Broker Not Responsible for Fraudulent Insurer

 Broker Must Owe A Duty To Be Held Responsible for Failure of Insurance

Complex insurance programs are required to properly insure major property owning organizations require the services of multiple brokers and sub-brokers. Because of the complexity of the insurance, the number of properties and organizations involved, and the extensive premiums needed to insure the risk, less than honorable people are tempted to engage in fraudulent schemes that cost the various plaintiff a great deal of money. As a result the parties damaged sued everyone in sight.

In M.G. Skinner and Associates Insurance Agency, Inc. and Western Consolidated Premium Properties, Inc., v. Norman–Spencer Agency, Inc., United States Court of Appeals, Seventh Circuit, No. 15-2290 (January 4, 2017) the Seventh Circuit was faced with a case that arose out of a complex insurance transaction that ended badly because the supposed insurance turned out to be a complete fraud. Despite the complexities of the broader transaction and the litigation that it spawned, this appeal presents, essentially, a single question: whether Norman–Spencer Agency, Inc., an Ohio insurance agency, owed a duty to M.G. Skinner and Associates Insurance Agency, Inc. and Western Consolidated Premium Properties, Inc., two entities that had engaged a chain of sub-brokers to procure insurance for a vast collection of real property.

M.G. Skinner and Associates and Western Consolidated Premium Properties, plaintiffs-appellants here, contend that Norman–Spencer Agency was one of the sub-brokers in the chain, and thus it owed them a duty of reasonable care in procuring the insurance, which Norman–Spencer Agency breached by failing to point out obvious signs that the ultimate provider of the insurance was dishonest.


Appellant Western Consolidated Premium Properties, Inc. (WCPP), a California corporation, is a risk purchasing group through which the owners or managers of commercial property can purchase insurance. Appellant M.G. Skinner and Associates Insurance Agency, Inc. (MGSA), also a California corporation, is an insurance broker that acts as the program administrator for WCPP. Michael Skinner is the sole shareholder of both WCPP and MGSA. WCPP and its affiliated broker MGSA represent more than 600 commercial properties, including office buildings, shopping centers, and residential complexes. The total insured value of these properties is nearly $3.5 billion.

In late 2011, MGSA sought renewal coverage for the WCPP properties.  NCAIG had previous insurance-placement experience with Michael A. Ward and his company JRSO, LLC. By November 1, 2011, Littlejohn and Morash intended to place the WCPP coverage with JRSO. Except that Ward and JRSO did not provide insurance. As it turns out, Ward had created a fictitious insurance policy for WCPP that was not actually backed by a legitimate insurer.

Ward was eventually convicted of wire fraud, sentenced to 10 years in prison, and ordered to pay more than $9 million in restitution to various victims of his fraud, including WCPP.

To fit Norman–Spencer in, the court was required to backtrack and add some details.

Ward, Littlejohn, and Norman–Spencer’s president, Brian Norman, met on November 11, 2011, to discuss Norman–Spencer’s potential retention as the JRSO program administrator. Following that meeting, Norman drafted a document titled “Memorandum of Understanding” that purported to outline the agreement between Ward and Norman. Among the terms of this agreement was that Norman–Spencer would issue a backlog of approximately 64 already-bound policies in exchange for $25,000, and that going forward, Norman–Spencer would underwrite and issue policies for the JRSO program. The memorandum of understanding was never signed, but Norman–Spencer was paid the $25,000 and began issuing the backlogged policies. The 64 backlogged policies included Myan Management’s coverage, but not WCPP’s.

Norman pushed to be involved in more business with Ward. But whatever the terms of Ward and Norman–Spencer’s November 11, 2011, agreement, Ward did not allow Norman–Spencer to be involved in the WCPP placement. In November 2011, Norman discovered an order of conservation issued against Ward and JRSO by the Circuit Court of Cook County that Norman thought could cause concern about Ward’s ability to bind coverage.

None of the proposals or any pricing information came through Norman–Spencer. MC Risk and NCAIG each received a commission from the premium; Norman–Spencer did not.

After Ward’s fraud was discovered, the Myan Management coverage was reincorporated into the WCPP placement. MGSA and WCPP ultimately procured new insurance that cost more than $2 million more than the original, fraudulent insurance.

The district court granted summary judgment in favor of Norman–Spencer concluding that because MGSA was not the “insured” on the Myan Management policy and did not make any payment toward that policy, Norman–Spencer could not have wrongly retained any MGSA funds.


Under Illinois law, an insurance broker has a duty to exercise ordinary care and skill in renewing, procuring, binding, or placing coverage requested by the insured or proposed insured. This duty was an aspect of Illinois common law of negligence even before the any relevant statute was enacted.

There are three principles applicable to the duty of insurance brokers that are significant here. First, if the broker is authorized to engage sub-brokers, then the duty extends down the line to the sub-brokers who are engaged to procure insurance. Second, the duty can be breached if a broker fails to disclose information about the insurer that would be material to the insured’s decision to place the insurance with that insurer.  And third, the duty arises once the insured—or prospective insured—requests specific insurance coverage.

WCPP contends that Norman–Spencer was negligent in failing to inform WCPP about the red flags Norman–Spencer discovered while investigating Ward and JRSO. WCPP argues that Norman–Spencer had a duty to WCPP because NCAIG directly requested that Norman–Spencer participate as a sub-agent. This last point is a factual contention that must be supported by evidence.

On appeal, WCPP contends that three pieces of evidence supported this contention. But none of this evidence creates a genuine dispute of material fact about Norman–Spencer’s involvement. The Memorandum of Understanding document as written indicated only Ward’s desire to have Norman–Spencer involved in the WCPP placement. The undisputed facts show that Ward made it clear that Norman–Spencer was not to be involved with the WCPP placement because Ward did not want to cut Norman–Spencer in on the commissions.

The district court was correct: there is no evidence that any broker in the procurement chain ever requested that Norman–Spencer serve as a sub-broker to procure insurance for WCPP. As a result Norman Spencer had no duty to them or the insured.

The evidence shows that Norman–Spencer wanted to get in on the WCPP deal, but no one asked it to procure insurance for WCPP, and it made no affirmative undertaking to do so. Under Illinois law, and the facts of this case, Norman–Spencer had no duty to WCPP, and the district court properly entered summary judgment in favor of Norman–Spencer on WCPP’s negligence claim.

The court concluded that Norman–Spencer could not be liable under a breach of fiduciary duty argument because it did not receive any money from the WCPP placement or participate in that placement. WCPP does not present any evidence showing that Norman–Spencer retained or misappropriated any WCPP funds. Rather, it is undisputed that Norman–Spencer did not receive a commission for the WCPP placement.

MGSA also brought a negligence claim against Norman–Spencer regarding the Myan Management policy. Norman–Spencer was involved in the Myan Management policy; it was one of the 64 backlogged policies that Norman–Spencer issued as part of its administration agreement with Ward. But the policy was bound before Norman–Spencer got involved, and Norman–Spencer received a flat fee for performing certain administrative tasks on all the backlogged policies and nothing else.

Even if Norman–Spencer had a duty to the “insured” MGSA could not sustain a claim regarding the Myan Management policy because MGSA was not the insured on that policy.

MGSA also brought a breach of fiduciary duty claim against Norman–Spencer for wrongfully retaining money it received for issuing the Myan Management policy. Norman–Spencer did not misappropriate MGSA’s funds. Because Myan Management was the insured on that policy, Myan Management’s funds paid for the premium, not MGSA’s—MGSA merely forwarded the premium payment using Myan Management’s funds.


Victims of fraud refuse to admit that they were victims because of their own negligence. Rather, they sue everyone in sight, in hopes of recovering the millions of dollars they lost when they paid a fraud perpetrator who created multiple fraudulent policies that had no real insurance or reinsurance behind it. The broker who got no money – but probably had insurance – was sued since there was little chance of recovering from the fraud perpetrator who is in jail.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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