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RISKVUE ARCHIVE | FEATURE STORIES
Broker-Insured Relations In Arranging Coverage: Avoiding Communication Breakdown
By Timothy Owen
When an insured accuses its broker of misrepresenting coverage, protracted and expensive litigation is the likely result. Often the dispute boils down to a misunderstanding between broker and insured that could have been avoided with proper communication. This article examines the relationship between broker and insured on coverage issues and provides some key strategies for making sure coverage is understood by all.
A good relationship between risk manager and insurance broker requires a mutual understanding of what coverages and services are required by the insured and what the broker is capable of delivering. Unfortunately the lack of this understanding causes most disputes and lawsuits between insureds and brokers.
For example, consider the following: Coverage is denied for property damage to a vacant building, where:
(1) The insured expressed to the broker a concern about vacant building coverage before the loss occurred.
(2) The insured had an insurance policy containing the standard vacancy exclusion, but didn’t read it.
(3) The insured later claims the broker failed to adequately point out the exclusion.
Some brokers might respond defensively and claim that they satisfied their legal duty to provide coverage by obtaining the standard available coverage, and that the insured was “aware” and put on notice of the exclusion upon receipt of the policy. Such a reaction strains the broker-insured relationship, which could kill the potential to resolve a coverage dispute. A more constructive approach might be for broker and insured to align against the insurer’s decision to deny coverage.
There is case law suggesting that the insured’s receipt of a policy puts the insured on notice of coverage and bars the insured from later claiming ignorance of exclusions.1 Most courts, however, often bend over backwards to avoid such a pro-broker position, particularly if the broker has misrepresented the coverage.2 The courts commonly cite confusing policy language as a reason for not strictly applying pro-broker case law. In showdowns over whether an insured was actually aware of coverage limitations, courts consider the superior knowledge brokers should have regarding insurance and their duty to insureds to accurately describe the coverage obtained. A broker’s silence in the face of the insured’s concern over vacancy coverage would likely override the insured’s duty to read the policy provisions, resulting in liability against the broker.
By understanding the legal rights and obligations of brokers and their clients, the insured can ensure that expectations about the coverage provided through the broker are reasonable. The law gives an insured the “right” to the coverage the broker agreed to obtain. If the broker breaches this agreement, the broker may be liable for the uninsured loss. However, the broker is only obligated to obtain coverage that is reasonably available in the market, except when the broker has assumed the responsibility to obtain additional coverage.3 The law also protects the broker by obligating the insured to read the policy and to be bound by its terms, provided they are clear and conspicuous.4
One of the most common complaints of insureds is that the broker failed to obtain adequate coverage for the insured’s risks. Such allegations are typically precipitated by the insurer’s denial of a claim on the ground that the claim is not covered by the terms of the policy. In litigation, whether the broker obtained “appropriate and adequate” coverage is usually determined by a jury with non-insurance members who may have a jaded view toward the industry.
Despite continued use of terms like “all risk” in insurance policies, risk managers should understand that brokers cannot obtain true “all risk” coverage because such a product does not exist. Insureds often effectively argue that use of terms like all risk and blanket coverage is evidence of misleading policy language, but a jury is less likely to find that a risk manager was misled by the policy. Insureds sophisticated in business and insurance matters often are presumed to understand the limitations of policy terms and conditions and will be held to a greater level of understanding than an ordinary insured.
The broker’s duties to an insured when obtaining coverage also have limitations. In California, for example, a broker is required only to use “reasonable care”5 in obtaining coverage. This has been interpreted to mean that the broker is not obligated to secure coverage or limits sufficient for all possible risks.6 As a general rule, the insured must advise the broker of the desired limits. However, by providing advice and recommendations regarding limits, the broker incurs a duty to use reasonable care in giving this advice.7
The broker’s duty of reasonable care, as it relates to the type of coverage to be obtained, as opposed to coverage limits, generally means that the broker is obligated to procure only what is available in the market. For example, in the absence of an express or implied agreement by the broker to obtain true “all risk” coverage or some other unique form of insurance, the broker does not impliedly agree to provide coverage for every conceivable risk.
Whether the broker satisfies the legal standard of care frequently hinges on the extent to which the insured can demonstrate its reasonable expectations regarding coverage. Evidence of the broker’s knowledge of an insured’s operations and risks together with evidence of the communications between the insured and the broker are critical to establishing reasonable expectations.
Another source of litigation between insureds and brokers often arises when insurance companies fail or become insolvent. Insureds will typically argue that the broker knew or should have known of the insurer’s financial instability. For practical reasons, including the inability to obtain reliable, up-to-the-minute financial information on insurers, courts do not impose on brokers a duty to guarantee an insurer’s solvency.8 In most states, if the broker places coverage with an insurer admitted to conduct business in the state, the broker has satisfied the standard of care,9 unless the broker had reason to believe the insurer was unstable and failed to advise the insured.
A broker’ s duty of reasonable care, however, is frequently expanded when the broker agrees to assume additional duties. Using the earlier example regarding vacancy coverage, if the broker represents that coverage for all risks is available or specifically states that vacant building coverage will be obtained, the broker then assumes the obligation to get that specific coverage. Failure to obtain such coverage without advising the insured is thus a breach of the broker’s duty.
When a dispute over the placement of coverage develops into a lawsuit, the positions of the insured and the broker are predictably well-defined. The insured will complain that it was led to believe that a specific type of loss was covered. The broker may argue that the insured was aware of the policy’s limitations or that the standard coverage was obtained.
The strongest evidence either side has to support their position is documentation prepared before the loss that establishes what coverage was requested by the insured or provided by the broker. Documentation can include formal coverage proposals prepared by the broker, minutes of a meeting or handwritten notes that memorialize a telephone call or conversation between the insured and the broker. Particularly important are any documents or notes that describe the material terms of the coverage, such as limits, covered properties and operations, excluded risks, changes in coverage and requests by the insured for special coverages.
Although sometimes unavoidable, litigation is expensive, time-consuming and often frustrating for both sides. By the time documents are analyzed, depositions are conducted, experts are consulted and trial is completed, a six-figure legal tab is not unusual. Because attorneys’ fees in many cases cannot be recovered by the insured, the cost of trying the case may exceed what the insured stands to recover.
Clearly a better alternative to litigation is knowing what your coverage is before a loss occurs. The following are simple suggestions to help avoid misunderstandings of coverage:
(1) Make sure your broker has a working knowledge of your risks and those you want insured: the nature of your operations, all property locations and especially any information not readily apparent to the broker, such as planned expansion into a different business, an anticipated commercial property vacancy or the acquisition of additional vehicles and equipment. Having this information in writing may be useful if a dispute with the broker develops.
(2) Ask your broker for a written proposal of the coverage and services to be provided. Any changes in existing coverage, limits, deductibles or persons/property should be clearly stated. While this is standard practice among commercial brokers, it is too often overlooked during last-minute renewals or rush placements.
(3) Require the broker to personally deliver all policies and review the specific coverage terms with you. Many brokers complain, though, that even when insureds are willing to sit down and review insurance contracts, they often do so only half-heartedly. Undoubtedly, reviewing a lengthy boiler and machinery policy is not always an eagerly awaited event, but nevertheless it is an exercise with obvious value to both sides.
(4) Document all communications with your broker, particularly requests for non-standard coverages and changes in existing coverages. The form of your documentation is not as important as putting the substance of your communication on paper. Remember, a document may be your strongest evidence in the event of a dispute with your broker.
Both parties have the responsibility to ensure that appropriate coverage is obtained. Taking a proactive role is the most effective way to ensure appropriate coverage and avoid disputes. Clearly communicate what risks you want covered, make sure the broker has understood you, review your policies and document all your communications. Leaving too much of your insurance matters to the broker is a sure way to find yourself on the wrong end of a denial-of-claim letter. 
Notes
1 Hackethal v. National Casualtv Co. (1987) 189 Cal.App.3d 1102; and Hadland v. NN Investors Life lns. Co., Inc. (1994).
2 Greenfield v. Insurance, Inc. (1971) 19 Cal.App.3d 803; and Eddy v. Sharp (1988) 199 Cal.App.3d 858.
3 Jones v. Grewe (1987) 189 Cal.App.3d 950.
4 Hadland, supra.
5 Jones v. Grewe, supra.
6 Id.
7 Free v. Republic Ins. Co. (1992) 8 Cal.App.4th 1726.
8 Wilson v. All Service Corp. (1979) 91 Cal.App.3d 793.
9 Id.
ABOUT THE AUTHOR
Timothy Owen is a principal of Owen & Babikian in Los Angeles, California. As an attorney admitted in California and New York, he litigates insurance broker malpractice lawsuits and frequently lectures on liability issues.
riskVue | The webzine for risk management professionals
August 2000
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