Recent Developments in Regards to The Duty to Advise/Procure

 

Generally, an insurance agent/broker has a duty to procure the coverage that has been requested, or if unable to obtain same, to advise the customer of the inability to do so within a reasonable time. There is generally no duty to provide advice about the sufficiency of coverage, the existence of additional, optional coverages, or to ensure that the customer has complete coverage for all potential risks presented. 
 
 

The rationale that guides this general principle with regard to the agent’s/broker’s duty of care is that, in the absence of a “special relationship” or “special circumstances”, the agent/broker should not be placed in the position of being the guarantor of the sufficiency of the customer’s coverages. While lawyers or accountants may have specialized knowledge that may require a client to place a special level of trust and reliance upon their guidance generally, it is believed that individuals and corporate entities have at least as good or better of an opportunity to know about the assets or risks they want to insure against, their financial ability to withstand an uninsured loss, and their willingness to pay for coverage to address the risk. Accordingly, it is generally the rule that in the absence of what is referred to as a “special relationship” or “special circumstance”, the agent/broker has no special duty to advise regarding coverage to obtain, or to provide continuing advice or guidance with regard to coverage procured. 

 
 
The duty to advise can generally be deemed to be broader and more encompassing where: the agent/broker has been asked for specific advice or guidance on a coverage issue and provided same; where the agent/broker has undertaken special duties in handling the customer’s account; the broker has agreed to accept or has charged special compensation in addition to the standard commission for advice/guidance with regard to coverage; the agent/broker has held himself out as an expert, and knows or has reason to believe that the customer is relying upon his expressed expertise with regard to a coverage issue; and/or the agent/broker and the customer have a relationship of such significance in terms of time, trust and reliance that the agent/broker should know or have reason to know that the customer is relying upon his advice with regard to coverage issues.
 

Examining how these principles are applied in practice, it can be seen that where substantial uninsured losses are involved, expansive arguments can often be made regarding the scope of the insurance agent/broker’s duty to advise/procure. These arguments notwithstanding, recent illustrative cases reveal that the courts are showing some hesitancy to accept an ever broadening reading of this duty absent a “special circumstance.” But care must still be exercised to clearly identify what is being requested/renewed, what is being rejected/allowed to lapse, and, where possible, documenting the application/renewal process. This article will discuss recent case law on the scope of the duty to advise/procure in the absence of a “special relationship” or “special circumstances.” A subsequent article will discuss cases considering when a “special circumstance” can be said to exist creating a heightened duty of care.

 
 
In City Blueprint & Supply Co., Inc. v. Boggio, 3 So.3d 62 (La. App. 4th Cir. 2008), a broker was sued by
a company which was damaged by flooding from Hurricane Katrina. For many years, the broker (and the agency he worked for) had purchased the company’s commercial package insurance policy, which included property insurance. Although the broker had allegedly always assured the company’s owners that they were “fully insured”, the coverage contained a flood exclusion. The company’s owners argued that the absence of flood insurance in the circumstances evidenced a breach of the broker’s duty to procure. But the Court noted that a broker owes an obligation to use reasonable diligence in attempting to place only the coverage requested, and it had been acknowledged that the owners had never specifically requested or inquired about flood insurance.
 
 
 
 

As an alternative argument, the owners contended that the broker had a fiduciary duty to advise them about the various flood insurance options, and whether they needed to have flood insurance. The Court, citing Cameron Parish School Bd. v. State Farm Fire and Cas. Co, 560 F. Supp. 2d 485, 488-489 (W.D. La. 2008), and noting that there had been a number of Louisiana federal district court decisions which had previously considered the issue in the context of Hurricane Katrina flood based broker negligence claims, held that insurance agents have no duty to “spontaneously identify their clients’ needs and advise them as to whether they are underinsured.” Id. at 65 n.1. And because the owners admitted they had never read the policy, the court dismissed their negligent misrepresentation claim as well, because the “blind assumption” that they were covered by flood insurance, when the broker had never told them that flood insurance was included in the commercial package, was not justifiable. Id. at 67.
 

 
 
In Dairy America, Inc. v. New York Marine and General Ins. Co., Case No. CV F 07-0537, 2010 U.S. Dist. LEXIS 31846 (E.D. Ca. April 1, 2010), similar issues arose in the context of a loss to goods being stored in a warehouse while in transit. The insured, Dairy America, was a marketer and seller of powder milk products throughout the United States and internationally. 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 the shipments were in transit or in storage. The broker offered to obtain an “ocean cargo/stock through put policy”. In correspondence 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.” 2010 U.S. Dist. LEXIS 31846, at *4. The policy incepted on August 11, 2005. On August 29, 2005, 59 loads of milk powder located in a warehouse in Gulfport, Mississippi were destroyed by Hurricane Katrina. Of those 59 loads, 36 had been shipped before that date. Following submission of a claim for the entire loss, the insurer investigated the claim, determined that 23 loads had been shipped before the policy inception date, and refused to indemnify the loss arising from the destruction of those loads per the policy terms. In addition to asserting a claim for breach of contract against the cargo insurer and the cargo insurer’s managing general agent (which were dismissed on summary judgment), Dairy America brought suit against the broker for the nearly $1 million uncovered portion of the loss.

 

 
 
While Dairy America asserted claims against the broker styled as claims for “negligent misrepresentation”, “professional negligence” and “breach of contract”, the claims all were based on the contention that Dairy America advised the broker that it wanted coverage for all of its shipments – – including shipment in transit at the time coverage incepted, and the broker represented that is what had been obtained. The broker moved for summary judgment, and the court granted the motion.

 
 
 
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.”   Id. at *21 (quoting Jones v. Grewe, 189 Cal. App. 3d 950, 956, 234 Cal. Rptr. 717 (1987)). Although Dairy America’s comptroller apparently subjectively intended that the policy cover loads both in transit at the time of policy inception and thereafter, the court noted that there was no evidence introduced on the motion that Dairy America had specifically requested or been promised such coverage. Id. at *27 (“Ms. McAbee’s ‘understanding’ of coverage for ‘product in transit at the time of the policy’s inception’ does not constitute Gallagher’s misrepresentation of coverage for the loads”). 
 
 
 

Dairy America also argued that, given the coverage request made, the broker had a duty to procure “proper insurance coverage”, Id. at *28, and therefore should be held negligent for failing to procure coverage for goods in transit at policy inception in any event. But the Court rejected this argument. First, the court noted that a broker generally has no duty to volunteer that an insured should obtain different or additional coverage.” Id. at *29. Second, the court noted that no evidence had been presented that coverage could actually have been obtained for goods already in transit. Id. at *29-30. Further as to Dairy America’s breach of contract claim, the court held that there could not have been a contract in place to insure the product already in storage at the Gulfport warehouse at policy inception, because Dairy America’s comptroller had admitted that she didn’t even know there was product being stored there at policy inception. Id. at *33-34.

 
 
 
While these cases evidence the fact that the courts will not necessarily look to impose an expansive view of the broker’s duty of care with regard to advising on coverage in the ordinary course, where steps of any nature that might induce reasonable reliance have been taken, the courts have evidenced they will not hesitate to find a greater duty owed. However, even in these instances, recent case law suggests there should be room for optimism that the courts will take only measured steps in this regard. Moreover, courts will look closely to see if, in the circumstances, a duty to even advise as to whether coverage has been seasonably procured has arisen.
 
 
 

An example of this can be seen in Peterson v. Big Bend Insurance Agency, Inc., 202 P.3d 372 (Wash. Ct. App. 2009). In Peterson, a couple with a home insured against fire loss asked their agent for help in trying to get their home insured for its full replacement value. The agent had advised he would use a computer software program “cost guide estimate” to determine a replacement value for the home. However, although he took measurements and photos, and gathered other information about the house, his customer service rep failed to make use of a standard questionnaire typically used with the cost guide software. Had they been used, the software and questionnaire would have increased the estimated replacement value significantly. Moreover, although the insurance limits were increased, it was only due to an automatic increase for inflation. The cost guide estimate wasn’t actually applied at all.

 
 
 
When a fire destroyed the house, the insurance policy paid out the policy limits – – $193,000.00. However, the cost guide estimate would have increased the limits to $213,000 using the information the agent had obtained, and as much as $240,000 if the questionnaire had been used. The actual cost to replace the home was $328,843. The insureds sued for the difference between the $328,843 cost to replace the home – – which they had requested the agent obtain – – and the $193,000 paid by the insurer. Because certain services in regards to calculating coverage limits had been promised but not provided, the trial court held that the agent had breached its duty of care to the insureds. But the court calculated the damages only as the difference between the cost guide estimate had it been properly applied, and the insurance limits that were paid. The insureds appealed from this ruling.
 
 
 
 

In affirming the trial court decision, the appellate court acknowledged that “the duty of care that an insurance agent owes his or her client does not include the obligation to procure a policy affording the client complete liability protection.” Id. at 377. However, the court agreed that in undertaking to provide a cost guide estimate, and failing to do so, the agent had breached the special duty of care it had undertaken. Nonetheless, there was no evidence that the agent had agreed to conduct a professional real estate appraisal, or obtain bids and consult builders or other experts to determine the full replacement value of the home. Accordingly, the agent need only be responsible for the difference between the insurance limits actually in place, and the limits that would have been in place but for the failure to utilize the cost guide estimate (and questionnaire), as represented.
 
 
 
 

In Cole v. Wellmark of South Dakota, 776 N.W.2d 240 (S.D. 2009), the parents of several children (the “Coles”) utilized an independent insurance 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 had reviewed and approved the 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 out 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. Thereafter, a refund check was allegedly sent which the Coles claimed not to have received, and 5 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 their duty to procure. The insurer sought and obtained summary judgment dismissing the claim against it in light of the policy application’s express language advising that coverage would not be effective until written approval had been issued by the insurer. The decision was affirmed by an intermediate appellate court, and the South Dakota Supreme Court affirmed as well. Additionally, the trial court dismissed the Coles’ claim that the agent had breached its duty to procure, this ruling was affirmed, and the South Dakota Supreme Court affirmed this ruling also.
 
The question before the South Dakota Supreme Court on appeal from the Circuit Court was 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. In other words, had the agent breached the basic duty of an insurance agent/broker in failing to notify the customer of the failure to procure the requested coverage within a reasonable time of determining that the coverage could not be procured. While that is generally considered a basic duty, as noted above, in this instance the court found that no such duty had arisen because, in this instance, 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 knew or 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 seasonably notify the Coles of her inability to obtain coverage. Id. at 251.
 
 
 
 
Even where the broker-insured relationship is longstanding and particular coverage provisions may be less than obvious on their face, recent court decisions suggest that courts will still be careful in their analysis of the agent’s/broker’s duty of care.
 
 
 
 
In Isidore Newman School v. J. Everett Eaves, Inc., Case No. 09-c-2161, 2010 La. LEXIS 1667 (Sup. Ct. La. July 6, 2010), a broker had had a 16 year relationship with a school in Louisiana for which it had annually procured property and casualty insurance. Each year the broker had met with the school’s business managers to discuss coverages and renew the policy, and provided a written insurance proposal. As part of the property coverage, since 1999 the school had paid for “Business Income and Extra Expense” (“BI & EE”) coverage, 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, which caused the school to be closed for over two months. As a result, the school suffered a loss of tuition revenue/income of more than $3 million. The school thereupon sued the broker for failing to appropriately advise the school 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 to it and to explain the costs and potential benefits of those coverages.”  Id. at *4. The school also argued that by holding itself out as an insurance professional, the broker “voluntarily assumed a duty to provide accurate and complete information about the scope of the coverage recommended.”   Id.  The school maintained that had it been properly informed that BI & EE coverage included tuition loss, it would have increased its coverage. In particular, it argued that because the policy was over 400 pages in length and was quite complicated and difficult to understand (particularly with regard to whether it could understand “net profits” as something it was entitled to as a non-profit institution), it was incumbent upon the broker to spell out what was covered under BI & EE.
 
 
 
 
 
 

After a trial on the merits, the trial court found that the broker had breached its duty of care by not explaining the components of the BI & EE coverage sufficiently to permit the school to make an informed choice regarding the coverage. On appeal, the decision was affirmed, with the appellate court finding that the broker had assumed a duty to provide recommendations on the scope and amount of insurance coverage that the school should purchase. Upon review by the Louisiana Supreme Court pursuant to grant of certiorari, however, the court reversed, concluding that the lower courts had erred in holding that the broker owed a duty to the school to advise as to the amount of insurance coverage to obtain. In so holding, the court stated:
 
An agent has a duty of “reasonable diligence” to advise the client, but this duty has not been expanded 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. It is not the agent’s obligation to spontaneously or affirmatively identify the scope or the amount of insurance coverage the client needs.
 
Id. at *20.

 
 
 

 
 
Finally, even in circumstances where one might arguably suggest the agent/broker had or should have had access to information to justify imposing a duty to question the insured about coverage and/or offer advice regarding possible coverage changes or options, recent decisions have shown circumspection in taking that leap.
 
 
 
 
In Carpenter v. Bolz, 234 P.3d 866, 2010 Kan. App. Unpub. LEXIS 523 (Kan. Ct. App. 2010), the court considered an appeal of a dismissal of breach of contract, negligence and breach of fiduciary duty claims against an insurance agent made after the plaintiffs had suffered a fire loss for which their insurance was $87,000 less than their mortgage. Noting that the homeowners had only advised the agent of their original mortgage, and not the subsequent increased mortgage, the trial court granted the agent summary judgment. On appeal, the appellate court affirmed, noting particularly with regard to the breach of contract claim that in order to establish a breach of contract claim against an agent in regard to a “failure to procure” based claim it first must be shown that there was a “meeting of the minds” with regard to the coverage to be procured. Here, because there was no evidence the agent had been advised of anything other than the original loan amount, the court found that “there is no evidence that the parties came to a meeting of the minds that defendants would procure coverage for any amount other than the amount of the original loan . . . .” Id. at *13.
 

 
 
 

 
 
In a very recent Supreme Court Iowa decision, Merriam v. Farm Bureau Insurance, 2001 Iowa Sup. LEXIS 3 (Sup. Ct. Iowa Feb. 4, 2001), the court considered the question of whether an insurance agent had breached a duty of care to a self-employed over-the-road truck driver by assisting him with certain insurance coverages, but never recommending he procure self-employment workers’ compensation coverage. This case is interesting and significant because in the context of the interactions between the agent and customer, the court had ample opportunity to find a basis for concluding that there was a justified reliance upon the agent’s expertise, and concluding the agent had a broader duty to advise regarding possible coverage concerns and options. But the Iowa Supreme Court refused to be drawn towards adopting an expansive perspective of the agent’s duty to advise in ordinary circumstances.
 

 
 
In Merriam, the agent worked for Farm Bureau Insurance, and had been assigned to the account of the Merriams, a married couple who had insurance on their primary residence with Farm Bureau. He met with them in early 2005 to discuss insuring a second residence the Merriams were purchasing for Mr. Merriam’s mother. During this meeting, the agent suggested the Merriams consider insuring their personal vehicles with Farm Bureau. At the same time, the Merriams indicated an interest in obtaining insurance on their horses, and the agent agreed to get them a quote. They also asked about getting a quote on insurance on the husband’s guns, as well as adding their new garage and chicken coop onto their homeowner’s policy, and obtaining life insurance on Mr. Merriam’s mother.
 
 
 
During the meeting, the agent was aware that Mr. Merriam was a self-employed truck driver and, in fact, Mrs. Merriam mentioned that he had a million dollar policy in place if he was killed in his truck. But no discussion was had regarding whether he had unemployment insurance, and the agent neither asked questions about it nor suggested it as a consideration. Then, unfortunately, just a few weeks later Merriam sustained severe injuries to his arm (which was crushed by a dump truck he was operating while he was patching the driveway where he parked his truck).
 
 
 
 
In the absence of workers’ compensation insurance, the Merriams sued Farm Bureau, alleging the agent was negligent in failing to advise them that, as a self-employed over-the-road truck driver, Mr. Merriam had no workers’ compensation insurance unless he purchased it himself. They claimed he “was in a position of superior knowledge pertaining to available insurance products and was negligent for failing to initiate a conversation with them regarding this issue.” 2011 Iowa Sup. LEXIS 3, at * 4.
 
 
 
 
After discovery, Farm Bureau moved for summary judgment contending the agent owed no affirmative duty to inquire or advise the Merriams on the husband’s need for self-employment workers’ compensation coverage. The lower court agreed and dismissed the claim. The Iowa Supreme Court affirmed.
 
 
 
 
In reaching this decision, the Iowa Supreme Court noted that the agent had admitted he was aware that Mr. Merriam was self-employed, because in rating their personal vehicles he needed to know what their occupations were, where they worked, how far it was to and from work, etc. The Merriams argued that the agent’s awareness of his self-employment status and his life insurance policy, combined with his unsolicited recommendation for other insurance coverage, supported a conclusion that the agent was holding himself out as an insurance specialist and thereby assumed a greater duty of care to the Merriams, including to make recommendations regarding the workers’ compensation coverage.
 
 
 
 
In rejecting this argument, the Iowa Supreme Court noted that the Merriams had made no specific inquiry with respect to self-employed workers’ compensation insurance, and did not either expressly or impliedly seek the agent’s assistance in assessing any of their insurance needs other than those specifically requested. Further, there was no evidence of a long-standing relationship between them that would support an implied agreement to expand his duty to include assessment of the Merriams’ other insurance needs, no evidence that he had advised them that he was an insurance specialist, no evidence he offered to consult with them regarding additional insurance needs, and no evidence he had received any additional compensation above his commission. Id. at 11.
 
 
 
 
Summing up, the Court stated:
 
The plaintiffs contend [the agent] Stonehocker’s knowledge of Timothy’s self-employed status and million dollar life insurance policy was sufficient to trigger a duty of inquiry on Stonehocker’s part. The fact that Stonehocker was a trained and licensed insurance agent with arguably “superior knowledge as to what insurance products in [Timothy’s] position would require to be adequately protected from injury or loss” cannot be the basis to find an implied agreement to expand Stonehocker’s duty. If that were the case, then every trained and licensed insurance agent would have a duty to provide an assessment of all of the insureds’ insurance needs, whether requested or not.
 
Id. at 12.
 
 
 
 
What these cases tell us is, first, that where there is an uninsured loss, efforts will often be made by the customer to establish a duty to advise/procure coverage that would have covered the loss, and pin responsibility upon the agent/broker for failing to have done so. It is indeed a truism that “misery loves company”, and where money is involved “it’s just business, nothing personal.” Second, while courts have, in fact, expanded their review of the responsibilities of agents/brokers in recognition of the special expertise they generally provide (and, more and more frequently, explicitly promise in order to win business), a practical analysis will still be applied to determine what was actually requested. Courts considering the scope of the duty to advise/procure appear to be exercising prudence and caution in considering under what circumstances the agent’s/broker’s duty should be expanded, and when particular coverages should be offered or suggested in the absence of a request for same.

 
 
 
 
This said, where a loss is not covered and an argument can be fashioned that the agent/broker should have inquired about particular coverages or offered or suggested certain coverage options, it is extremely helpful to have documented your interactions with the insured. In this regard, whether with a new customer or an existing customer on renewals, it is a good idea as a regular practice to document what has been offered, what has been requested, what has been bound, and what was, accordingly declined. This is the medicine that has to be taken. Of course, there is an inherent danger is documenting what you’ve promised, because it becomes black and white proof of the breach of a duty of care if you fail to deliver. But it helps immensely in establishing the true parameters of your duty to advise/procure, and, as such, may help you avoid the costs and uncertainties of “he said/she said” litigation if a loss at some point arises that there is insufficient coverage to fully indemnify.
 
 
 
 
 
Peter Biging is a partner in the law firm of Lewis Brisbois Bisgaard & Smith, LLP, where he is a Vice Chair of the firm’s Professional Liability Practice Group. Mr Biging’s practice involves defense of a wide variety of professionals against errors and omissions claims. He also handles a significant amount of coverage work, focusing primarily on reviewing and litigating coverage issues with respect to professional liability policies. When not litigating cases, Mr. Biging has authored numerous articles and is a frequent lecturer on professional errors and omissions liability and coverage issues. He has been recognized in both 2009 and 2010 as a New York Super Lawyer.

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