Broker May Not Rely on Representation of Underwriter About Coverage Provided
It is axiomatic that an insurance broker is responsible to obtain the coverage required by the insured. As an insurance professional the broker is required to read the policy provided to determine it provides the coverages required and not rely upon representations of others.
In Loomcraft Textile & Supply Company v. Schwartz Brothers Insurance Agency, Inc., & Schwartz Brothers Insurance Agency, Inc., Third-Party Plaintiff-Appellant v. Fireman’s Fund Insurance Company, Appellate Court of Illinois, 2017 IL App (2d) 160557-U, No. 2-16-0557 (April 3, 2017) a broker tried to pin the responsibility to determine appropriate coverages to the insurance underwriter and relied on the underwriter’s representations that were not totally correct.
Schwartz Brothers Insurance Agency, Inc. (Schwartz), appealed the trial court’s grant of summary judgment in favor of Fireman’s Fund Insurance Company (Fireman’s Fund. The trial court ruled that Schwartz needed expert testimony to be able to prevail on its allegations.
Schwartz filed a third-party complaint against Fireman’s Fund after Schwartz was sued by Loomcraft Textile & Supply Company (Loomcraft). It sued Schwartz on a single count of broker negligence. Loomcraft alleged Schwartz obtained a replacement policy from Fireman’s Fund and assured Loomcraft that it matched the coverage in the previous Liberty Mutual Insurance policy, including a selling price endorsement. On December 16, 2013, Loomcraft suffered a loss to its fabric inventory and goods with a retail value of $608,611.85. It submitted proof of the loss to Fireman’s Fund. Fireman’s Fund asserted that according to the policy, the loss for finished goods was valued at replacement cost rather than selling price. In its complaint, Loomcraft claimed that Schwartz breached its duty to Loomcraft by failing to obtain the agreed-upon coverage under the Fireman’s Fund policy, and that as a direct and proximate result of Schwartz’s breach, Loomcraft sustained damages of $529,980.58.
In its answer to the amended complaint, Schwartz admitted that it agreed to procure an insurance policy for Loomcraft that included “Selling Price Replacement Cost” (selling price coverage) and that it had informed Loomcraft that the Fireman’s Fund policy included such coverage. In essence it admitted liability and negligence in failing to obtain the policy with the coverage promised.
Schwartz sued Fireman’s Fund alleging contribution and reformation. Fireman’s Fund, in an earlier agreement, promised to indemnify Schwartz if it was held responsible for errors made by Fireman’s Fund.
To obtain replacement insurance for Loomcraft Schwartz submitted an application for insurance to Fireman’s Fund to insure Loomcraft. Thomas Brennan, a Fireman’s Fund insurance underwriter a Schwartz employee advised Brennan that Loomcraft required selling price coverage for all of its goods. Brennan told Jacobs that such coverage would be included with Fireman’s Fund’s property coverage and that a separate endorsement was not necessary. Contrary to Schwartz’s specific request and instruction, Fireman’s Fund underwrote and issued an insurance policy to Loomcraft that did not contain the selling price coverage requested, thereby exposing Schwartz to liability to Loomcraft.
While the dispute with Fireman’s Fund was pending Loomcraft obtained a judgment against Schwartz for $529,980.58.
Fireman’s Fund moved for summary judgment against Schwartz. Fireman’s Fund argued that the agency agreement’s provisions were inapplicable because the trial court had found that Schwartz’s negligence as an insurance broker caused Loomcraft’s damages; Fireman’s Fund argued that Schwartz was not acting as Fireman’s Fund’s agent when it engaged in the negligent conduct. Fireman’s Fund moved for summary judgment against Schwartz and argued that the indemnity provision limited its obligation to its own acts and conduct, as opposed to negligence attributable to Schwartz.
Schwartz failed to state a claim for negligent misrepresentation. A negligent misrepresentation claim must include facts showing that the defendant owed the plaintiff a duty to communicate accurate information. The Underwriter, in fact, correctly stated that there was a selling cost provision but did not point out that it only applied to goods manufactured by Loomcraft who, Schwartz should have known, manufactured nothing.
For a claim of negligent misrepresentation, the defendant has to be in the business of supplying information to guide others, in contrast to information that is supplied as ancillary to or in connection with the sale of merchandise or other matter. Fireman’s Fund is in the business of selling insurance rather than in the business of supplying information, and any information that it does supply is in connection with the sale of insurance. Therefore, Schwartz failed to state a claim of negligent misrepresentation.
Schwartz argues that even if its allegations raise a claim of professional negligence rather than negligent misrepresentation, Illinois law still does not require it to retain an expert to prove its case. Schwartz recognizes that, in general, a plaintiff in a professional negligence case has the burden to establish the standard of care through expert witness testimony. This is because jurors, who are not skilled in the profession, are not otherwise equipped to judge the professional’s conduct.
The elements of a professional negligence action are: (1) the existence of a professional relationship; (2) a breach of duty arising from that relationship; (3) causation; and (4) damages. Expert testimony is generally necessary to prove the standard of care in a professional negligence case, except where the conduct is so grossly negligent or the procedure is so common that the jury can readily appraise it without expert testimony.
This distinction highlights that there is no defined “duty of care” or “standard of care” regarding an insurer’s representations about coverage to the broker/producer, and whether the insurer can expect that a broker/producer would rely solely on such representations without examining the policy itself. This is especially true considering that it is the broker who has the duty to the insured to obtain the agreed-upon insurance coverage, and that the policy here did contain a type of selling price coverage, albeit one not ultimately applicable to Loomcraft’s products.
Expert testimony is generally necessary to prove the standard of care in a professional negligence case accordingly an expert would be necessary to testify regarding the standard of care applicable between an insurer and a broker/producer, and the trial court correctly granted summary judgment in Fireman’s Fund’s favor based on Schwartz’s lack of an expert witness.
Insurance contracts are the most complex commercial contracts that are read by no one. In this case the broker did not read the policy nor did the insured. As a result, both relied on erroneous statements of coverage by the underwriter and the broker. The responsibility was that of the broker to ascertain that the coverages required were obtained. In so doing the broker failed.
This article and all of the blog posts on this site summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
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 the first annual Claims Magazine/ACE Legend Award.
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