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Possible Defenses Available to the Insurance Producer
Possible Defenses Available to the Insurance Producer
A continued trend in many states reflects growth in the number of lawsuits filed against insurance producers, whether agents or brokers. Law relating to the relationships among insurer, producer and insured is complex. The legal theories pursued against insurance producers are myriad, ranging from traditional theories of agency, contract and fiduciary duty, to more aggressive contentions of statutory and common law fraud. This article identifies theories and possible defenses available to the insurance producer, but is by no means exhaustive.
Available legal theories against an insurance broker (or agent) include breach of contract, breach of fiduciary duty, professional negligence, negligent misrepresentation, common law fraud and violation of a state consumer fraud act. The duty of an insurance broker is to adhere to the applicable standard of care under a negligence claim; adhere to the terms of the contract under a breach of contract claim; and to exercise confidence, loyalty and skill so as not to breach a fiduciary duty. Of course, fraud-related claims generally involve intentional acts. Courts have noted that a broker's duties stem from contract, common law and agency. Agency laws typically determine scope of duty.
Generally, an insurance producer's primary function is to negotiate and procure an insurance policy on behalf of the proposed insured, informing the insured of all material facts within the broker's knowledge that may affect the transaction. Lake County Grading v. Great Lakes Agency, Inc., 226 Ill. App. 3d 697 (1992). As a licensed professional, an insurance producer has the duty to exercise reasonable skill, and if found negligent may be liable for any losses resulting from a failure to do so. Economy Fire & Casualty Co. v. Bassett, 170 Ill. App. 3d 765 (1988). An insurance producer may be liable for any loss the client may sustain resulting from the producer's failure to procure proper insurance. Illinois Constructor's Corp. v. Morency & Associates, 802 F. Supp. 185 (N.D. Ill. 1992).
Plaintiff and defense counsel often debate the scope of the alleged duty and the extent of an insurance producer's knowledge relative to the client's needs. An insurance producer generally does not have a duty to investigate or inquire as to existing coverages, particularly when the express instructions of the client are being followed. Hosselton v. Fidelity & Deposit Co. of Maryland, 226 Ill. App. 3d (1992). Unless specifically retained to do so, an insurance producer is not liable for investigating coverage questions. Pittway Corp. v. American Motorist Insurance Co., 56 Ill. App. 3d 338 (1977). The primary function of an insurance producer is to faithfully negotiate and procure an insurance policy according to the wishes and requirements of the client. Id.
Claims against insurance producers often allege that the new policy is different from the old policy, when authorization was not given to change the scope of the policy. Yet, the insurance producer's duty is to procure insurance that is requested by a client, not to interpret existing policies or provide unsolicited advice. See e.g. Fitzpatrick v. Hayes, 57 Cal. App. 4th 916, 927 (1997). In fact, some case law establishes that the client (the individual insured) bears the burden of knowing the contents of the insurance policy and has a duty to bring any discrepancies in the policy to the attention of the insurer. Connelly v. Robert J. Rioden & Co., 246 Ill. App. 898 (1993); Furtak v. Moffett, 248 Ill. App. 3d 255 (1996). The insured's purported comparative negligence (to the extent evidence of same is admissible), however, is not an absolute defense. A client or insured's failure to read or know the contents of the policy generally is not bar to bringing the claim, though may evidence comparative negligence. Perelman v. Fisher, 298 Ill. App. 1007 (1998); Cp. Clement v. Smith, 16 Cal. App. 4th 39 (1993).
An insurance producer typically is entitled to rely on a client's representations. Exposure may exist if the reliance is unreasonable or the producer should have known better, primarily because of a course of dealing with that client or extensive relationship. In Hosselton, plaintiff claimed the insurance broker was negligent in failing to ascertain the value of an estate before issuing a surety bond. Hosselton, supra, 236 Ill. App. at 947. There, the guardian of the estate specifically requested in writing a $10,000 bond and did not reveal the size of the estate. In accordance with the client's request, the producer procured a $10,000 bond to cover the estate, only to find out later that the estate was worth more than $300,000. Id. The Hosselton court held that the producer did not have a duty to ascertain the value or extent of the estate before procuring the surety bond. The producer was entitled to rely on what he was told by his client.
On the other hand, courts may find liability if the extent and nature of the relationship reveals that the producer should have known that information provided was unreasonable or incorrect. In Economy, the producer procured a homeowner's insurance policy for a client who operated a day care center at her home. A child attending day care was injured and the homeowner's insurer denied coverage citing a business exclusion. Even though the client operated the day care out of her home for many years, never requested insurance for those operations and believed that her homeowner's policy covered day care activities, the court found liability because the broker simply never bothered to inquire about the operations. Economy, supra,170 Ill. App 3d at 773. Reliance on the client, and procuring limited insurance per the client's wishes, when the producer knew that she operated a business out of her home, was an unacceptable defense.
