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Evolving Trends in Professional Liability Claims Against Insurance Brokers
By Marc J Zimet, Esq. of Jampol Zimet LLP
While the general rule of liability for insurance agents and brokers is that an agent or broker is only responsible for procuring for its client, the coverage specifically requested by the client (Jones v. Grewe), the duties imposed on brokers have dramatically increased over the years. In short, brokers are no longer looked at as salespeople selling someone else's product, but rather, professionals responsible for advising clients properly as to what it is they need and procuring for them, products that meet that need.
While this seems like a stretch, we wouldn't think twice of a doctor or lawyer being liable to a patient or client who came in to his or her office and said "please give me a knee replacement" or "please transfer all of my assets to the Southern Confederacy." The doctor and lawyer owe a duty to find out if the patient needs a knee replacement or whether the client really understands the import of his request to transfer assets to the "Southern Confederacy." It is new for us to understand that a broker too has a professional duty to "diagnose" the client's needs and to do what's best for the client, even when that means educating the client.
Take for example, the 2009 case of Williams v. Hilb, Royal & Hobbs Insurance Services (177 Cal.App.4th 624.) In that case, Hilb, Royal was found liable to Williams, the owner of a Rhino Lining Franchise, for failing to sell to Williams, a policy of workers' compensation insurance. What made this case interesting was that Williams had never asked Hilb, Royal for a workers' compensation policy, a fact that Williams conceded. Nonetheless, the court in that case found that because Hilb, Royal represented itself as an expert in the needs of small business owners, Hilb, Royal breached its duty to Williams by not at least trying to sell to Williams, a policy of workers' compensation insurance.
Williams had just purchased his first Rhino Lining franchise. Rhino USA referred him to a broker who had considerable experience with Rhino Lining franchises. When Williams called her and requested a meeting, she told him a meeting was not necessary since she was the expert on Rhino's insurance needs. Williams did not request any specific type of insurance. He put himself completely in the broker's hands, asking only for whatever insurance she thought was needed to operate the business. When she faxed him an application form entitled "Designed specifically for Rhino Liners Dealers," he filled in only basic information, leaving all portions relating to insurance coverages blank. The broker knew that workers' compensation insurance is mandatory in California and was aware that some Rhino workers had dangerous jobs. Yet she did not procure workers' compensation insurance for Williams. During his third year in business, one of Williams' employees was seriously injured in a catastrophic fire while on the job.
The broker claimed that in her first telephone call with Williams she had discussed with him the need for workers' compensation insurance, but Williams told her he would purchase it elsewhere. However, the broker never provided Williams a written quote for workers' comp insurance, did not write him a letter confirming that workers' comp insurance was offered and declined, did not write a memorandum to the file, and did not make a record of her telephone call with Williams about workers' comp insurance.
One of Hilb, Royal's defenses was that Williams was comparatively negligent because he did not read the insurance policy. The court rejected this argument, saying that even if Hilb, Royal could prove that Williams had failed to read his policy, such failure would not necessarily show that Williams had acted negligently. The court cited a previous case for the proposition that "an insured should be able to rely on an agent's representations of coverage without independently verifying the accuracy of those representations by examining the relevant policy provisions." (Williams, supra, p. 643, citing Clement v. Smith (1993) 16 Cal.App.4th 39, 45.)
The court in Williams found that the broker had violated her duty to her client. Even though the general rule under the seminal case of Jones v. Grewe is that an insurance agent does not have a duty to volunteer to an insured that the insured should procure additional or different insurance coverage, there are three situations that are exceptions to the Jones rule: "(a) the agent misrepresents the nature, extent or scope of the coverage being offered or provided . . ., (b) there is a request or inquiry by the insured for a particular type or extent of coverage . . ., or (c) the agent assumes an additional duty by either express agreement or by `holding himself out' as having expertise in a given field of insurance being sought by the insured . . . ." (Williams, supra, pp. 635-636, citing Fitzpatrick (1997) 57 Cal.App.4th 916, 927.) The broker in Williams fell within exception "c". The court held her to a higher standard because she held herself out as having expertise in a given field of insurance, namely, insurance for a specific type of small business.
The broker could probably have protected herself if, immediately after that telephone call, she had sent Williams a letter confirming that she had told him he needed workers' compensation insurance and that he had declined to purchase such insurance through her. It would have been even better if she had enclosed with the letter a written statement to that effect, for him to sign and mail back to her. If the broker had done that, and had retained the signed statement in her file, this case might have gone a different way.
Whether a broker's statements create expanded duties depends on the description of expertise provided by the broker. In the 2011 case of Wallman v. Suddock (200 Cal.App.4th 1288), the court for our own Second District Court of Appeals affirmed that more is required than just the insured's assertion that they purchased insurance from the broker and followed his advice for several years. Rather, in evaluating whether the heightened duty applies, a court will look to evidence of what the broker said that gave rise to the insured's reasonable belief that the broker is an expert in certain types of insurance matters.