A school forced to shut down during a major hurricane does not have nearly enough business-income coverage to make up for lost tuition revenues.
A manufacturer’s cargo coverage does not cover goods in transit temporarily sitting in a warehouse that was damaged during a storm.
A family’s application for health insurance is denied by the insurer, leaving them to pay for expensive treatment for their daughter while they claim to have no idea that there was not coverage in place.
Should the insureds in these cases have the right to sue their agent or broker for failure to exercise basic duties of care absent special circumstances?
Recent court decisions have said no, following a general rule that, absent such special circumstances, agents and brokers have no duty to customers to provide advice about sufficiency of coverage or to ensure that a customer has complete coverage for all potential risks presented.
BASIC DUTIES OF CARE
Like other professional-service providers, insurance agents and brokers must strive to be diligent and careful in responding to customers’ needs. But absent special circumstances, their duties of care are not necessarily as expansive as others.
Lawyers or accountants, for example, have such specialized knowledge it is understood that their clients are going to place a special level of trust and reliance in their advice and guidance. In contrast, individuals and corporate insurance buyers are expected to have at least as good—or maybe even a better opportunity—to know what assets or risks they want to insure against as their agents and brokers. They also have a clearer view of their financial ability to withstand uninsured losses and better insight into their own willingness to pay for coverage to address the risks.
It follows then, as a general rule, that absent special circumstances, an insurance agent or broker has no special duty to advise customers what coverage to obtain, or to provide continuing advice or guidance with regard to coverage procured.
An insurance agent or broker’s basic duty of care is simply to obtain the coverage that has been requested. If the agent or broker cannot procure the requested coverage within a reasonable timeframe, then the producer must tell the customer that he or she cannot do so. But that’s it.
The rationale that guides this general principle is that the agent or broker should not be placed in the position of being the guarantor of the sufficiency of the customer’s coverages. (See related textbox, “Becoming Special.”) While insureds are making efforts to get courts to read the basic duty of care more expansively, recent decisions indicate courts are not taking the bait.
LA. HIGH COURT WEIGHS IN
In Isidore Newman School v. J. Everett Eaves Inc., a broker had a 16-year relationship with a school in Louisiana, annually procuring property and casualty insurance. Each year, the broker met with the school’s business managers to discuss coverages, provide a written insurance proposal and renew the policy.
As part of the property coverage, since 1999, the school had paid for business income and extra-expense coverage (BI & EE), the limits for which had been increased from $250,000 to $350,000.
Following Hurricane Katrina, the school suffered major damage to its physical structure, causing the school to be closed for more than two months. As a result, the school suffered a loss of tuition revenue/income of more than $3 million.
The school sued the broker for failing to appropriately advise it with regard to the BI & EE, alleging that the broker “had a duty to inform [the school] of the different coverage options that were available…and to explain the costs and potential benefits of those coverages.”
The school maintained that if it had been properly informed that BI & EE coverage included tuition loss, it would have increased its coverage. In particular, it argued that the policy was more than 400 pages long and quite difficult to understand, particularly with regard to whether it could understand “net profits” as something it was entitled to as a nonprofit institution. Because of this complexity, the school said it was incumbent upon the broker to spell out what was covered under BI & EE.
After the trial court ruled for the school—finding the broker had breached its duty of care by not explaining the coverage sufficiently to permit the school to make an informed choice—and after the appellate court affirmed, the Louisiana Supreme Court reversed upon review.
In a July 2010 ruling, the state’s top court concluded that an agent has only a duty of “reasonable diligence” to advise the client, but this duty does not expand to include the obligation to advise whether the client has procured the correct amount or type of insurance coverage.
“It is the insured’s responsibility to request the type of insurance coverage and the amount of coverage needed,” the court continued. “It is not the agent’s obligation to spontaneously or affirmatively identify the scope or the amount of insurance coverage the client needs.”
RECENT DECISION: NARROW READING
In Dairy America Inc. v. New York Marine and General Ins. Co., the insured, Dairy America, was a marketer and seller of powdered-milk products. In 2004, in addition to ocean-cargo insurance (which had been in place since 2000), Dairy America approached its broker about obtaining insurance that would protect its product shipments whether they were in transit or in storage.
The broker offered to obtain an “ocean cargo/stock through put policy.” In correspondence with the broker regarding the possibility of obtaining this coverage, Dairy America’s comptroller noted “[m]y initial thought is to consider coverage for all products regardless of whether it transfers title at the plant, at the border, over the rail, or at a destination.”
The policy incepted on August 11, 2005. On August 29, 2005, 59 loads of milk powder located in a warehouse in Gulfport, Miss., were destroyed by Hurricane Katrina. Following submission of a claim for the entire loss, the insurer determined that 23 loads had been shipped before the policy inception date and refused to indemnify the loss arising from the destruction of those 23 loads per the policy terms.
Dairy America brought suit against the broker for the nearly $1 million uncovered portion of the loss, alleging “negligent misrepresentation,” “professional negligence” and “breach of contract.”
In granting summary judgment to the broker and dismissing Dairy America’s claims, the court noted that a broker’s general duty of reasonable care does not include an “obligation to procure a policy affording the client complete liability protection.”
Although Dairy America’s comptroller apparently subjectively intended that the policy cover loads in transit both at the time of policy inception and thereafter, the court noted there was no evidence introduced that Dairy America had specifically requested or been promised such coverage.
Dairy America also argued that the broker had a duty to procure “proper insurance coverage,” and therefore should be held negligent for failing to procure coverage for goods in transit at policy inception in any event.
Rejecting the argument, the court first noted that a broker generally has no duty to volunteer that an insured should obtain different or additional coverage. Second, the court noted that no evidence had been presented that coverage could actually have been obtained for goods already in transit.
In Cole v. Wellmark of South Dakota, the South Dakota Supreme Court dealt with a different type of situation—one in which an insurer denied an application for coverage. The question before the court was whether the agent breached a basic duty in failing to notify the customer of the failure to procure requested coverage within a reasonable timeframe.
Here, the parents of several children (the “Coles”) utilized an independent agent to apply for health insurance coverage for their family while the wife transitioned in her career. The insurance application was filled out and submitted, but it expressly noted above the signature line that coverage would not be effective until the insurer reviewed and approved issuance of the policy—and notified the insureds in writing of the approval of coverage.
While the initial premium check was cashed, the insurer allegedly sent two riders to be signed and returned (regarding coverage limitations with regard to disclosed preexisting conditions), and never received them back. The Coles claimed they never received the riders.
The insurer also claimed to have sent a letter rejecting the application in light of the Coles’ failure to return the executed riders. The Coles claimed they never received this letter either.
The insurer then allegedly sent a refund check, which the Coles claimed not to have received. Five days later, the Coles’ daughter suffered a knee injury requiring the family to incur $20,000 in medical expenses to treat.
The Coles sued both the insurer for coverage and the agent for negligent breach of duty to procure. Ultimately, the South Dakota Supreme Court, on appeal from lower courts, considered the question of whether, in connection with the agent’s submission of the policy application, the agent—who was aware that coverage had not been bound due to the Coles’ failure to return the signed coverage riders—had a duty to notify the Coles that the insurance could not be procured.
While that is generally considered a basic duty, in this instance the court found that no such duty arose because the Coles did not ask the agent to conduct a review, make a recommendation and then obtain the insurance the agent had recommended. Here, instead, the agent had simply been asked to file the appropriate materials so that the application could be evaluated.
Because the Coles should have known that their coverage would not be effective until they had received written approval from the insurer, and they had not asked the agent to monitor the progress of their application, no duty was imposed on the agent to do so, or to notify the Coles of the inability to obtain coverage.
TAKEAWAYS FOR PRODUCERS
In the first two cases, the insureds had significant interaction with the agent or broker who handled placement of their coverage. In all three cases, the insureds contended that they had the right to rely on the agent or broker’s expertise and professionalism in believing that coverage for their losses would be in place, or that they were fully covered against potential loss. Yet in each case, the producer had failed to either recommend coverage for the loss in question or to put such coverage in place.
While courts appear to be more inclined than ever to view agents and brokers as owing a higher duty of care where there might be any indication of special factors giving rise to a greater, more expansive duty of care, these decisions should give brokers some comfort—and a reason to believe that the playing field hasn’t been completely tilted against them.