The primary function of a policyholder’s coverage attorney is to review and evaluate the insurance company’s handling of a claim and to advocate for the policyholder’s coverage position. Most commonly, an attorney works to force the carrier to provide coverage for a particular loss. But sometimes, the search for coverage leads to an unexpected conclusion: The carrier’s denial was correct, and the reason there is no coverage is that the broker made a mistake. In this situation, a policyholder’s coverage attorney may double as broker malpractice counsel. Although many brokers act as trusted advisors, they can make mistakes and, in some cases, pursuing those mistakes may be a policyholder’s only legal recourse.
Many broker-policyholder disputes are resolved informally by the broker and/or their own errors and omissions insurance without a lawsuit. Even when lawsuits are filed, they very often settle out of court, with confidential settlements and non-disclosure agreements.
However, some recent high-profile cases offer a reminder that such claims arise more often than you may realize. For example, in 2018, a chain of grocery stores won a $12 million judgment against their insurance broker arising from insufficient coverage for losses caused by Superstorm Sandy in 2012. The appellate court recently affirmed that judgment, confirming that the broker was the legal cause of the policyholder’s lack of coverage. In April 2021, a Marriott hotel owner sued its broker in South Carolina alleging the broker’s negligence caused the hotel to be uninsured for its pandemic-related losses. And in June 2021, an English semi-professional soccer club filed a lawsuit alleging that its insurance broker failed to secure suitable coverage for the club, resulting in significant uncovered losses in a 2019 fire. While these are just a few examples, similar cases against insurance brokers large and small are not uncommon.
A threshold consideration for broker malpractice cases is what exactly constitutes a “broker.” While the terms are often used interchangeably, there are important distinctions between insurance agents and insurance brokers. An insurance agent usually refers to someone who sells insurance for a particular carrier. Generally speaking, if you are buying insurance from a well-known carrier purchased through a small local office, you are probably dealing with an “agent.” An insurance broker, on the other hand, generally represents policyholders in purchasing insurance from any number of carriers.
To make matters more confusing, the same person may be an agent of one carrier, but also be authorized to place insurance with other carriers. If you go to a State Farm office and they sell you a State Farm policy, they are acting as an agent, but if they sell you a Travelers policy, they are acting as a broker.
The distinction is material because the agent and the broker work for opposing sides of the transaction, with the broker acting as the representative of the policyholder, and the agent representing the carrier. When a broker does something, their conduct is imputed to the policyholder, but whatever an agent says or does is binding against the carrier.
For example, if an agent tells the policyholder that a policy will cover a particular kind of claim, the carrier can be bound by that representation and be held responsible for paying the claim, even if the policy sold does not actually provide that coverage. Conversely, if a broker makes that same misstatement, the carrier would have no responsibility to pay the loss, but the policyholder may have a malpractice claim against the broker. Broker malpractice claims generally target the independent brokers.
Malpractice is just a fancy way of saying “professional negligence,” and as with virtually all negligence claims, it requires four basic elements: duty, breach, causation and damages. In many of these cases, the key question is: What duty did the broker owe to the policyholder? For brokers, the answer is a good news/bad news situation. The good news is, in many states, the broker’s duty is to generally procure the insurance that the policyholder requested. If the policyholder asks the broker to find a CGL policy with $2 million in limits and the broker finds such a policy, the broker has fulfilled their duty.
The policyholder could later come back and ask, “Why didn’t you tell me I really needed $5 million in limits?” or “Why didn’t you tell me the policy had that exclusion in it?” or “Why didn’t you tell me I should also buy directors and officers coverage?” In such cases, the policyholder may not be able to establish the broker owed a heightened duty to provide anything beyond what was requested. That is, the broker just needed to procure the product the client requested, like a server at a restaurant who successfully delivers all the food and drinks the diner ordered.
The good news for policyholders is there are many exceptions where a broker may owe a greater duty. The general rule stated above applies to the brokering of policies, meaning the task of accessing the insurance markets and finding policies matching the policyholder’s requests. But in today’s competitive market for insurance brokerage services, few brokers limit their role in that way. Modern clients are looking for more than just access to the insurance markets—they want a trusted advisor to help them navigate all things insurance. As with all professionals seeking to provide that value-added proposition, the scope and breadth of the broker’s duties expand as they provide additional services. While an insurance broker ordinarily has no duty to volunteer that an insured should buy more or different insurance coverage, that changes if the broker is engaging in conduct that causes them to undertake that duty, such as purporting to help the client evaluate coverage needs, making representations about the scope of the coverage, and claiming to be an expert in the particular field.
While identifying risks and recommending coverage needs is one way brokers provide value-added services and assume the subsequent additional duties, there are many others. These include filling out applications, negotiating specific coverage terms and reporting claims to the carrier. The latter-most may actually give rise to the most broker malpractice claims.
Consider a hypothetical case where a policyholder has relied on the broker’s expertise for many years for all its coverage needs, including the services listed above. The policyholder has been buying “claims made and reported” directors and officers coverage from the same carrier throughout this time, but the broker now recommends moving the business to another carrier that offers better pricing. This relatively commonplace transaction could subject the broker to many potential pitfalls and resulting liability. What will the retroactive date be on the new policy? Should the insured buy a tail policy? How will the scope of coverage change? What claims or potential claims need to be reported to the old carrier? What needs to be disclosed to the new carrier? Handling any of these issues incorrectly can badly hurt the client and may, in turn, lead to a malpractice claim against the broker.
Brokers often strive to go beyond transactions and develop relationships with their clients. The broker benefits from that relationship by keeping the business year over year, collecting commissions on the policies sold. But that relationship also expands the scope of the broker’s duties and legal exposure. Policyholders want to know they can rely on their broker for additional services, but the broker has to hold up their end of the bargain as well. If a broker is going to provide additional services to their clients to attract and keep their business, they need to execute those services correctly. When their failure to do so leads to a loss of coverage for what would have otherwise been a covered loss, policyholders have to look to their broker—not the carrier—to be made whole. While it may disrupt or even terminate the trusted broker-policyholder relationship, policyholders sometimes have no choice but to pursue malpractice claims against their brokers as their only potential source of recovery.