It is easy for an insurance broker to view its liability to only its known clients. While that view makes sense from a business prospective, in the world of insurance litigation where a plaintiff is always looking for a source of compensation, brokers remain a likely target when things go awry. This article addresses an area of insurance broker liability to strangers to the policyholder-broker relationship.
The case of Business to Business Markets, Inc. v. Zurich Specialties provides a stark example of how an insurance broker can be left on the hook when an insurer denies coverage. In this matter, Business to Business Markets (“B2B”) contracted with an Indian company, Tricon Infotech, to create custom software for it. Part of the agreement required Tricon to obtain errors and omissions coverage to compensate B2B if Tricon failed to deliver.
In order to help Tricon meet this requirement, B2B contacted a retail broker to obtain coverage for Tricon. The retail broker went to the surplus market using Professional Liability Insurance Services, Inc., which placed coverage with Zurich Specialties London Ltd.
We all know what occurred next, Tricon failed to deliver the software. B2B sued the surplus lines broker for negligence in procuring the policy. The problem was that the surplus policy Professional Liability Insurance Services placed with Zurich contained an exclusion of coverage for claims arising from or related to work performed in India.
The trial court agreed that Professional Liability Insurance Services was not liable due to the lack of privity (a contractual relationship) with B2B. That makes sense from a business prospective; B2B was a complete stranger to the surplus broker and the insurer. However, the appellate court disagreed. Relying on a California Supreme Court case, the appellate court ruled that a defendant may have a duty to exercise due care to protect a third-party although they are not in privity of contract. Relying on an analysis of various legal factors, the Court determined that B2B did not need to be in privity with the broker and that B2B was basically an intended beneficiary of the transaction in placing the coverage. Thus, the broker owed duties to B2B, even though B2B was not its customer or a named insured.
This type of situation can also arise in other instances. For example, use of certificates of insurance can expose brokers to liability when the certificate contains incorrect information or the broker fails to add the certificate holder as an additional insured. Regardless of how many disclaimers the certificate of insurance may contain, those usually only benefit the insurer not the broker who issues the certificate. A very common argument is that the certificate holder is a third-party beneficiary of the actions undertaken by the broker for its client. These failures can lead to third parties asserting claims for negligence, negligent misrepresentation, and fraud.
Another example is when a policyholder’s broker fails to place the coverage. This can often occur around renewal time if the insured is switching carriers. What usually happens is that the broker and insured are trying to renew coverage at the last minute before the current policy expires, but the coverage lapses before new coverage is in place and a loss occurs in the meantime. In this instance, most of the prior policies would not owe coverage absent an extension having been purchased. Once again, the policyholders only recourse may be to assert a claim against its insurance broker.
This type of loss of coverage and broker liability was addressed in Sept. 2013 by the District Court for the District of Maryland in Boiardi v. Freestate with an opinion explaining a broker’s liability. In this case, the broker obtained a new quote for coverage but did not place the coverage before a fire loss. The broker had the quote from the carrier and acknowledgement that it would extend coverage to the policyholder but failed to coordinate with the customer to place the coverage in time.
The Court held, “[i]n order to recover damages from a broker for failure to obtain an insurance policy, a plaintiff must show that the broker’s failure to obtain the policy was the proximate cause of her damages.” Under Maryland law, a plaintiff does not need to show that an insurance policy was obtainable in order to prove that a broker’s failure to procure such a policy caused her loss. Rather, availability of insurance is assumed unless the defendant proves its unavailability as an affirmative defense. “[A] broker cannot meet its burden of showing lack of proximate cause . . . merely by showing that the insurer which it approached would not supply the insurance in question. Testimony that a particular insurer cannot supply insurance ‘is a far cry from evidence demonstrating that such insurance is not available elsewhere.’”
When coverage fails, the injured party is looking for compensation. While the party’s insurer and broker are likely targets in the coverage litigation, the other party’s broker may also prove a viable target as highlighted by the Business to Business case.
In other instances, the insured’s own broker may be at fault for the lack of appropriate coverage. Policyholders must be vigilant in understanding the nature of causation for the loss of coverage in order to seek out the responsible party. Just because an insurance broker is not your broker does not mean it is not the party responsible for the loss of coverage and owed you some level of care. Of course, at other times, your broker may be responsible. Thoroughly understanding the nature of the coverage is critical, but when coverage has been properly denied broker liability may be a company’s alternative route to recovery for the loss.