A customer walks into your office and requests “complete” or “full” insurance coverage for a new package liquor and sundries store, scheduled to open for business in a month or two. You procure general liability, commercial property and liquor liability policies of insurance for the customer’s new business. More than a year later, following the renewal of the policies, an employee is injured while working at the store. Your customer does not have workers’ compensation insurance. Did you owe a duty to procure worker’s compensation insurance in light of the customer’s request for “complete” or “full” coverage? Can your customer sue you for your failure to procure a workers’ compensation policy? What are your defenses? Does your duty depend on whether you are a broker or an agent? Does it depend on the history of your relationship with the customer?
The answers to these questions are not consistent across all jurisdictions. But in the last few years, certain trends have emerged, some favorable to insurance producers. This article examines some of the more traditional views and theories of liability, addresses specific statutory enactments that have significantly limited fiduciary claims and, with them, an increasingly blurred “agent-broker” distinction, and evaluates recent trends limiting the scope of insurance producers’ duties in some situations, while eradicating them altogether in others.
The jurisdictional focus of this piece lies in Illinois. The authors practice in Illinois, a statute limiting fiduciary duties owed by insurance producers (which some argue expands the duty for agents and not brokers) is already “on the books” in Illinois, and the Illinois Appellate Court decided a case of first impression earlier this year in favor of one of this firm’s broker producer-clients. So, Illinois is a good place to start. But given the not-always-consistent treatment of insurance agents and brokers from one state to the next, this article includes a discussion of some of the laws governing insurance producers’ duties to perform in a number of other jurisdictions.
I. Theories Of Liability And One Common Thread
To continue our hypothetical, Employee’s accident-related medical expenses, lost wages and temporary and total disability are statutorily owed by Customer, and Customer (“Insured”) asserts you failed to procure a worker’s compensation policy for the store. As a result, Insured is forced to compensate Employee, in addition to paying certain fines and penalties levied against Insured by the state’s workers’ compensation regulatory body, in light of Insured’s failure to carry the statutorily-required coverage. Ultimately, the payments become so burdensome that Insured closes the business.
Are you liable to Insured for the out-of-pocket expenses, lost profits and payment of statutory penalties arising from Insured’s failure to maintain the required workers’ compensation insurance? You can bet Insured will be looking to recoup his or her losses and you could easily be a target based on Insured’s perception that you, as a licensed producer, should know the insurance needs for Insured’s business. Depending on the jurisdiction and more specific facts of the case, Insured’s claim might sound in negligence,breach of an oral or written contract, breach of fiduciary duty or even fraud.
One common thread running through each of Insured’s potentially-viable theories of liability against you is the element of duty (common law, contractual or statutory). In this context, “duty” refers to “a legal obligation that is owed or due to another and that needs to be satisfied; an obligation for which somebody else has a corresponding right.” Black’s Law Dictionary (7th ed. 1999). In other words, on whose behalf, under what circumstances and to what extent are you legally obligated to renew, procure, bind or place insurance coverage, such that your failure to do so could result in civil liability to a customer for any and all damages flowing from that failure?
II. To Whom Do You Owe A Duty?
A. Traditional View
According to the traditional view, the duties owed by insurance producers turn on whether the producer is an “agent” or a “broker.” The distinction between “agent” and “broker” is not always easily discerned and is commonly a point of contention between the insured, insurer and, when a claim is lodged, the insurance producer.
Agents’ duties typically are owed to the insurer. The relationship is often subject to an agency agreement, which creates certain delineated duties and allegiances on behalf of the producer vis-à-vis the insurer. As a broad statement of law, an agent’s liability to an insured is only administrative. That is, agents are only responsible for the timely and accurate processing of forms, premiums, and paperwork. Lazzara v. Howard A. Esser, Inc., 802 F.2d 260, 264 (7th Cir. 1986); see also, Burnhope v. National Mortg. Equity Corp., 208 Ill. App. 3d 426, 433 (1st Dist. 1990).
On the other hand, brokers’ duties are owed to the insured and, in that capacity, they have a higher duty, in most states, to their customers. Brokers negotiate and procure insurance for the insured, and maintain a principal-agent relationship with the insured. This is a higher duty than the pure administrative duty of the agent and, in some jurisdictions, includes a fiduciary duty. Id.