INSURANCE AGENTS & BROKERS E&O : CHALLENGES AHEAD

INSURANCE AGENTS & BROKERS E&O:CHALLENGES AHEAD Your Company Name and Logo

History of company/company vision • Who’s who • Company policies • Benefits • Performance reviews • Other resources • Required paperwork • Summary Members of Panel Peter J. Biging, Esq. – Goldberg Segalla LLP Chad A. Zupke, Esq. – Markel Service, Inc. David W. Colwick, Esq. – Allied World Ins. Co. Cliona A. Levy, Esq. – Marsh & McLennan Cos, Inc.

AGENDA I. Traditional Exposures and Emerging Trends • Basic Duties of Care • When Expanded Duties Can Arise II. Third Party Claims, Insurer v. Agent Claims, and Assigned Claims III. Practical Considerations for Defending and Trying the Agent/Broker E&O Claim in the Current Environment • Investigation • Discovery • Trial

Pop Quiz: Which is the Real Claim? • A claim by the estate of a murder victim for selling life insurance naming as a beneficiary a man introduced as her “Uncle” who proceeded to murder her after the policy was obtained. • A claim by the owner of a factory damaged by fire for failing to advise the owner that an insurer who declined to bid on the property coverage based its decision on criticism of its fire suppression system. • A claim by the victims of a drunk driver against the insurance agent for the restaurant at which the driver became intoxicated for failing to ensure the restaurant was properly insured against Dram Shop claims. • A claim by pig farmers who, when trying to transport thousands of gallons of liquefied pig feces, caused a spill on neighboring land, for failing to procure pollution coverage for their operations. • All of the above.

TRADITIONAL EXPOSURES • Failure to Purchase the Coverage Requested • Failure to Name an Additional Insured • Negligence in the Issuance of Certificates of Insurance • Negligence in the Processing of a Claim

BASIC DUTIES OF CARE • Exercise good faith and reasonable skill, care and diligence in procuring insurance requested in accordance with client’s instructions. • Obtain coverage which is not void. • Obtain coverage which is not materially deficient. • Obtain the coverage undertaken to be supplied at the requested limits. • Obtain requested coverage for client within reasonable time or inform client of inability to do so.

EXPANDING EXPOSURES VIA SPECIAL RELATIONSHIP OR FIDUCIARY STATUS • Continuing and Developing trend in case law to impose additional extra-contractual duties on agents and brokers: • Failure to Properly Advise as to types or amounts of coverage to purchase • Failure to Investigate Prior to Recommending or Purchasing Coverage

TYPICALLY NO DUTY TO ADVISE • Traditionally, agents/brokers have no duty to advise as to specific types of coverages to obtain, limits, or additional or optional coverages to purchase. • Reasons: • Insureds are in a better position to know their personal assets and abilities to protect themselves. • Would make agents and brokers responsible for not offering every possible coverage option or enhancement. • Would provide perverse incentive to insured to purchase coverage with lower limits or more narrow coverage and simply rely on agent/broker’s E&O insurance as excess of loss insurance.

THUS, ABSENT A “SPECIAL RELATIONSHIP” OR “SPECIAL CIRCUMSTANCES”: • “An agent has a duty of “reasonable diligence” to advise the client, but this duty has not been expanded to include the obligation to advise whether the client procured the correct amount or type of insurance coverage. It is the insured’s responsibility to request the type of insurance coverage, and the amount of coverage needed. It is not the agent’s obligation to spontaneously or affirmatively identify the scope or the amount of insurance coverage the client needs.” • Avenue Musicians & Artists, LLC v. Hudson Spec. Ins. Co., et al., 2016 U.S. Dist. LEXIS 74042, at * 3 (June 6, 2016, E.D.La.) (citing Isidore Newman Sch. V. J. Everett Eaves, Inc., 42 So.3d 352, 359 (La. 2010)) (emphasis added)

FACTORS IMPACTING WHEN A “SPECIAL RELATIONSHIP” OR “SPECIAL CIRCUMSTANCES” EXIST • The receipt of compensation in addition to the customary commissions paid by the insurer, such as for a “service fee.” • Counseling of the insured with respect to specialized coverage or a specific coverage issue. • The agent’s/broker’s declaration that he is a highly skilled insurance expert, coupled with the insured’s reliance thereon. • The agent’s/broker’s exercise of broad discretion in servicing the insured’s needs. • A course of dealing over an extended period sufficient to have put an objectively reasonable agent/broker on notice that his advice is being specially relied upon. • An ambiguous request for coverage that requires clarification.

PROBLEM Courts are Struggling with how to Apply These Factors Without Opening a Pandora’s Box of Claims for Failure to Advise

EXAMPLE: • Tiara Condominium Assoc. v. Marsh USA, Inc. : • Luxury ocean front 43-story residential tower • In 2004, Board instructed Marsh to bind windstorm coverage with Citizens Ins. Co. at 2002 appraised RCV of $49M. • Board had highly sophisticated members, including an insurance executive and accountant. • Board was specifically put on notice that older appraisal would be substantially lower in value than an updated appraisal. • Board asked Marsh if it could use older appraisal for use in placing the insurance, with the clear goal of reducing the limits and thus the premiums. • Two Hurricanes hit close together, causing extensive water and mold damage. • Despite questions as to whether the damages should be considered only a single occurrence, Marsh obtains $89M insurance recovery from Citizens. However, it spends approx. $130M+ on the repairs. • In spite of $89M recovery, Tiara sues Marsh, claiming that Marsh failed to advise the Board of the risks of making use of the older appraisal, and basing limits thereon. Claims: - Should have advised to get updated appraisal. -Should have advised the Board to buy higher limits

Tiara v. Marsh • Trial court awarded summary judgment to Marsh on all counts. • Decision discussed the breach of contract claims (based on alleged non-procurement of a per occurrence policy) in detail. • Dealt very briefly with negligence and breach of fiduciary duty claims, but dismissed them on the basis of the Florida Economic Loss rule which prohibited plaintiffs from stating tort claims against commercial parties governed by contract, except if the defendant was a “professional” (i.e., physician, architect). • 5th Cir. upheld dismissal of the breach of contract claims, but reversed dismissal of the tort claims, rolling back the application of the Florida Economic Loss rule to products liability cases only.

Tiara v. Marsh • Case is remanded to district court. • Marsh moved again for summary judgment on the tort claims, primarily on the grounds that the Independent Tort Rule barred the claims. • Court denied Marsh’s motion, and ruled that Tiara’s negligence and breach of fiduciary duty claims could proceed if Tiara could show that a “special relationship” existed between Tiara and Marsh such that Marsh had assumed a duty to advise as to limits and coverages. • Although Tiara Board was sophisticated and clearly understood impact of using older appraisal, court found issue of fact because Marsh’s agreement stated it would act as Tiara’s “risk advisor” and “financial risk manager.”

Tiara v. Marsh • Bifurcated trial. Tiara required to show special relationship first. • Two week jury trial on the existence of a special relationship. • How does the jury determine what is special vs. what is standard? • (1) representations by the broker about its expertise; • (2) representations by the broker about the breadth of coverage obtained; • (3) the length and depth of relationship; • (4) the extent of the broker’s involvement in the client’s decision making about its insurance needs; • (5) information volunteered by the broker about the client’s insurance needs; and • (6) payment of additional compensation for advisory services. • Tiara Condo. Assoc., Inc., 991 F.Supp.2d 1271, 1281 (S.D.Fla. 2014).

Post Tiara • It is now clear that even in circumstances involving a sophisticated insured clearly making a conscious decision to accept greater risk to reduce costs, special relationship question will likely be deemed an issue of fact for the jury. • This means: the availability of early resolution through summary judgment/motion to dismiss is severely impacted. • Increases the cost of litigation, and the associated risks. • The issue will be a huge driver of discovery going forward. • Example: In a recent 2016 case, American K-9 Detection Services, Inc. v. Rutherford International, Inc., 2016 U.S. Dist. LEXIS 62279, May 11, 2016, S.D.Fla., the court held that plaintiffs don’t even have to use the words “special relationship” in the pleadings. If the pleading alleges that the defendant held itself out as an expert in the field of a type of insurance and plaintiffs relied on that expertise, that, alone, is sufficient to allege a “special relationship.” • Post Tiara

Example:National Association of Investors Corp. v. Dobson v. McComber Agency, Inc., 2010 Mich.App. LEXIS 1204 • Non-profit established to provide its members with investment education. • Independent insurance agency had procured coverage for the non-profit for 15 years. • D&O policy purchased providing $1 million in coverage, but contains “insured vs. insured” exclusion. • Agent asked to give presentation to Board of Trustee to answer questions like: • who is specifically covered • how much coverage is enough • what are the circumstances under which organizations like ours would/could be sued • is there a common plan to follow if some individual or group decides to sue the board, individuals on the board, etc.

National Association of Investors Corp. v. Dobson v. McComber Agency, Inc. (cont’d) • Agent gives presentation, which made no mention of the “insured vs. insured exclusion” • Former board member subsequently sues the non-profit, alleging he had been improperly removed from the board • Not for profit’s claim denied based on “insured vs. insured” exclusion • Suit brought against agency and agent alleging they were negligent in not advising of “insured vs. insured” exclusion and opportunity to purchase coverage without same • Motion made at close of trial by agency for a directed verdict dismissing negligence claim on ground that the policy exclusions was set forth in the policy, and agency made no misrepresentation concerning coverage

National Association of Investors Corp. v. Dobson v. McComber Agency, Inc. (cont’d) RESULT? Motion granted at trial court, but reversed on appeal. REASON: “We agree with plaintiff that a reasonable juror could find that defendants’ failure to identify the insured v. insured exclusion in response to plaintiff’s request for a full presentation on its potential exposures constituted inaccurate advice.”

PROBLEM When a “special relationship” is found to exist, what is the scope of additional duties owed? Answer: The duties will depend on the facts of the case, but can include duties to advise on limits and types of coverages, the duty to investigate and identify potential coverage failings, as well as how to marry coverages with other policies to avoid coverage gaps.

This said, all is not yet lost. • In a recent Colorado case, the court held: • “[E]ven when an agent represents that he or she is knowledgeable about insurance coverages, and regularly in the course of his or her business, informs, counsels and advises customers about their insurance needs, the agent has not triggered a special relationship and assumed a heighted duty of care….Although Valley alleges that [the broker] held himself out as an insurance expert and advised Valley on a number of matters related to its insurance needs, these allegations are indistinguishable from facts Colorado courts have previously deemed insufficient to substantiate the ‘special relationship’ that triggers a heightened duty of care.” Valley Equip. Leasing Inc. v. McGriff, Seibels & Williams, 1:14-cv-02383 (April 28, 2016) D.Colo.

Other Positive Rulings of Recent Vintage • Hammond Transp., Inc. v. Cottingham & Butler Ins. Servs., 2016 U.S. District LEXIS 41065 (March 29, 2016, E.D.Ky.) (court found that generalized representations by an agent that it would obtain the “best insurance available” for its client and provide additional services to the client, such as training, did not heighten the duties owed to the client) • Addressing whether an insurance broker may be deemed negligent when a policy excludes coverage that the insured never requested but needed, the Court sided with the broker: Imposing a duty of omniscience …only because in hindsight their failure to act caused a particular problem, would not further the goals of the tort system. Schlossberg v. B.F. Saul Ins. Agency of Mo., Inc. 2015 U.S. Dist. LEXIS 166426 (D. Md. Dec. 8, 2015)

Question: What is Up with the Economic Loss Rule? • Traditionally has been Valuable Defense Tool for Insurance Agent/Broker E&O Claims • Rule: The “economic loss rule” provides that a party who suffers only economic harm may recover damages for that harm based only upon a contractual claim and not on a tort theory, such as negligence or strict liability. • Utility: Has for years been a means of disposing of agent/broker professional negligence claims in many states.

Economic Loss Rule:Dead or Alive? • Increasingly, the economic loss rule has been under attack as applied to agent/broker E&O claims, and has been in significant retreat. Is it dead? Answer: Not yet. So keep it in mind depending on the jurisdiction you are in. • Florida: Dead, except in product liability cases. See, Tiara v. Marsh. • Illinois: Dead. SeePRMConnect, Inc. v. Drumm, 15-cv-417 (May 26, 2016) N.D. Ill., the court holds that the economic loss rule (known as the Moorman Doctrine in Illinois) does not to apply to claims against an insurance agent or broker because of the fiduciary duty an insurance agent in Illinois owes to the insured that exists outside the contract for insurance procurement. • Virginia: Alive. Phoenix Packaging Operations, LLC v. M&O Agencies, Inc., 7:15-cv-00569 (June 3, 2016) W.D.Va. Economic loss rule is the basis here for dismissal of all claims against an agent and TPA for negligence in connection with the set up and administration of a self insured health care trust, apart from those based on breach of contract. • Oregon: Alive. State Farm Mut. Auto Ins. Co. v. Boggs , 2015 U.S. Dist. LEXIS 21830 (D. Or. Feb. 24, 2015).

Question: What About the Duty to Read? • Traditionally, Courts Have Held that the Insured Has a Duty to Read, and this Duty is so Significant that, in fact, it can Provide Absolute Defense for Agent/Broker Even Where Clear Misrepresentation has been Made Regarding Coverage • However, the duty to read as an absolute defense has eroded, and is more likely now to provide only a comparative negligence argument.

THIRD-PARTY EXPOSURES • Exposures under traditional third-party beneficiary theory • Exposures under theory of duty to public generally • Exposures to assignee of claim by uninsured/under-insured defendant against defendant’s broker

Agents and Broker Duties to Third Parties • The Cleveland Indians hired National Pastime Sports (NPS) to produce a Kids’ Day event, which included attractions like a bounce house and slide. • Contract required NPS to secure $5M in GL coverage, with the Indians named as Add. Ins. • NPS engaged Doodson d/b/a CSI as brokers. • Application submitted by NPS stated that Kids’ Day attractions would include inflatables. • Policy issued by New Hampshire Ins. Co. excluded coverage for injuries caused by inflatable slides. • In June 2010, Johnson and Brown were injured when an inflatable slide collapsed on them. Johnson died of his injuries.

Agents and Broker Duties to Third Parties Cont’d • NPS and Cleveland Indians v. Doodson d/b/a CSI Ins. Group and N.H. Ins. Co., E.D. Mich., Case No. 11-11378. • E.D.Mich. holds that the N.H. Ins. Co. policy does not cover Johnson’s injuries, and 6th Cir. affirms. Cleveland Indians Baseball Co., L.P. v. N.H. Ins. Co., 727 F.3d 633 (2013). • NPS and broker settle out of court. • E.D.Mich. dismisses Cleveland Indians’ negligence claim against broker, but the 6th Cir. reverses. See Cleveland Indians Baseball Co., L.P., 727 F.3d 633.

Agents and Broker Duties to Third Parties Cont’d • “While it is understandable that the law should not allow the insurance broker to be held liable to a virtually limitless class of claimants who are total strangers to the relationship between the insurance agency and the insured, or parties who were unknown to the insurance broker before the filing of a suit, this is not that case. The Michigan courts have repeatedly held in numerous contexts that considerations of fairness, including the defendant's ability to prevent the harm, permit a finding that the defendant owes a duty of care to foreseeable third parties. CSI knew that it was procuring insurance for the Indians as well as for National Pastime, it knew exactly what dates and events the insurance was for, it knew that the Indians had paid the premium and that CSI had issued a Certificate of Insurance to the Indians indicating that the policy was in effect. CSI was well aware that the Indians could be harmed if the proper insurance was not procured.” 727 F.3d at 639. (emphasis added.)

Agents and Broker Duties to Third Parties Cont’d • E.D. Mich. rejected the broker’s attempt to argue that the negligence claim was barred by Michigan’s economic loss rule. “[b]ased on our review of case law from other jurisdictions, we conclude that the economic loss doctrine does not generally bar claims for economic losses suffered when an insurance broker negligently procures insurance.” 727 F.3d at 639. • Interestingly, the broker attempted to use special relationship as a defense. “CSI also argues that foreseeability alone is not enough and that there must be some additional "special relationship" that would make CSI liable to the Indians in this case. That special relationship certainly exists here. It is undisputed that CSI knew that the insurance was to cover the "Kids Fun Days" events hosted by the Indians before baseball games. CSI sent a Certificate of Insurance directly to the Indians, listing them as an additional named insured. . . . If indeed Michigan would require some additional "special relationship" to impose tort liability on CSI, such a relationship surely can be demonstrated here.” 727 F.3d at 639.

Agents and Broker Duties to Third Parties Cont’d • Meanwhile, Johnson’s widow is unable to collect on a default judgment that she wins against NPS, so she sues the broker. • Johnson v. Doodson Ins. Brokerage, 1 F.Supp.3d 776 (E.D.Mich. 2014) (dismissing negligence claims brought by Johnson’s widow against broker), aff’d, 793 F.3d 674 (6th Cir. 2015). • The same courts rule that “foreseeable third parties” do not include Johnson and Brown because, unlike the Cleveland Indians, they were not named contractual beneficiaries – either individually or as a class of individuals -- in the insurance policy.

Agents and Broker Duties to Third Parties Cont’d • The courts relied on Fultz v. Union-Commerce Assoc., 470 Mich. 460, 683 N.W.2d 587 (Mich. 2004), in which the court ruled that the plaintiff who had slipped on a snow- and ice-covered parking lot did not have a negligence cause of action against the contractor hired by the premises owner to plow and salt the lot because, in essence, the plaintiff merely claimed that the contractor had breached its contract by failing to perform its contractual duties. • 6th Cir. on Johnson’s claim: “Failing to perform a contractual obligation to procure insurance against suits by injured parties does not implicate a risk of harm that the broker had any common law duty to prevent.” Johnson v. Doodson Ins. Brokerage, LLC, 793 F.3d at 677.

EXPOSURE TO INSURERS • Suits against agents/brokers for misrepresentation made in policy application • Suits against agents/brokers for breach of agency/producer agreement • Assignments of claims against broker/agent • Impact of Consumer Protection Statute Based Claims

Insurer vs. Broker Claims • Burlington Ins. Co. v. Okie Dokie, Inc. • Underage restaurant patron kills Police officer in a drunk driving accident, after allegedly drinking at restaurant, and restaurant sued by decedent’s estate • Burlington provides restaurant with defense under reservation of rights, and brings action for declaration of no duty to defend or indemnify and rescission of policy based on misrepresentations in policy application • In application, restaurant had represented it derived no more than 25% of its revenue from sale of alcohol and was a restaurant with a dance floor • Burlington contends that, in fact, business was run as a nightclub, hosted concerts, and derived more than 25% of its revenue from sale of alcohol • Burlington brings action for declaratory judgment that it has no duty to indemnify or defend restaurant, and for rescission • Burlington Ins. C. v. Okie Dokie, Inc., 320 F. Supp. 2d 4S (D.D.C. 2004)

Insurer vs. Broker Claims cont’d • Burlington also sues broker for negligent misrepresentation in preparation of application • Claims broker knew about operations, but failed to disclose relevant information • Claims damages based on defense costs it had to pay on policy it wouldn’t have issued, and cost of DJ action • Broker moves to dismiss, arguing it owed no duty to Burlington, because its sole contractual relationship was with its client, the insured

Insurer vs. Broker Claims Cont’d • Court denies motion to dismiss • Holds: “One who, in the course of his business . . . supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by the justifiable reliance upon the information if he fails to exercise reasonable care or competence in obtaining or communicating the information” • Rejects argument that lack of contractual privity was fatal to Burlington’s claim

Assignment of claims against broker/agent • The majority of jurisdictions recognize the assignability of a client’s causes of action against an agent/broker for failure to procure coverage. • See, e.g.: • DC-10 Entertainment, LLC v. Manor Insurance Agency, Inc., 308 P.3d. 1223 (Colo.App.2013) • AMCO Insurance Co. v. All Solutions Insurance Agency, LLC, 198 Cal.Rptr.3d 687 (Cal.App.2016)

Assignment of claims against broker/agent • AMCO Insurance Co. v. All Solutions Insurance Agency, LLC, 198 Cal.Rptr.3d 687 (Cal.App.2016) • Property owner claims he asked agent to procure coverage to building. No coverage was procured and building burned down in a fire which spread to neighboring property, whose owners and carrier filed suit against him. • Property owner assigns claim to neighboring property owners and their insurer, who are allowed to proceed against agent for failure to procure coverage which presumably would have applied to the loss.

Assignment of claims against broker/agent • In California, the court had an opportunity to extend the assignability exception for legal malpractice claims to also preclude the assignment of claims against agents/brokers and opted not to, citing the “unique quality of legal services” and “personal nature of the attorney’s duty to the client” and finding those factors not present in the client-broker relationship. • Troostv. Estate of Deboer, 155 Cal.App.3d 290, cited in AMCO.

Impact of consumer protection statutes • Murray, et al. v. Farmers Co. of Arizona, 239 Ariz. 58, 366 P.3d. 117 (2016) • Plaintiffs’ insurance agent advised plaintiffs not to increase their UM/UIM limits to correspond to their liability auto limits. • Minor plaintiff suffers traumatic brain injury permanently incapacitating her. • Parents on behalf of daughter sue agency under Arizona’s Consumer Fraud Act (CFA).

Impact of consumer protection statutes cont’d • Agent argues the minor does not have standing to bring the CFA claim because she was not a party to the sale in which the alleged misrepresentation took place. • Holding: Court finds the broad language of the CFA applies to third party beneficiaries of the underlying transaction, such as the minor plaintiff here.

Practical Considerations In Defending the Agent & Broker E&O Claim • History of company/company vision • Who’s who • Company policies • Benefits • Performance reviews • Other resources • Required paperwork • Summary • Plaintiffs will lie, count on it • Plaintiffs’ stories will morph as necessary to keep claim alive • Evidence upon which to base a “duty to advise” will almost always be present in some form

Investigation • You need to be sure to investigate for the following from your agent/broker client • All electronically filed records concerning placement of the policy or handling of the claim at issue • Electronically filed and other records concerning placement of all other policies and/or handling of other claims • All email communications involving the policy or claim in issue, on every device and every email account that may have been used • Email communications regarding other policies and/or claims • All handwritten notes, calendars, diaries, notebooks, etc. of producers, account executives and CSRs who may have been involved in handling account

Investigation Cont’d • Billing records • Records of electronic transmissions separate and apart from emails • Records of pop-up notes that may appear when certain electronic file records are accessed • Current and past marketing materials utilized by brokers, including newsletters • Current and prior company web page materials • Electronic records of when claim notices have been sent

Investigation Cont’d • Producer, account executive, and CSR LinkedIn bios • Social Media postings by producers, account executives and CSRs • Producer, account executive and CSR personnel files

Discovery You will want to try to obtain the following in discovery: • Plaintiffs’ records with regard to: • Internal and external communications concerning purchase of insurance coverage/discussion and notice of claim, both with defendant agent/broker and others • Receipt of policies, policy summaries, policy endorsements • Plaintiffs’ receipt, review and confirmation of policy applications

Discovery Cont’d • Evidence of sophistication of Plaintiff with regard to insurance matters • Evidence of Plaintiff declining proposals to increase limits, excess or umbrella, optional coverages • Evidence of Plaintiff making choices based on cost • Evidence of Plaintiff correcting policy information • Evidence of Plaintiff communicating with others post-loss regarding the loss

Discovery Cont’d • Evidence concerning insurer’s investigation of claim and any ROR and/or declination letters • Evidence of premium allocations prepared by Plaintiff • Evidence of Plaintiff soliciting bids from other brokers

Trial Disturbing Statistics: - 76% of jurors believe that corporate executives lie and cover up - 30% believe that it takes “billions” to send a message to corporations - 71% do not believe there should be a cap on juror awards - 45% will ignore a judge’s instructions

Trial Must Do’s • Voir dire • Critical to find as centrist a jury as possible • Understand that people may lump agents/brokers with insurers • Need to utilize as means of building theme of allocation of responsibilities

INSURANCE AGENTS & BROKERS E&O : CHALLENGES AHEAD