Chapter 2 New Appleman on Insurance Law Library Edition – Content Abstract

Chapter 2 New Appleman on Insurance Law Library Edition – Content Abstract

 
This chapter begins with a description of the key functions insurance intermediaries perform and an explanation of why those functions are of vital importance to lawyers whose practice includes the resolution of insurance coverage disputes. Section 2.01 notes that most insurance today is sold through intermediaries. Businesses as well as individuals depend on insurance agents and brokers to help them guard against many kinds of risk. Individuals often purchase several different types of insurance, whereas businesses and professionals often purchase complex and multi-layered insurance programs. Insurance agents and brokers play important roles in the formation of many insurance contracts. This is significant because the circumstances of the negotiations and formation of an insurance policy often are key factors in the resolution of disputes that arise between insureds and their insurers. Such disputes may concern not only the existence of coverage for a loss incurred, but also the adequacy of the coverage procured. Because a lack of coverage or inadequate coverage can result in financial calamity, insurance agents and brokers often are targets of litigation. In the reinsurance realm, many transactions are accomplished with the aid of reinsurance intermediaries, who provide their clients with varied and valuable advice on all manner of issues relevant to their reinsurance programs. This chapter analyzes many critical legal issues relating to insurance agents and brokers, and reinsurance intermediaries.
 
Section 2.02 of this chapter examines insurance agent and broker licensing, noting: (1) All states require insurance agents and brokers to be licensed, typically by line of insurance; (2) An insurance policy sold by an unlicensed agent or broker remains valid and enforceable, and insureds cannot use alleged licensing violations to circumvent unfavorable policy terms or conditions; and (3) Violations of licensing statutes or regulations will not support negligence per se claims against agents and brokers.
 
Insurance intermediaries are typically classified as either “agents” or “brokers.” Agents generally serve a single insurer. In contrast, brokers generally are independent contractors who have relationships with more than one insurance company. It is important to understand, however, that an intermediary is always an agent for some party to the insurance transaction. The facts of the particular case determine whether an intermediary is the agent of the insurer or the insured. Three criteria drive any determination of an intermediary’s status or role in a particular transaction: (1) the identity of the party who initiated the intermediary relationship; (2) the identity of the party who controls the intermediary’s actions; and (3) the identity of the party whose interests the intermediary represents. General agency law principles apply in the insurance context. An agent may act with actual or apparent authority; if acting without authority, the agent’s acts may be ratified by the principal.
 
Agents and brokers may be classified into more specific categories. A managing general agent is authorized by insurance companies to manage all or part of an insurer’s business in a specific geographic territory, or in connection with a particular type of business. A special agent is an agent whose authority to bind an insurer is expressly limited. A soliciting agent is typically authorized to solicit insurance, to take applications for insurance and forward them to the insurance company or its general agent, to deliver policies once issued by the insurance company, and to collect premiums. A retail broker deals with the insured; the broker to whom the retail broker looks for assistance in placing coverage is the wholesale broker. A broker may have dual agency relationships where the broker serves as an agent for the insured in some capacities and as an agent for the insurer in other capacities. Dual agency is problematic if the intermediary has a conflict of interest. The term “producer” has no special meaning in insurance law and its meaning depends on the context in which it is used. Further detailed analysis about the classification of agents and brokers can be found in Section 2.03 of this Chapter. 
 
Insurance agents and brokers may be liable to insureds for breach of duty. Most agent and broker litigation involves claims against intermediaries by their clients. The most common theories of liability asserted by insureds against agents and brokers include: negligence, negligence per se, breach of fiduciary duty, fraud and misrepresentation, and breach of contract. Section 2.05 sets forth the necessary elements for establishing each such theory of liability. Whether the claim sounds in tort or contract can be extremely important. For instance, most states have different statutes of limitations for contract and tort actions, with the majority of states having longer limitations periods for breach of contract claims. In addition, some states do not recognize certain theories for claims against an agent or broker.  
 
Generally speaking, an intermediary owes an insured two duties: (1) to procure the coverage specifically requested by the insured; and (2) to timely inform the insured if the intermediary cannot procure the coverage specifically requested so as to enable the insured to protect its interests in other ways. These duties are much more limited than many lawyers might expect. Liability typically requires proof of a failure to meet agreed upon, specific terms. Intermediaries generally do not have a duty to continue or maintain coverage in the absence of an agreement to the contrary. Similarly, agents and brokers generally do not have a duty to advise insureds on coverage issues. There are key exceptions, as where the intermediary agrees to advise an insured on coverage issues, assumes a duty to do so, or may be said to have such a duty because of the intermediary’s special relationship with the insured. Section 2.05 discusses the special relationship exception in detail and explains its contours through case examples. Agents and brokers generally have no duty to explain insurance coverage. However, an agent or broker may have a duty to explain policy terms to an insured where the policy at issue is a renewal and the renewal policy differs materially from the original policy. These rules and their exceptions are analyzed in more detail in Section 2.05.
 
Courts increasingly have questioned whether intermediaries have a duty to disclose to their clients the compensation they receive from the insurance companies. This compensation may create incentives for placement of insurance. While there is no general common law duty to volunteer such information, intermediaries who are asked about their compensation by clients must answer honestly as a matter of agency law. There has been a significant amount of litigation recently about brokers receiving contingent commissions. An insurer pays contingent commissions to a broker for reaching agreed upon levels of premium volume and profitability on the broker’s overall book of business with the insurer. Critics of contingent commissions contend that they are unlawful or unethical because: (1) they create a conflict of interest between brokers and their clients, i.e., the insureds; or (2) brokers allegedly breach their duties of honesty and loyalty by not disclosing their contingent commissions arrangements to their clients. The author of this chapter explains his conclusion in Section 2.05 that contingent commissions generally do not engender a conflict of interest and that there is no duty to disclose such commissions unless the client specifically asks the broker for that information.  
 
Sometimes brokers are sued for placing coverage with insurers that become insolvent. Brokers are not financial forensic professionals; they generally have no duty to investigate an insurer’s financial condition before placing coverage with it. Even so, as explained in Section 2.05, brokers may be liable for negligence and misrepresentation if they place coverage with insurers if they know or reasonably should know that those insurers are insolvent or nearly so when coverage is placed. 
 
The extent to which an insured has a duty to examine its policies to ensure that they afford the coverage desired, and to reject them if they do not, is somewhat controversial. The courts are split on whether insureds’ failure to examine their policy constitutes a defense for intermediaries for procuring incorrect or inadequate coverage. Some courts hold it is an absolute defense, especially where the policyholder is sophisticated in business or insurance matters provided the policyholder had a reasonable opportunity to examine the policy before the loss occurred. However, there are several exceptions to this position that are explained in Section 2.05.
     
Intermediaries may be liable to insurers for breach of duty. Insurers may sue intermediaries on a variety of theories for various alleged wrongs. Insurers generally may sue intermediaries in both contract and tort, because intermediaries owe duties to insurers beyond those stated in their agency agreements. Agents have a fiduciary duty to the insurers who   employ them. Thus, an insurer’s right to recover from an intermediary is more difficult to establish if the intermediary is a broker rather than an agent. Section 2.06 examines common contract and tort claims, such as negligence and misrepresentation. Additionally, an insurer may be entitled to indemnity if an agent has exceeded the agent’s authority by binding the insurer to coverage that it would not otherwise have written or if an agent has misrepresented facts to an insured about the coverage. Section 2.06 accordingly examines insurers’ contractual and common law indemnity claims against agents and brokers.
 
Agents and brokers also may be liable to third parties. As in other areas of professional liability law, third-party beneficiary theory is a common theme. Additional insureds are intended third-party beneficiaries of the policies to which they are added. The courts are divided on whether a broker has an actionable duty to an additional insured to procure the intended coverage. The most pressing issue is whether a third party is entitled to sue a tortfeasor’s agent or broker for failing to procure liability insurance for the tortfeasor. Again, the courts are divided. Some courts hold that insurance is in part intended to provide recovery for an innocent injured party. However, most courts decline to hold intermediaries liable to third parties injured by insureds. The author of this chapter in Section 2.07 explains his view that insurance intermediaries generally should owe duties to third parties only for claims involving life insurance beneficiaries, claims involving additional insureds, claims involving employees entitled to workers’ compensation, and property or fire insurance claims made by mortgagees.
 
Expert testimony is sometimes used in insurance agent and broker litigation. Section 2.08 identifies three basic principles from the relatively few cases about use of experts for this litigation: (1) As in some other types of professional liability litigation, expert testimony is not required where jurors can apply their common knowledge or everyday experience to an agent’s or broker’s conduct; (2) Expert testimony is required where a transaction is esoteric or complex, where technical insurance issues are involved, or where the agent’s or broker’s professional skills and experience are implicated in the alleged breach of duty; and (3) Agents and brokers named as defendants may through their own testimony provide the expertise required to assist the jury in gauging the standard of care and evaluating its alleged breach.
 
Intermediaries are also used for reinsurance. The role of a reinsurance intermediary is much more complicated and sophisticated than that of an ordinary insurance broker. Section 2.09 discusses the importance of agency principles in reinsurance transactions, reinsurance intermediary liability for failing to procure coverage, and intermediaries’ potential liability in the case of reinsurer insolvency. Among other services, intermediaries streamline the purchasing process as a ceding insurer deals only with the intermediary. Intermediaries may provide a broad array of services to insureds, including assistance in claims handling, accounting services, underwriting, catastrophe and financial modeling, actuarial analysis, and collecting and transmitting funds between the ceding company and its reinsurers. Thus, a reinsurance intermediary is typically the ceding insurer’s agent for most, but not all purposes.
 
Courts generally apply basic agency principles to assess the reinsurance intermediaries’ duties in reinsurance transactions. In Section 2.09 the author agrees with this approach and disagrees with those commentators who suggest replacing agency principles with a liability regime grounded in fair dealing principles reflected in reinsurance doctrines or contract provisions such as utmost good faith, “follow the fortunes,” “errors and omissions” clauses and “honorable undertaking” clauses. The author further argues that, in the absence of unusual circumstances, the reinsurance intermediary owes a duty of utmost good faith to its client and not to both parties to the transaction. Depending on the facts, an intermediary who fails to place coverage may be liable for negligence, fraudulent or negligent misrepresentation, breach of contract, or breach of fiduciary duty. Moreover, in contrast to the general rules governing insurance brokers, in many cases the reinsurance intermediary may be liable for failure to advise cedent clients about reinsurance issues or to explain them. However, there generally is no liability for reinsurer insolvency after reinsurance coverage has been placed.