Can I sue my insurance broker for negligence? This is a question that often gets asked when a party suffers a catastrophic loss and doesn’t have sufficient insurance coverage to pay for all claims. Many states, including California, have existing law that provides a duty on the part of a broker to, “use reasonable care, diligence, and judgment in procuring the insurance requested by an insured.” Jones v. Grewe (1987) 189 Cal.App.3d 950, 954. The standard in many jurisdictions for recovery in these cases is what the insured would have recovered by way of benefits or payments from the insurance company but for the broker’s negligence.
Many state statutes provide for the measure of damages in this type of case. One example is California Civil Code 3333, which states: “For the breach of an obligation not arising from contract, the measure of damages … is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.” What does this type of standard mean in a claim for professional negligence against an insurance broker? California courts have interpreted this standard to mean that a person or business who is left “high and dry” due to lack of proper coverage caused by the oversight of the agent or broker is entitled to recover not only the amount that would have been due under the policy if it had been obtained” but, also, “any consequential damages resulting from the agent’s breach of duty…”. Greenfield v. Ins. Inc. (1971) 19 Cal.App.3d 803, 812.
For example, in the Greenfield case, the insured purchased “business interruption insurance” and specifically asked for coverage in case in mechanical breakdown causes a shut down of his business. When a machine failed, he was informed that he wasn’t covered for mechanical failure. The insured was awarded damages at a daily rate for every day that his business was shut down for lost revenue in an amount that the insurance would have provided plus all the costs expended to repair the machinery.
What Happens When The Broker “Sides” With The Insurance Company Re: No Coverage?
A broker simply being lax in failing to procure the coverage requested is one thing but, what if the broker actually sides with the insurance company that a particular loss is not covered by the policy when it really should be? This would bring into play in most if not all jurisdictions a potential for additional causes of action against the broker for a breach of a duty of loyalty to their principal and becoming embroiled in a clear conflict of interest with the insured. Many jurisdictions, including California, have held that an insurance broker has a “fiduciary relationship” with the insured. Hydro-Mill Co., Inc. v. Hayward, Tilton and Rolapp Ins. Associates, Inc. (2004) 115 Cal.App.4th 1145, 1158.
In the scenario above, where the broker or agent simply stays neutral but, is accused of failing to act properly in obtaining coverage, in essence, you have a “case within a case” where there are two issues as follows: (1) Whether the loss should be covered; and (2) whether or not the coverage should have been procured. However, if the broker sides with the carrier agreeing that there is no coverage, they should not be allowed to argue issues related to their alleged abandonment of their principal. For example, in ABKCO Music, Inc. v. Harrisongs Musics, Ltd. (S.D.N.Y. 2981) 508 F.Supp. 798, aff’d 722 F.2d 988, the court ruled against a manager who, after gaining “intimate knowledge of the business affairs” of his prior client, attempted to side with the opposing side in a settlement dispute with his client. The court, in essence, imposed a sanction stating that an action for breach of fiduciary duty is a “prophylactic rule intended to remove all incentive to breach.” Id. @ 995-996. In addition, claims for breach of fiduciary duties can also give rise to additional damages meant to punish the conduct (so-called “punitive damages”) in addition to the “compensatory” and “consequential” damages discussed above.
Both state and federal law in many jurisdictions allow for an insured to bring a negligence action against a broker if it can be shown by admissible evidence that the insured requested the broker to obtain certain coverages and it is later found that such insurance was not procured. Furthermore, if the broker decides that they will “side” with the insurance company and argue that there is no coverage, this may give rise to additional claims for breach of fiduciary duties of loyalty to their client. In the second instance, the broker may be precluded from offering certain evidence against his client and may open him or herself up to additional claims that may warrant further damages.
Claims Against Insurance Brokers for Negligence or Breach, Kirk A. Pasich, Adovcate Magazine, August, 2015.