In the insurance world, after a loss has been sustained or a claim made for which there is insufficient or no coverage, it is not unusual for insureds to argue that they would have had full coverage but for the failure of their agent or broker to properly advise them. For sound public policy reasons, the rule in the vast majority of states has generally been that agents and brokers are not fiduciaries of their clients with respect to their insurance choices. They generally have a responsibility only to purchase the coverage requested or to advise that they are unable to do so within a reasonable period of time. And that is where the duty typically ends absent “special circumstances.”
The reason for this is that insureds are in a better position than anyone else to know their insurance needs, calculate the value of their assets and business operations, measure their ability to pay for insurance and determine their ability to absorb uninsured risk. Further, if you were to act on the presumption that agents and brokers should be deemed responsible for insureds’ purchasing the coverage necessary for all possible circumstances, you would place an impossible burden on them. You would also run the risk that insureds would have no incentive to purchase the appropriate coverage, and would instead rely on their agent’s or broker’s errors and omissions coverage as excess insurance to protect them in the event that their coverage proved insufficient for a particular loss or claim.
For these reasons, the special circumstances necessary to give rise to a duty to advise can vary, but typically have been found to include (among others): clients paying broker fees for services beyond standard commissions; agents/brokers representing themselves as experts with knowledge that the insured is placing special trust and reliance on their expertise; agents/brokers providing advice on a specific coverage issue; and agents/brokers having such a longstanding relationship with their clients that the agent/broker should be aware that the insured is placing special trust and reliance on him for advice and guidance on coverage issues generally. Absent these special circumstances, courts have not hesitated to find that an agent/broker has no legal duty to advise, and thus cannot be found liable for having failed to suggest or offer different coverage than that which was purchased.
This history notwithstanding, there are indications that the “special circumstances” line of defense that has previously provided such a substantial barrier to claims against agents and brokers for failing to properly advise their clients is beginning to show signs of weakness. Three recent decisions considering the issue offer evidence that the duty to advise may be entertained as a viable claim far more frequently than once might have been imagined. And it would behoove agents and brokers to take note not only of the decisions, but of the lessons to be learned.
The first case of significant note in this area was decided last December. An Indiana appellate court considered an argument made by a prosthodontist that it had relied on its agent to provide advice regarding the sufficiency of its business contents property coverage, after it suffered a loss more than $500,000 in excess of its limits. In Indiana Restorative Dentistry v. Laven Insurance Agency Inc., the trial court had granted the agent summary judgment and dismissed the claim against it after noting that the facts showed: (1) the agent’s discretion to act on the insured’s behalf in obtaining insurance renewals was limited to the coverages and amounts reflected on forms completed by the insured; (2) the agent did not provide insurance counseling; (3) the agent did not hold itself out as having skills over and above other agents; and (4) the agent’s compensation was limited to commissions on the premiums. The agent argued it had purchased the insurance requested, and that should have been the end of it.
However, on appeal the decision was reversed. In reversing, the appellate court relied in significant part on the fact that each year the agent would send the insured a questionnaire tailored to its business, the responses to which would provide the basis for the coverage limits purchased. The court found that even though the agent had purchased what was requested, by sending the questionnaire the agent was inherently counseling the insured about its policy renewal. Thus, “[e]ven though [the insured] made the final decision on its actual procurement of the recommended policies, [its] decision was in no small degree guided by its response to [the agent’s] tailored questionnaire.”
In January, the next shoe dropped when a Florida federal district court considered whether a duty to advise had existed and been breached in connection with the purchase of property insurance by a condominium in Tiara Condominium Association, Inc. v. Marsh USA Inc. Here, while the insured had an insurance committee composed of highly educated and sophisticated members, and had intentionally asked its broker to purchase property insurance based on a two-year-old appraisal it was well aware would substantially understate the condominium’s present value in order to reduce its premiums, it argued that its broker should be responsible for the fact that the coverage limits turned out to be insufficient to cover damages caused by two hurricanes that had hit Florida in rapid succession.
In denying the broker summary judgment and ordering the case to be tried, the court noted that in its contract with the insured the broker had agreed that it would act as the insured’s “risk management” and “financial risk” advisor. So even though there was little doubt that the condominium’s board had engineered the purchase of less insurance to reduce its premiums, the court was going to leave it up to the jury to determine if the broker had been negligent in failing to fully advise of the potential consequences of using the older appraisal, including the potential for the insurer to apply a coinsurance penalty (as it had successfully threatened to do in this case, in connection with the negotiation of a reduced settlement of the insurance claim).
Finally, in February the New York Court of Appeals considered whether a broker owed a duty to advise with respect to a company’s business interruption coverage in Voss v. The Netherlands Ins. Co. In this case, the insured had argued that the broker had led it to believe it would regularly assess and offer advice on the amount of the business interruption coverage limits. Notwithstanding the fact that the insured had indicated that there had not been dialogue with the broker about the business interruption coverage limits, the court found that the allegations were sufficient to create an issue of fact concerning whether the broker had accepted and failed to fulfill a duty to advise concerning a coverage issue.
Accordingly, although the issue really seemed to be about the appropriate business interruption limits to purchase, and the insured would undoubtedly have a far better understanding of this than its broker, the Court determined that it was an issue for the jury to determine if the broker should nonetheless be the one held responsible for the failure of the insured to obtain sufficient limits to cover its business interruption losses after water damage to the premises impacted its business operations.
Looking at these decisions, one can argue that they are just three recent rulings, the rulings are specific to their facts and they are not necessarily representative of how courts will decide these issues in other cases going forward. However, they suggest that a troubling pattern is emerging. Where there is any possible factual basis for concluding that special circumstances exist giving rise to a duty to advise, the courts seem to be looking very hard to find one. The days of easy dismissals of “duty to advise” cases may rapidly be coming to a close. And agents and brokers need to be forewarned, because their jobs are not getting any easier.
Peter Biging is a partner with the law firm of Goldberg Segalla, where he co-chairs the firm’s professional liability practice. He can be reached at email@example.com.