Legal Issues for Business Owners in the Insurance Industry

Business owners acting as insurance brokers or agents will face a number of legal issues, and those issues will be shaped largely by the relationship your business has with its clients. Thus, as a business owner, it becomes your duty to be quite familiar with both how your company interacts with its clients and the law governing the state in which your business operates.

Generally speaking, insurance brokers owe a duty to procure the insurance their client requests, and to use due diligence and care in securing such insurance for each client they serve. However, brokers should also be aware of whether the state in which they practice imposes heightened standards of care. Since insurance brokers market themselves as experts in the field of insurance, some states have imposed heightened duties on them. For example, in Aden v. Fortsh, 169 N.J. 64, 776 A.2d 792 (2001), the New Jersey Supreme Court imposed a fiduciary duty on an insurance broker whom the plaintiff had accused of negligence for failure to secure a homeowner’s insurance policy with adequate dwelling coverage for the interior of a condominium unit. Even courts that have not imposed a fiduciary duty similar to what is imposed on skilled professionals (e.g., attorneys and doctors) have applied a professional malpractice standard on insurance brokers. The takeaway is that business owners in the insurance industry need to research the law of the state where they practice in order to determine the scope of their duties.

With the existence of a duty comes the possibility of breaching it. There are number of claims an insured can bring against a broker, most of which deal with the breach of a duty owed by the broker. The scope of the duties owed by a broker to an insured relies heavily on the relationship the two have. If the insured can show that a “special relationship” existed between it and the broker, the broker may owe heightened duties. While several state courts have addressed the issue, there has yet to appear a clear rule as to whether such a relationship exists. But, each opining court focuses their analysis on similar factors: how the broker has held themselves out the insured, whether there was some sort of oral or written agreement between broker and insured, or whether there was a long-standing relationship between broker and insured. If the broker holds themselves out as an expert in the field to the insured’s detriment, or if the broker has a long-standing relationship with the insured, the court is more likely to find that a special relationship exists. See Sadler v. the Loomis Company, 776 A.2d 25, 35 (2001). Other states have found the existence of a special relationship as long as the insured demonstrates that it made a particular request to the broker. See American Building Supply Corp v. Petrocelli Group, Inc., No. 188, 2012 N.Y. LEXIS 3476 (N.Y. Nov. 19, 2012). The takeaway is that business owners in the insurance broker industry need to be aware of the law of the state in which they practice, and the implications that could have on the duties owed to their clients.

In general, insured-broker claims arise in when the insured has a claim filed against it, and the insured believes the broker to be the reason for the lack of coverage. The insured can sue for negligence if they believe the broker breached its general duty to use due diligence and care in securing a policy of the type the insured requested. The insured could also file a claim for breach of contract, but only if some type of agreement existed between the broker and the insured.

Another potential legal issue for insurance brokers comes in the application phase. Most of the time the broker will help the insured fill out and submit the insurance application. If the application contains material misrepresentations, the insurance provider could use that as a reason to deny coverage or even to cancel the policy altogether. If it is later discovered that the broker was responsible for the misrepresentation, they could face liability. After the application phase is complete, the insured will may file a claim only to realize that the policy they bought won’t insure them. This could lead the insured to feel as though they were not properly advised by their broker when applying for coverage. But unless the insured can establish a “special relationship,” they will likely not win on a claim that their broker failed to properly advise them on the proper coverage. This type of disagreement can be avoided by communicating clearly with clients and finding out exactly what occurrences they want to be insured against.

A separate legal issue that business owners in the insurance industry can find themselves encountering involves the broker’s status as an agent. Specifically, for whom is the broker’s agent status directed? The basic elements of an agency relationship include “the manifestation by the principle that the agent shall act for him, the agent’s acceptance of the undertaking and the understanding of the parties that the principal is to be in control of the undertaking.” See Comcast Spectator L.P. v. Chubb & Son, Inc., No. 05-1507, 2006 U.S. Dist. LEXIS 55226, at *36 (E.D. Pa. Aug. 8, 2006) (citations omitted). Courts have held that, given the facts and circumstances of a given transaction, brokers can act as agents for either the insured (the person purchasing an insurance policy), the insurer (the person or entity providing the insurance), or both. The answer to the question posed above will depend almost exclusively on the communication between all parties involved.

For example, if broker A is securing premium payments from insured person B to be forwarded to insurance company C, broker A becomes an agent for insurance company C. But, when securing that insurance policy for insured person B, broker A was an agent for insured person B. Therefore, it is possible for a broker to be the agent of both the insured and the insurer. This example sheds light on the fact that business owners acting as insurance brokers need to be aware of the duties they may or may not owe out of their status as agent.

When acting as an agent for the insured, the broker will owe certain duties. One of those is referred to as the duty to procure. Absent extenuating circumstances, this duty extends to using reasonable skill and care in obtaining the type of policy the insured asked of the broker. This duty does not extend to providing advice on the best-priced option or whether a particular policy will cover a claim or claims. The only way in which a broker’s duties can extend to providing price and coverage advice is if the insured can show that a “special relationship” existed with the broker. Courts have found that such a relationship exists if the “broker holds himself or herself out as a highly skilled insurance expert, and the insured relies to his detriment on that expertise.” See Sadler v. the Loomis Company, 776 A.2d 25, 35 (2001). If the insured can show that a special relationship existed and that they suffered a harm due to the broker’s failure to uphold its duties under that relationship, the insured could have a claim for breach of contract. This situation would typically present itself when the broker and insured engaged in extensive discussions or executed some type of written agreement.

While this is not a list of every single legal issue a business owner in the insurance industry might face, it outlines the most common and serious ones. All of these issues can be avoid by being proactive: manage how your brokers interact with your clients, and always be aware of how the law might impact the way you do business.