Broker Not Liable for Late Notice that Cost Illinois Client $1.34M
An Illinois construction company that waited six years to inform its excess insurer that it had been sued cannot expect coverage from that carrier, and it can’t go after the insurance brokerage that sold it the policy either, a federal appellate court ruled.
“Waiting five to seven years before telling an insurance company that its policy may be implicated in a suit is too long,” the U.S. Seventh Circuit Court of Appeals said. The court affirmed a ruling by the U.S. District Court in Chicago in a case titled Landmark American Insurance Co. v. Deerfield Construction.
Deerfield is an Illinois construction company with 55 employees that specializes in telecommunications projects. It hired a consultant, Laurus Strategies, to ensure that it complied with the insurance coverage requirements in its contracts with construction clients.
Laurus referred the company to Arthur J. Gallagher Risk Management Services, which helped Deerfield purchase a $1 million commercial auto policy from American States Insurance Co. and an excess policy from Landmark with up to $10 million in coverage.
A coverage dispute arose after a January 2008 accident involving Deerfield employee Sean Graff and truck driver Ryan Keeping. American States refused Keeping’s demand to settle the case for $1.25 million and counter-offered $75,000.
For years, neither Deerfield, Laurus, Arthur J. Gallagher nor American States notified Landmark that it might be called upon to pay damages while those negotiations were underway. The appellate court made light of American States’ “gambler spirit” by relying entirely on its own evaluation of Keeping’s lawsuit. The carrier thought that Keeping’s claim was without merit. Arthur J. Gallagher did not inform Landmark about the suit until December 2014, six weeks before the case went to trial.
Landmark promptly sent a reservation of rights letter to Deerfield. After a jury returned a $2.37 million verdict in Keeping’s favor, Landmark denied coverage because Deerfield had not reported the accident promptly as required by the policy.
The court later reduced the award to $2.34 million, but that still left Deerfield owing $1.34 million.
Deerfield filed suit against Landmark seeking a court order requiring it to pay for the remaining damages owed Keeping. It also filed suit against Arthur J. Gallagher alleging negligence and a malpractice claim against the lawyer and law firm that American States had assigned to defend the claim, David Olmstead of the Law Offices of Meachum, Starck, Boyle & Trafman.
District Court Judge Ruben Castillo dismissed the malpractice suit against the law firm and the complaint against Arthur J. Gallagher. The judge found that the brokerage had no duty under Illinois law to notify Landmark of the lawsuit.
Castillo declined to rule on the malpractice claim against the Meachum law firm. Since both Deerfield and the law firm are both Illinois corporations, that complaint should be decided in state court, the judge ruled. Castillo noted that the statute of repose in Deerfield’s complaint against the Meachum firm won’t lapse until 2020 at the earliest.
Deerfield appealed to the Seventh Circuit seeking reversal of the rulings in favor of Landmark and Arthur Gallagher. But the appellate court found that the district court made the right call.
According to the opinion written by Chief Judge Diane P. Wood, insurance brokers have a very limited fiduciary duty to their clients under Illinois law: “The broker is liable only if negligent or when dealing with the “wrongful retention or misappropriation” of certain funds,” the opinion states.
The circuit court also rejected Deerfield’s argument that Landmark cannot assert a late notice defense because Arthur J. Gallagher was its agent. Under Illinois law, a brokerage is not an insurer’s agent if it performs traditional brokerage activities, such as sending bills and collecting payments, the opinion says.
Deerfield had argued that if Arthur J. Gallagher was not Landmarks’ agent then it must be its agent, and if that’s so, the brokerage is liable because if failed to give proper notice to Landmark.
“Deerfield has identified no Illinois cases establishing that insurance brokers have a duty to deliver notice of claims on behalf of an insured, and so its negligence claim fails,” the court said.