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One of the most frustrating - and dangerous -- problems for the insurance broker is the unexpected and, in the broker's opinion, wrongful denial by the client's insurer of a claim under the policy procured by the broker. Such a denial often gives rise to a lawsuit by the insured client against the insurer for bad faith and, all too often, against the broker for negligence (and worse). At a minimum, it creates tension between the broker and his/her client as well as between the broker and the insurer. ________________________________________________

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When the broker is sued by the client for negligence that the client alleges caused or contributed to the denial, the broker and his/her counsel must avoid a knee-jerk reaction that can often prejudice the broker's position and, more importantly, ruin profitable relationships among the insurer, broker and client without accomplishing anything constructive.

The first task should be to examine the policy, the application, and the facts of the claim to make a preliminary determination whether the denial by the insurer was improper. Sometimes, the broker can persuade the insurer to change its position. The denial might have been based upon an incorrect assumption by the insurer, for instance that a premium was not timely paid, which the broker can dispel with the proper documentation (e.g. email confirmations). Often, the insurer will cite an inaccuracy in the application that the broker can correct by demonstrating that the application was correct or that the insurer knew or should have known of the shortcoming. On rare occasions, where the claim is not large, the insurer might change its position to accommodate the broker to preserve an important source of business for the insurer.

Where the broker cannot at the outset of the claim change the insurer's mind, the broker must decide how to respond to the client's claim of negligence. The broker will assert that (i) his/her actions did not fall below the standard of care of brokers (i.e. the broker was not negligent) and (ii) the insurer's denial is wrongful and not the result of any negligence of the broker even if such negligence exists. A victory on either point would result in a verdict in favor of the broker; the issue is how mechanically should the broker assert that argument?

The obvious first choice is to allow and help the client to assert that position. That is best for the broker because (i) the client has the best and most sympathetic claim against the insurer, (ii) the client's claim is much stronger than any claim the broker could make, because the client will have the threat of actual and punitive damages for bad faith if the insurer's coverage determination is ultimately found to have been incorrect, (iii) the client does not have the relationship with the insurer to protect and thus can be more aggressive than the broker in asserting this claim, (iv) the client will usually want, and often need, the broker as an ally in his effort to attack the insurer, and a claim that the broker was negligent will tend to excuse the insurer's denial, and (v) the broker and his/her insurer can avoid the bulk of the expenses in attacking the insurer, but can just "go along for the ride

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However, on occasion, the client chooses not pursue the insurer or does so ineffectively. While the client's potential award might be smaller attacking the broker (no bad faith damages can be awarded), the client might feel he or she really does not have the ability or desire to battle a large and experienced insurer or just does not understand why the insurer's denial is improper. In that event, the client seeks damages from the broker equal to the amount that the insurer would have paid had the claim been accepted and paid according to the policy. On these occasions, the onus of making the claim that the insurer's denial was wrongful falls upon the broker.

If required to take the laboring oar against the insurer, the broker's first inclination will often be to cross-complain against the insurer. Such a cross-complaint might seek a declaration that the client's claim is covered or claim that the insurer is obligated to the broker to pay a share of any judgment against the broker under the rubric of implied equitable indemnity. However, there are legal impediments to either theory.

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The insurer owes no duty to the broker; the insurer's duty is to the broker's principal, the client. It is thus unlikely that the insurer or the court will give credence to an affirmative claim for wrongful denial against the insurer by the broker. The claim for implied equitable indemnity is based upon the existence of joint liability - that is, the broker claims that he/she and the insurer are jointly liable for any damage to the client, so the insurer must bear its equitable share of any such liability (expressed as a percentage of negligence in the verdict). This theory too has legal shortcomings.

In the vast majority of cases, the insurer and the broker are not jointly liable for a single damage. The broker is liable for damage caused by his/her negligence, while the insurer does not owe the client a duty of reasonable care. Its duty to the client is contractual, which is to perform the obligations that the policy imposes on the insurer (i.e. to pay this claim). Bad faith, while a tort duty, flows from an implied covenant of the insurance contract, not a common-law duty such as reasonable care and does not create joint liability with the broker.

There appears to be no viable basis in the usual case for an affirmative claim by the broker for affirmative relief against the insurer. However, the broker, hoping for a quick resolution of the dispute, might nevertheless feel that if the insurer is attacked by the broker and the insured, it will elect to settle the claim in a manner satisfactory to the client rather than spend the money and take the risk on litigation with both the client and the broker. However, this effort is expensive and will usually fail, so the best bet is for the broker to simply rely on a defense of lack of causation and seek to point out the factors that required coverage.

That determination is almost always made by the court, so it is unnecessary for the broker to take an overtly antagonistic stance against the insurer in making that assertion. This can be important to the broker, because it is usually important to the business success of a broker to develop and maintain good relationships with insurers, and brokers must be careful about suing insurers, especially insurers with whom they regularly do business. The "political" fallout of an affirmative attack on an insurer can overwhelm any advantage the broker might otherwise gain from such a claim.

In addition, despite the broker's concern about his/her relationship with the insurer, the broker's professional liability insurer clearly has the right to defend the broker by any acceptable means, and it is important for the broker to make that showing. Proving the existence of coverage is one obvious means of defense of the broker, and it might be the only viable strategy, and it is the one that the insurer will usually choose to follow.

Finally, the broker must understand that he/she might be found liable to the client even if it is established that the claim should have been covered. If the client asserts and the jury concludes that the coverage issue would not have arisen absent some negligence on the part of the broker (e.g. creating an ambiguity or a circumstance that, while resolved in favor of the client, was the reason for the initial denial), the broker might still be liable to the client for the expenses that the client incurred in pursuing coverage against the insurer. This amount, mainly of attorneys' fees and expert costs, but occasionally, in the proper circumstances, including other consequential damages, could be quite large even though no indemnity is payable (because the insurer eventually paid the claim, whether voluntarily or as the result of a judgment against it).

Alan R. Jampol is a graduate of UCLA School of Law and has been practicing in Southern California for over 30 years. Alan is "AV"® rated with Martindale-Hubbell and he has specialization in the litigation and arbitration of matters related to errors and omissions claims against professionals, including lawyers, real estate brokers, insurance brokers, engineers, and architects. Alan has tried nearly one hundred cases to conclusion with a stellar record of success. He has lectured before Bar Committees, served as an arbitrator for the Superior Court and the American Arbitration Association and has taught in a private law school. He is a member of the American Bar Association, the Los Angeles County Bar Association and their committees. He is also a member of the Defense Research Institute, the Association of Southern California Defense Counsel, the Professional Liability Underwriting Society and the Association of Business Trial Lawyers.