Insurance Broker Liability- Is the U.S. adopting a Canadian Perspective on standard of care?

Presented by: Samantha IpClark Wilson LLP

Fall 2014 USLAW Network Client ConferenceSeptember 18-20, 2014

San Francisco, CA

Background- Who is a broker liable to?

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• To the Insured

– Contract

– Negligence

– Fiduciary Duty

– Fraud

– Misrepresentation

Background- Who is a broker liable to?

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• To the Insurer

– Contract

– Fiduciary Duty (if agents)

– Negligence

• To Third Parties

– Contract (Third party beneficiary)

– Negligence

• To the Insured

– Negligence

Background to Liability- Today’s Focus

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Issue: What standard of care does a broker owe their clients?

• “Standard of care” :

– The degree of care that one person owes another.

– It is what the “reasonable person” would do in similar circumstances.

– The care owed is dependent on the circumstances, both in terms of the situation and the individuals involved.

Background to Liability- Standard of Care

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• “Standard of care” :- Traditionally, courts held a broker to the standard of

care of a “reasonable salesperson”. - Brokers were regarded as “middlemen”, small scale,

and modestly remunerated.

Background to Liability- Standard of Care

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1) To secure the coverage sought by the insured;

2) To inform the client if no coverage can be obtained;

3) To notify the client if the requested coverage has been denied;

4) To secure adequate coverage for the risk;

5) To place coverage with a carrier that the broker knows or ought to have known was solvent; and

6) To notify the insured of the cancellation, expiration and renewal of a policy (depending on the jurisdiction).

Obligations of Brokers: Generally

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4) To secure adequate coverage for the risk;

“A broker’s duty generally does not extend to advising an insured as to the appropriate types of coverage or limits of liability”, Sadler v. The Loomis Company, 776 A.2d 25 (2001) (Maryland Court of Special Appeals)

“Insurance agents or brokers are not personal financial counselors and risk managers, approaching guarantor status” Murphy v. Kuhn, 660 N.Y.S.2d 371 (N.Y. 1997).

Securing Coverage: The General Rule

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• If an insured can demonstrate a “special relationship” between the insured and the broker, a broker may owe a higher standard of care to the insured.

• “Special Relationship” factors:

– The broker holds himself out as a highly skilled insurance expert;

– There is a long standing relationship where the insured has relied on the agent’s expertise; or

– The broker receives compensation beyond the usual premiums for placing the insurance.

Exception: “Special Relationship”

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Voss v. The Netherland Ins. Co., 2013 WL 696528 (New York, Feb. 14, 2014.

• $75,000 in business interruption coverage.

• At the time of placing the policy, the plaintiff asked the broker if the coverage was adequate and if the broker could review the coverage as the Plaintiff’s business changed.

• Later, on the recommendation of the broker, coverage was reduced to $30,000.

• A roof collapse left the plaintiff with damages greater than $30,000.

Is the “Special Relationship” becoming less Special?

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Voss v. The Netherland Ins. Co., 2013 WL 696528 (New York, Feb. 14, 2014.- Decision

• The trial court granted summary judgement in favour of the defendant on the grounds that there was no special relationship; the plaintiff was fully aware of the coverage limits.

• In a 4-3 decision, the Court of Appeal reversed the judgement on the grounds that there was some evidence that the plaintiff relied on the expertise of the broker. This may be enough to create a “special relationship”.

Is the “Special Relationship” becoming less Special?

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Voss v. The Netherland Ins. Co., 2013 WL 696528 (New York, Feb. 14, 2014.- The Dissent

• Traditional interpretation of standard of care.

• Loosening the limits of liability against a broker would turn the broker into “backup insurance”,

• The plaintiff was suing the broker for not following through on their gratuitous promise to review the plaintiff’s business needs.

• A broker is not required to “advise, guide, or direct a client”.

Is the “Special Relationship” becoming less Special?

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Bronfman v. BFL Canada Risk and Insurance Services Inc., 2013 ONSC 5372.

• Plaintiffs were wealthy individuals whose house was broken into.

• Thieves removed a 310 pound safe that held expensive jewellery and $50,000 in cash.

Canadian Perspective

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Bronfman v. BFL Canada Risk and Insurance Services Inc., 2013 ONSC 5372.

• Plaintiff’s discovered that their insurance policy contained several restrictions, including a coverage limit of $10,000 for jewellery and $1,500 for cash.

• Plaintiff’s argued that the broker failed to advise of the coverage limits, and if they had done so, they would have obtained higher limits.

• The broker argued that the plaintiff has an obligation to read their policy, and voice any concerns because they are in the best position to determine their needs.

Canadian Perspective

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Bronfman v. BFL Canada Risk and Insurance Services Inc., 2013 ONSC 5372.- Decision• The broker did not maintain a reasonable standard of

care.

• A reasonable standard of care requires an obligation to explain the extent of coverage and point out any relevant gaps.

• By being aware of the plaintiff’s wealth and the coverage limits, the broker breach the standard of care by not advising greater coverage.

Canadian Perspective

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1) Commercial realities and greater specialization, may erode the general rule that brokers do not have a duty to advise their clients on coverage.

2) As a result, the “Special Relationship” may become the norm.

3) This would align with the Canadian Perspective that usually evaluates brokers against the standard of care of a professional, rather than a salesman.

Takeaways

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THANK YOU

Presented By:Samantha Ip, Clark Wilson LLPssi@cwilson.com | 604.643.3172www.cwilson.com

THANK YOU

These materials are necessarily of a general nature and do not take into consideration any specific matter, client or fact pattern.

Please direct inquiries or comments to:

Samantha Ip, Clark Wilson LLPssi@cwilson.com | 604.643.3172www.cwilson.com