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Liability Exposures for Insurance Brokers and Agents

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  • 1. Liability Exposures for the InsuranceLiability Exposures for the Insurance Broker/AgentBroker/Agent Presented to the AssociationPresented to the Association of Insurance and Financialof Insurance and Financial AdvisorsAdvisors Nassau Club, Princeton, NJNassau Club, Princeton, NJ December 18, 2008December 18, 2008 Adam M. Smith, Esq.
  • 2. Coughlin Duffy, LLP 2 INTRODUCTIONINTRODUCTION  Adam M. Smith, Esq. is a partner at the law firm of CoughlinAdam M. Smith, Esq. is a partner at the law firm of Coughlin Duffy, LLP, specializing in the representation of the insuranceDuffy, LLP, specializing in the representation of the insurance industry - insurers, reinsurers and their agents - for 14 years in aindustry - insurers, reinsurers and their agents - for 14 years in a wide variety of matters pertaining to liability, property, disability,wide variety of matters pertaining to liability, property, disability, health and life insurance, as well as commercial matters.health and life insurance, as well as commercial matters.  This presentation will provide you with the knowledge andThis presentation will provide you with the knowledge and understanding of your legal duties as a broker/agent and to protectunderstanding of your legal duties as a broker/agent and to protect yourself and your company from potential E&O liabilities.yourself and your company from potential E&O liabilities.
  • 3. Coughlin Duffy, LLP 3 AGENDAAGENDA  Duties an agent owes to an insurerDuties an agent owes to an insurer  Duties an agent owes to aDuties an agent owes to a consumer/clientconsumer/client  Case examplesCase examples  Avoiding liability – risk managementAvoiding liability – risk management  Q&AQ&A
  • 4. Coughlin Duffy, LLP 4 Duties owed to anDuties owed to an insurerinsurer  As a broker:As a broker: – Agent of the insuredAgent of the insured – Insurance Fraud Prevention ActInsurance Fraud Prevention Act: relates: relates to false statements in underwriting orto false statements in underwriting or claims processclaims process  As an agent:As an agent: – Principal/agent relationshipPrincipal/agent relationship
  • 5. Coughlin Duffy, LLP 5 General duties of agentGeneral duties of agent to principalto principal  Duty of care and skillDuty of care and skill  Duty of good conductDuty of good conduct  Duty to keep and render accountsDuty to keep and render accounts  Duty to act only as authorizedDuty to act only as authorized  Duty to obeyDuty to obey  Duty of loyaltyDuty of loyalty  Duty to maintain confidential informationDuty to maintain confidential information  From:From: Restatement of Agency, 2dRestatement of Agency, 2d
  • 6. Coughlin Duffy, LLP 6 Duties toDuties to insureds/clientsinsureds/clients  New Jersey does not distinguishNew Jersey does not distinguish between agents and brokers (exceptbetween agents and brokers (except as to relationship with carrier)as to relationship with carrier)  A broker or agent who undertakes toA broker or agent who undertakes to procure insurance for a client is liableprocure insurance for a client is liable for damage suffered if insurancefor damage suffered if insurance unavailable when called upon due tounavailable when called upon due to producer’s negligenceproducer’s negligence
  • 7. Coughlin Duffy, LLP 7 Relationship betweenRelationship between Insurance Producers andInsurance Producers and their clientstheir clients  Insurance producers are professionalsInsurance producers are professionals engaged in fiduciary relationship withengaged in fiduciary relationship with their clientstheir clients  Definition of professionalDefinition of professional  Definition of fiduciaryDefinition of fiduciary
  • 8. Coughlin Duffy, LLP 8 New Jersey courtsNew Jersey courts definition of dutydefinition of duty  ““One who holds himself out to the public asOne who holds himself out to the public as an insurance broker is required to have thean insurance broker is required to have the degree of skill and knowledge requisite todegree of skill and knowledge requisite to the calling. When engaged by a member ofthe calling. When engaged by a member of the public to obtain insurance, the law holdsthe public to obtain insurance, the law holds him to the exercise of good faith andhim to the exercise of good faith and reasonable skill, care and diligence in thereasonable skill, care and diligence in the execution of the commission . . .execution of the commission . . .
  • 9. Coughlin Duffy, LLP 9 New Jersey courtsNew Jersey courts definition of duty (con’t)definition of duty (con’t)  ““Liability for breach of that duty canLiability for breach of that duty can occur if the broker (1) neglects tooccur if the broker (1) neglects to procure the insurance, (2) if the policyprocure the insurance, (2) if the policy is void, (3) if the policy is materiallyis void, (3) if the policy is materially deficient, or (4) the policy does notdeficient, or (4) the policy does not provide the coverage he undertook toprovide the coverage he undertook to supply.”supply.”
  • 10. Coughlin Duffy, LLP 10 Most Commonly FoundMost Commonly Found Legal Duties ofLegal Duties of Agent/BrokerAgent/Broker  Duty to advise client regarding amountDuty to advise client regarding amount and type of insurance necessaryand type of insurance necessary  Duty to procure and maintainDuty to procure and maintain coveragecoverage  Duty to third partiesDuty to third parties  Duty to ensure solvency of insurer withDuty to ensure solvency of insurer with whom coverage is placedwhom coverage is placed
  • 11. Coughlin Duffy, LLP 11 Case ExamplesCase Examples  Avery v. Arthur E Armitage Agency:Avery v. Arthur E Armitage Agency: – Duty to advise of UM/UIM cover up toDuty to advise of UM/UIM cover up to liability limitliability limit – Absent special circumstances, duty onlyAbsent special circumstances, duty only triggered by client initiating contacttriggered by client initiating contact – Most cases turn on whether client madeMost cases turn on whether client made an inquiryan inquiry
  • 12. Coughlin Duffy, LLP 12 Case ExamplesCase Examples  Carter-Lincoln v. Emar GroupCarter-Lincoln v. Emar Group – Does an insurance broker have a duty toDoes an insurance broker have a duty to select a financially secure insurer? Yes.select a financially secure insurer? Yes. You have a duty to investigate.You have a duty to investigate. – Does an insurance broker owe a duty toDoes an insurance broker owe a duty to third parties? Yes. You owe a duty tothird parties? Yes. You owe a duty to those in the foreseeable “zone of harm” –those in the foreseeable “zone of harm” – loss payees, beneficiaries, claimantsloss payees, beneficiaries, claimants
  • 13. Coughlin Duffy, LLP 13 Case ExamplesCase Examples  DiMarino v. WishkinDiMarino v. Wishkin – Broker has a duty to procure coverageBroker has a duty to procure coverage promised or warn client at once that itpromised or warn client at once that it cannot be obtainedcannot be obtained
  • 14. Coughlin Duffy, LLP 14 Case ExamplesCase Examples  Dancy v. PoppDancy v. Popp – Even where insured signed formEven where insured signed form indicating availability and rejection ofindicating availability and rejection of additional UM cover, this is not conclusiveadditional UM cover, this is not conclusive evidence that the duty to inform has beenevidence that the duty to inform has been discharged.discharged. – Dissent: people must be heldDissent: people must be held accountable for their actions!accountable for their actions!
  • 15. Coughlin Duffy, LLP 15 Avoiding Liability – RiskAvoiding Liability – Risk Management tipsManagement tips  Communication and DocumentationCommunication and Documentation – Communicate clearly and frequently withCommunicate clearly and frequently with clientclient – Document all communicationsDocument all communications  Note to file of oral communicationsNote to file of oral communications  Have a policy for retaining your emailsHave a policy for retaining your emails  Know the terms and conditions of youKnow the terms and conditions of you E&O policyE&O policy
  • 16. Coughlin Duffy, LLP 16 Q&AQ&A