Court: Pennsylvania agents have no duty to inspect flood risks

Insurance agents and insurers in Pennsylvania were breathing a sigh of relief following a court ruling that says agents do not have a duty to inspect all properties before binding or renewing flood insurance coverage.

Had the recent Superior Court of Pennsylvania decision in the case of Wisniski v. Brown & Brown Insurance Co. gone the other way and found agents had such a legal duty to inspect all risks, industry players say it would have been so burdensome it could have “crippled not only the insurance business but all the industries that depend on insurance.”

“If insurance agents had not prevailed in the case, insurance could not have been issued without an agent looking at the property, a situation that would have caused a bottleneck for consumers trying to buy real estate,” added the Insurance Agents & Brokers of Pennsylvania, which filed a friend-of-the-court brief in the case with the help of Utica Mutual Insurance and Property Casualty Insurers Association of America.

The agents’ group said the court’s reasoning in the case “establishes a very favorable precedent” for Pennsylvania agents.

Insurers agreed. “We agree with the decision of the Superior of Court of Pennsylvania in that imposing such a duty on insurance brokers would be onerous” said Robert J. Hurns, counsel for the Property Casualty Insurers Association of America, which also filed an amicus brief in the case.

On Sept. 7, 1999, plaintiff Saturn Surplus’s business was flooded. Saturn’s complaint alleged that in 1994 it purchased a commercial policy from the Brown Agency, which was placed with EMC Insurance Companies. When Saturn employees informed the Brown Agency of the loss, they were informed there was no coverage for flood damage. Saturn filed suit, alleging the defendants breached their duty by failing to investigate their coverage needs, inspect the property, inform them that flood insurance was not included in the policy and recommend they purchase flood insurance. On April 18, 2003, the trial court granted the Brown Agency’s motion for summary judgment.

On appeal, the appellate court quashed EMC’s appeal and heard Saturn’s appeal on the merits. On March 2, 2005, the Pennsylvania Supreme Court vacated the appellate court’s decision and remanded the matter to the appellate court “for reconsideration of whether a duty exists.” On Aug. 15, 2006, the appellate court, after examining precedent set by Althaus v. Cohen, determined that no such duty existed.

In the court opinion, Judge Maureen Lally-Green wrote that while it “very well may be a wise and sound business practice for a broker to inspect premises and recommend insurance based on that inspection,” making such an inspection mandatory would have “onerous” consequences. Lally-Green explained the court’s reasoning:

“First, the time and expense of inspecting every property may very well outweigh the relative value of an inspection, particularly for low-value properties.

“Second, a knowledgeable insured may be able to provide all the information necessary for adequate coverage in an interview, without the need for a personal inspection.

“Third, we stress that we are concerned with extending this duty to brokers, not insurance companies or agents. While brokers may provide a variety of services, they are primarily in the business of acting as an intermediary between insurance companies and clients. Some brokers may not have the expertise to conduct a thorough inspection, and instead may rely on loss control experts at the insurance companies themselves to assess risks.

“Fourth, it is far from clear where the duty to inspect would end. If this court recognized a duty of brokers to inspect business properties, it is difficult to see a principled basis for failing to extend that duty to homes, land, cars, boats, and other insurable items.

“Fifth, imposing a duty to inspect would unreasonably diminish the insured’s own responsibility to ascertain and ask for appropriate coverage.

“Finally, we are persuaded by the position set forth by the Missouri Court of Appeals: [B]y creating such a duty insureds would have the opportunity to seek coverage for a loss after it occurred merely by asserting that they would have bought additional coverage if it had been offered. This turns the entire theory of insurance on its ear as individuals, in theory, take an ‘intellectual gamble’ when purchasing insurance as they weigh the expense of insurance versus the amount of coverage that they purchase. Allowing insureds to seek coverage, post-occurrence, allows them to completely circumvent this risk.”

While absolving the agent from an inspection duty, this particular decision left open questions about the insurer’s responsibility in this case. Saturn Surplus’s action against EMC will presumably continue in the trial court after this appeal involving the Brown Agency is complete.