Does an insurance brokerage firm have a duty to recommend a type of liability coverage that it doesn't know the customer needs?

On Dec. 8, 2015, a federal court in Maryland granted summary judgment to a broker in a case alleging that the broker owed such a duty (Schlossberg v. B.F. Saul Insurance Agency of Maryland).

The existence of a “duty to recommend” higher insurance limits or broadened coverage is the central issue in many cases against insurance brokers, including cases from New York, Indiana and California that we have discussed in earlier articles in this space.

The answer often turns on descriptive terms of the level of dependence the customer has upon the broker advice. If it is a “special relationship,” as many courts term a high degree of dependence, then a duty to advise can exist, but stating that conclusion doesn't tell us much. In the eyes — and testimony — of customers who have experienced large uninsured or underinsured losses, their relationships with their brokers are almost always “special.”

An alarming loss

The brokerage firm won this case on summary judgment, despite three facts that could have blocked summary judgment in other courts:

The terms of the customer's umbrella liability policy had changed, and the broker did not direct the customer's attention to the change.
The plaintiff came to court armed with an expert's opinion that the broker had fallen below the standard of care.
The plaintiff claimed that the lack of coverage had forced it out of business.

The broker's customer, DTM, was a private security company that provided guards and related services, with government agencies as its principal clientele, including the U.S. Department of Defense. DTM guards allegedly did not properly respond to an automated heat alarm at a Defense Department computer facility at Fort Washington, Maryland, causing $3.6 million in damage to the equipment. DTM's general liability policy had a $1 million per occurrence limit. An umbrella policy afforded additional coverage, but did not completely follow form to the primary policy. In particular, the umbrella policy excluded liability “arising out of or caused or contributed to by the ownership, maintenance, operation, use or installation of any alarm, alarm device, alarm component or alarm system.”

That might have been problematic, DTM being a security guard vendor and all, but in its annual applications for the policies, DTM left blank the section for “Burglar/Fire Alarms,” which notified the applicant that “Separate alarm application must be completed if this coverage is desired.” DTM didn't provide alarm systems, so no problem.

No problem, that is, except in the umbrella policy renewal in the year before the computer loss, when the umbrella policy's alarm exclusion was amended to apply to bodily injury or property damage “arising out of or caused or contributed to by the ownership, maintenance, operation, monitoring, use or installation of any alarm, alarm device, alarm component or alarm system.”

As it happens, the Defense Department expected DTM's guards to monitor the alarms at the facility, even though DTM didn't own, operate or do any of those other verbs to the alarm system. The new exclusion also appeared in the following year's umbrella policy — the year in which the alarm went off and the computers were damaged. The umbrella carrier denied coverage based on the exclusion.

(Photo: iStock)

Policyholder's role

The Schlossberg court laid the blame for the computer loss squarely on DTM, which was in a better position than the broker to determine its own insurance needs.

Because DTM annually failed to request any coverage related to alarm systems, the court found that the broker “had no way of knowing that any such coverage may be necessary.” The court also noted, quoting from an earlier case:

Absent full disclosure by an insured, which an agent or broker cannot compel, an agent or broker would have no way to ascertain an insured's exposure. Nor would the agent or broker necessarily know of a change in the insured's circumstances or economic status, which could affect the suitability of existing coverage.

Though not tasked with divining DTM's undisclosed needs, the brokerage firm took an extra step, beyond the application form's not-too-subtle clue that alarm services would not be covered. In forwarding the two renewal policies to DTM, the firm sent a cover letter saying, “With regard to the general/professional liability policy, among the exclusions are included work with canines and alarm systems. If this is a concern, please let us know immediately.” DTM did not respond.

The cover letter shows a broker taking the “extra step” to point out holes in coverage that might be relevant to a security guard service's business, even though the broker had no information that guard dogs or alarm systems were among DTM's services. The letter wasn't legally required, but it set the table for later admissions by DTM employees who were deposed in the case.

DTM's controller, who completed the insurance applications, testified, “I wouldn't know why [the broker] would say that. I mean, I know we don't have — we didn't know why that would be in the letter, canines and alarm systems.” DTM's vice president gave similar testimony.

The court had a second basis to grant summary judgment: DTM had not proved that the broker's alleged negligence caused any damage to DTM, because the Defense Department's case settled for an amount within the primary policy's limit. The plaintiff argued that DTM's dire financial straits were caused by a loss of Defense Department work after the Fort Washington incident, but the court dismissed that theory, finding insufficient evidence to connect the dots between the broker's conduct and any damage to DTM.

You be the judge

The Schlossberg decision provides a clear guide to the principles and evidence that can absolve a broker from liability when a customer lacks a type of coverage that, with benefit of hindsight, it should have requested.

Was the court right? Would your answer be the same if the Defense Department/DTM contract provided that DTM was to monitor the alarm systems at Fort Washington, and a copy had been provided to the broker?

Although the outcomes of summary judgment motions are uncertain until the judge issues his or her ruling — and even afterward, if there is an appeal — one thing is certain: They aren't free. Summary judgments can be difficult and costly to obtain. The Schlossberg case was filed in 2013 and was dismissed via summary judgment two years later. Brokers: Please remember to assess the adequacy of your own liability insurance limits, even if you're fairly certain that you do everything right in your dealings with customers.

Louie Castoria is a partner in the San Francisco-based law firm of Kaufman Dolowich & Voluck LLP. He is the director of the firm's West Coast Professional Liability Practice Group.

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An alarming loss: Does a broker have a duty to recommend higher limits?

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