When is ‘Enough’ Insurance Enough’ A Practical Approach for Brokers

There is a way to give your client some idea of the potential liability risk that he or she is taking on.

A firestorm destroys a subdivision. A neighbor’s child accidentally drowns in an uncovered swimming pool. A family’s breadwinner dies with inadequate life insurance benefits, and the teenage daughter must drop out of a private college, no longer able to pay the tuition.

People view their insurance policies from different ends of the telescope at different times. When choosing a policy, the telescope’s lens is on the premium, which looms large in the choice of carriers. That’s why TV ads boast about “how much you can save” in premiums, not “how much you may lose” if the event insured against occurs. After a major loss, the telescope turns around, and, with benefit of hindsight, the insured may ask, “Why didn’t my broker recommend that I buy broader coverage or higher limits?”

When policyholders sue their insurance brokers after a large loss, the courts do not automatically hold the brokers responsible. Legally, brokers and agents do not have an unlimited duty to advise clients about the amount of insurance they should buy. For example, courts have held that there is no duty to advise about the correct limits of coverage to buy simply because of the following circumstances:

The client and the broker have worked together for many years; The client has never expressly asked for an opinion regarding what limits are appropriate; The broker has not expressly given an opinion about the appropriate limits of coverage to buy; The broker has simply expressed that he or she is an “expert” in procuring insurance, even in the particular kind of insurance involved in the loss.

In contrast, other courts have found that a duty to advise regarding the breath of necessary insurance coverage or the appropriate limits of coverage to buy exists where the broker assumes a “special duty” to the client. That sounds reasonable, as a legal theory, but in practice the words “special duty,” like “beauty,” are in the eye of the beholder. With benefit of post-loss hindsight, courts have held that an insurance agent may be liable for failing to accurately tell the client how much coverage to buy. In one case, an insurance agent was found to be negligent for failing to tell his client that a 6-wheel commercial truck would not be covered under his existing passenger car policy. The client testified (naturally) that he had asked the broker whether the truck would be covered, and the broker replied that it would. The court held that the usual rule—that the policyholder has an obligation to read the insurance policy—did not govern the dispute; rather, the broker had a special duty to reasonably inform the client of his rights and obligations under the policy, having responded to the question.

Many of the published appellate cases on the scope of a broker’s duties come about because the broker’s defense counsel has asked the trial court to dismiss the case, and, ironically, has won! Questions of whether a legal duty does or doesn’t exist are for the judge to decide, not the jury. The problem with getting the trial court to dismiss the case is that the Court of Appeal gets to take a fresh look, and does not have to defer to the trial court’s ruling. (This is called de novo review.) If the Court of Appeal finds a material, disputed factual issue in its review of the record, then the case will be sent back for a jury to decide the factual issue. Juries decide the facts, judges decide the law. A policyholder’s protestation under penalty of perjury that “the broker told me I was fully covered” is generally enough to force twelve good citizens in the jury box to decide whether that’s what really happened.

In a first-party context, courts have held that an insurance agent must use reasonable care in responding to specific inquiries from the client. For example, when a homeowner asks whether his policy will be sufficient to rebuild his home if it is destroyed, and the agent (according to the policyholder) assures the client that the policy limits and scope of coverage are adequate, the agent can be liable for the damages resulting from the destruction of the client’s home in a raging fire, where the policy limits are in fact not adequate to completely replace the home.

Today in California and other Western States, the issue of “replacement cost coverage” looms large. There have been catastrophic wildfires in Southern California, Arizona, New Mexico and elsewhere. The same situation arose after the catastrophic Oakland Hills fire. Hundreds of lawsuits were filed against insurance companies, as well as agents and brokers, alleging that misrepresentations had been made that homeowners’ policies would provide coverage for the complete costs of rebuilding the insured homes. However, in the Oakland Hills instance, few of these cases proceeded to trial, because the California Insurance Department under then-Commissioner John Garamendi (who, coincidentally, is again the California Insurance Commissioner) used its regulatory muscle to force many homeowners’ insurers to pay the full costs of home replacement, regardless of their policy language.

The expense of replacing a premises can be calculated in costs per square foot. A much more difficult calculation is arises under third-party liability insurance policies. How much liability coverage should the property or business owner carry?

In one case, a judge who now sits as a member of the California Supreme Court ruled that an insurance agent had no obligation to advise a homeowner of the appropriate amount of liability coverage to purchase, absent a specific request for such an opinion. The homeowner was sued after a young child fell into a swimming pool at the home and was very seriously injured. Before the accident, how is anyone to know the cost of future medical care for an injured party? Will it be a few thousand dollars for a compound fracture, or several million dollars for a quadriplegic injury? Although the court found no duty to advise the homeowner about the proper liability limits, it stated in a footnote that a different result would apply if the agent had acknowledged a special duty by holding himself out to be more than an “ordinary agent.”

That phrase, “ordinary agent,” has proved to be troublesome ever since 1987, when the swimming pool case was decided. Few agents or brokers (or lawyers, for that matter) advertise themselves as “ordinary.” Some ads refer to brokers as “your insurance specialists” or get more specific about expertise in coverage for a particular type of risk. That’s understandable. Who among us would choose to have brain surgery performed by our primary care physician?

Some insurance professionals go a step further in promoting their services, affirmatively saying that they will perform “risk surveys at no additional cost.” That’s a nice catch phrase, but it takes on a different tone after a major loss for which the insurance coverage is not adequate.

In fact, there is a way to give your client some idea of the potential liability risk that he or she is taking on. Juries’ verdicts are publicly available, and can be searched in most areas online through such common law firm software as Lexis and Westlaw, and with somewhat more effort through Internet search engines, such as Google. What’s the potential liability risk of an uncovered swimming pool? You can give real-life information about the verdicts that juries in your client’s county have awarded over the past five years.

A different circumstance that can lead to a lawsuit arises when an insurance broker inaccurately describes the coverage available to the policyholder. In one instance, the broker sent a cover letter forwarding the client’s insurance policy, and the letter described coverage on an insured building as “all risk,” except for perils on the “exclusion list.” So far so good. The letter went on to list only a few of the exclusions, and did not refer at all to losses caused by water backing up through sewers or drains. The letter also omitted any statement that it did not contain a complete list of the exclusions. Although the trial court granted the broker a dismissal, the Court of Appeal reversed, finding that there was a factual issue for the jury to decide whether the broker had negligently misrepresented the terms of the policy.

Many of us reading that case would be surprised by the outcome. After all, the client had the entire policy; wasn’t he expected to read it? Older cases held that a policyholder cannot “remain intentionally ignorant of the terms of his or her policy.” However, the more modern trend appears to be to look at the specific facts of each case, and allow the jury to determine whether the broker made a misrepresentation. It is very easy, with benefit of hindsight, for a client to contend that a broker made an “oral promise” that coverage limits would be adequate, or that there would be coverage for a particular type of loss. The broker’s sworn testimony to the contrary will not be enough to prevent the case from going to the jury to decide who is telling the truth.

So, what is a broker to do? The answer lies, in large part, in properly documenting his or her file. Clearly, a broker cannot write a “CYA” letter to a client every time they have a conversation. An alternative is to offer the client various policy limits at different premium rates, thus creating a written record that the policyholder, not the broker or agent, has made the decision about how much coverage to buy. For example, life insurance quotations routinely include charts showing different levels of coverage that the applicant can purchase at different amounts of premiums. The same can be true for liability limits in CGL and similar policies. Another method is to offer the client the opportunity to purchase a personal umbrella policy for an additional premium. A letter making that suggestion will help establish that the insurance professional understood that all of us can face catastrophic risks from time to time, and that the “standard” coverages and policy limits are not always sufficient. In the end, an insurance agent or broker cannot make the file bulletproof, but can make it “bullet resistant.”

A common misunderstanding among professionals of all types is that the professional’s best friend is the least likely person to file suit. Unfortunately, in today’s society, it is the client for whom you have done your best work, whom you have known the longest, and with whom you have the closest personal relationship, who is likely to be your adversary after a major loss. All of the extra efforts you have devoted to that person will be used by opposing counsel to establish that you owed a “special duty” to him or her. We therefore frequently counsel clients to use the same procedures and practices in documenting their files for a close friend as they would for a complete stranger. If anything, it is the close friend who will have more evidence available to try to establish a “special duty.”

For copies of the California appellate opinions referred to in this article, e-mail CastoriaL@WEMED.com.

Louis Castoria is a partner in the San Francisco office of Wilson, Elser, Moskowitz, Edelman & Dicker LLP. He is chairman of the Northern California Chapter of the Professional Liability Underwriting Society, and is a member of the Society’s Education Committee.