The Court of Appeal found that the pertinent principle to resolve the issues raised by the case was stated in Paper Savers Inc. v. Nacsa ([1996] 51 Cal.App.4th 1090), which involved allegations by the insured (who did not read his insurance policies) that the insurance agent misled him regarding the extent of coverage for losses of business personal property. In reversing summary judgment for the insurer and insurance agent, the court concluded there were genuine issues of triable fact as to whether the agent made the representations and, if so, whether they were sufficient to impose a special duty on the insurer. An agent's misrepresentation of the nature, extent or scope of coverage being offered or provided is one of the three circumstances in which a heightened duty is imposed on the agent. The trial court correctly and expressly rejected the contention that the insured's reliance on the agent's alleged representations was unjustifiable as a matter of law because the insured did not read the policy. The Paper Savers court held:

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

Lessons learned

An agent's duty changes when the broker holds himself to have expertise. This case is a perfect example because the agent knew the business was new, held herself out as an expert in the particular business (having acted as agent for more than 50 similar dealerships), and that the plaintiff relied on her expertise to get him the insurance needed for his new business. Failing to obtain workers' compensation insurance–insurance all California businesses are required to acquire as a legal mandate–was clearly negligent and a failure to use the expertise the agent claimed.

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

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

o Obtaining a written contract with the insured specifically stating 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 they were 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.

Special Reports /

Down to Cases- False expertise claims can cost millions

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