Federal Appellate Court Holds That Insurance Broker Owes No Duty of Care to Clients When Not Retained to Procure Specific Coverage
In M.G. Skinner and Associates Insurance Agency Inc. et al. v. Norman-Spencer Agency Inc., case number 15-2290, the Seventh Circuit Court of Appeals affirmed the district court’s grant of summary judgment in favor of an insurance broker sued for failing to identify and advise insureds of an insurer’s untrustworthiness. The Court of Appeals narrowly construed an insurance broker’s duties under Illinois law as being owed only to named insureds who have purchased insurance from the broker.
Western Consolidated Premium Properties (“WCPP”) sued Norman Spencer Agency, Inc. (“Norman Spencer”) after it was allegedly defrauded into buying non-existent insurance policies. WCPP claimed that Norman Spencer was liable for the cost of replacing its insurance based on its failure to disclose various red flags Norman Spencer discovered when it sought to become involved in the insurance procurement process. The Court held that Norman Spencer owed WCPP no duty of care because it was not involved in proposal process and did not receive any portion of the commission generated from WCPP’s premiums.
The Court of Appeals recognized that an insurance broker can be liable for failing to disclose information material to the insured’s decision to place insurance with a particular carrier. The duty arises, however, only after the insured – or prospective insured – requests specific coverage from the broker. Once the duty arises, it flows downhill to sub-brokers, but it flows only to those sub-brokers who are engaged to procure the requested coverage. Since Norman Spencer was never part of the procurement chain with respect to WCPP’s policies, it owed WCPP no duty of care and could not be held liable for failing to provide WCPP with material information related to its purchase of insurance.
Additionally, the Court of Appeals affirmed Norman Spencer’s summary judgment as against Myan Management Group (“Myan”), a plaintiff representing various property owners, who were similarly defrauded into buying fake insurance. The court found that Norman Spencer owed Myan no duty of care because it was not a named insured on any of the fraudulent policies, and despite Norman Spencer’s having taken over administrative functions for the Myan policies. The court reasoned that, because Norman Spencer did not renew, bind or place insurance for any of the Myan property, it owed none of the Myan property owners a duty of care.
The Court of Appeals’ decision confirms that an insurance broker’s duty to disclose information material to an insureds decision to buy insurance from a particular carrier arises only after an insured requests specific coverage, and applies to only named insureds who engage the broker in the procurement process.