Broker Can Be Negligent For Failing To Acquire Insurance Requested
Insurance brokers transact insurance with but not on behalf of insurers. They act as the agent of the insured to acquire the insurance required by their client. By so doing they are obligated to seek and obtain the insurance required if available.
In LG Mayfield LLC v. United States Liability Insurance Group, Slip Copy, Court of Appeals of Ohio, 2017 -Ohio- 1203, 2017 WL 1196113 (3/31/2017) the Court of Appeals of Ohio was faced with two important questions raised when an insurance broker failed to obtain the insurance its client desired and the insureds could have avoided the problem by reading the policy.
In February 2014, Eric Eisner (“Mr. Eisner”) the sole owner and operator of Eisner, assisted Mayfield in applying for and procuring general liability and property damage insurance from USLI. The policy was obtained to cover Mayfield’s start-up restaurant, Oak & Embers Tavern (“Oak & Embers”). Mr. Eisner met with Gretchen Garofoli (“Mrs. Garofoli”), Oak & Embers principal, to review the application and coverages. After the policy was issued, Mr. Eisner provided a copy to Mrs. Garofoli; neither she nor her husband and agent Marc Garofoli (“Mr. Garofoli”) read the policy after it was issued. On June 27, 2014, a fire damaged the restaurant. After the fire, Mr. Eisner falsely advised the Garofolis that the policy included business interruption coverage. The policy, however, did not include such coverage.
In March 2015, Mayfield sued various parties, including appellees IHT, Eisner, and USLI for allegedly failing to obtain business interruption coverage for Oak & Embers, as part of the insurance contract it purchased from USLI.
The excerpts of Mr. Garofoli’s deposition, attached to the dispositive motion, reveal that he “believed” he advised Mr. Eisner that he and his wife wanted business interruption coverage and that Mr. Eisner advised him that they “needed” the coverage.
A court considering a summary judgment need not afford the non-moving party every inference to be drawn from the evidence, but only every reasonable inference. Viewing the evidence most strongly in Mayfield’s favor, the reasonable inference can be drawn that the Garofolis desired business interruption insurance and/or Mr. Eisner, despite his averments to the contrary, advised them it was necessary. If Mr. Eisner advised Mr. Garofoli that the restaurant “needed” business interruption coverage, and Mr. Garofoli indicated he wanted such coverage, but Mr. Eisner failed to procure the same, there is a genuine issue of material fact as to whether he was negligent in procuring the insurance policy that did not include business interruption coverage. The court of appeal concluded, therefore, that there is a genuine issue of material fact for litigation relating to Mayfield’s negligence claim against Eisner.
Mayfield asserts a genuine issue of material fact remains regarding USLI’s liability for breach of an oral contract because Mr. Eisner, acting as its agent, orally promised to obtain business interruption coverage.
In responding to USLI’s motion for summary judgment, Mayfield submitted only the affidavit of Christopher McCauley, the manager of Oak & Embers. McCauley averred that, after the fire, Mr. Eisner assured Mr. and Mrs. Garofoli that the policy contained business interruption coverage. Mr. McCauley also averred he heard a voice message left by Mr. Eisner shortly after the fire. In the message, Mr. Eisner stated he reviewed the subject policy and represented it included business interruption coverage. Obviously, Mr. Eisner’s representations were misleading because the policy did not include business interruption coverage. To formulate a sustainable theory of liability against USLI, Mayfield was required to advance some evidentiary quality material, whether by affidavit or deposition, that would allow for the reasonable inference that Oak & Embers, through Mr. and/or Mrs. Garofoli, requested Mr. Eisner to obtain business interruption coverage. Without this preliminary nexus, it is inconsequential whether Mr. Eisner was acting as USLI’s agent.
The record failed to establish Mr. Eisner was acting as USLI’s agent during his discussions with the Garofolis.
An insurance broker (or independent insurance agent) becomes an agent for a particular insurer when: (1) the broker notifies its customer, the potential insured, that he or she intends to place the customer’s insurance coverage with a particular insurer; or (2) the broker accepts an application for insurance on behalf of the customer.
The record on appeal reflects that after discussing Oak & Embers’ insurance needs, Mr. Eisner contacted three separate insurance companies to obtain an insurance quote for the restaurant. One of the companies was USLI. According to Mr. Eisner, USLI was the only company willing to offer a quote. After receiving the quote, Mr. Eisner contacted Mr. Garofoli and, eventually, Mrs. Garofoli signed the policy.
When Mr. Eisner contacted USLI, he was acting as a “broker.” An “insurance broker” is one who acts as middleman between the insured and the insurer, and who solicits insurance from the public under no employment from any special company and who, upon securing an order, places it with a company selected by the insured, or, in the absence of such a selection, with a company selected by himself; whereas an ‘insurance agent’ is one who represents an insurer under an employment by it.
At the time he sent the restaurant’s information to the companies, which did not include a business interruption coverage option, i.e., the essence of Mayfield’s negligent procurement claim, he was performing activities particular to his role as an insurance broker, not a soliciting agent. The alleged negligent act occurred when he was acting “as middleman between the insured and the insurer,” during the pre-application stage, and not as a representative of USLI.
Finally, Mayfield contends that because, after the fire, Mr. Eisner represented that the policy included business interruption coverage and the Garofoli’s believed such coverage was included, there was a mutual mistake justifying reformation of the contract.
Unambiguous insurance policies are enforced as written. Where, however, clear and convincing evidence demonstrates a mutual mistake in the policy, a court may employ the equitable tool of reformation to deviate from the terms of the written agreement and correct the mistake.
Nevertheless, a court should not reform an insurance policy where the party seeking reformation has failed to fulfill his duty to read the policy. An agent or broker is not liable when a customer’s loss is due to the customer’s own act or omission.
The record demonstrates that Mr. and Mrs. Garofoli did not read the policy. Had they done so, they would have known business interruption coverage was omitted. In this respect, the Garofolis were not vigilant in verifying their alleged assumptions about the coverage.
Alternatively, it is uncontroverted that USLI provided insurance coverage that was requested and did not deprive Mayfield of any benefits owed under the policy.
Although there was a strenuous dissent, the Ohio Court got everything right. A broker who promises one coverage, obtains at his request a policy that does not contain the business interruption coverage promised, can be held responsible for his negligence. Also, an insured who fails to read the policy when it is delivered cannot seek the equitable remedy of reformation because he was not vigilant in protecting his own rights. He can sue the broker but no one else.
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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