CHAPTER § 5.10 When a Claim Arises: Role of Brokers in Claim Management

• Jurisdiction: United States

§ 5.10 When a Claim Arises: Role of Brokers in Claim Management

In some instances, a company may engage the services of an insurance broker to purchase insurance. In those instances, litigation can arise over what duties and obligations a broker owes to both the insured and the insurer.

[1] Brokers' Provision of Notice

A broker may be liable to an insured where he fails to notify an insurer of a claim against the insured.²⁴⁶ This is because such a failure could give rise to the assertion of a late-notice defense by the insurer and the refusal to provide benefits otherwise due under the policy.²⁴⁷

Additionally, a broker may be liable if he fails to inform his client in a timely manner that an insurer has rejected an application for insurance. The basis for liability derives from the insured's induced reliance on the broker's representation to the insured's detriment. Once the insured fills out the application and pays the first premium, the insurer may be bound under a temporary contract until the insured is notified of a rejection.²⁴⁸

[2] Brokers as Agents

Courts are often asked to determine whether an insurance broker is the agent of the insurer or insured.²⁴⁹ This is because if the broker is regarded as the insured's agent, he owes a greater duty to that insured. Generally speaking, courts usually conclude that independent brokers are agents for the insured whose coverage they place.²⁵⁰ Under certain circumstances, however, courts may deem brokers to be agents for the insurer. For example, a broker who collects or holds insurance premiums for the insurer in a fiduciary capacity may be the insurer's agent.²⁵¹ Likewise, a broker who is affiliated with an insurer or has authority to represent the insurer may be the insurer's agent.²⁵²

In some circumstances, the broker may serve as a dual agent, representing both the insurer and the insured.²⁵³ As stated by the Missouri Court of Appeals:

We are aware that the general rule in regard to agents is that the same person cannot act as agent for both the company and insured. However, this rule is subject to some exceptions. The same person may act for the different principals in separate matters in which their interests are not conflicting and his duties not inconsistent. It is possible for an insurance company agent to become during the progress of the negotiations the agent of the insured; and in that event he may acquire rights, have powers, and incur obligations respecting both insurer and insured. The same person may act in both capacities; he may be the agent for insured, although as to the procuring of the insurance he also represents the company. Whether in a particular case or particular matter one acts as agent for the company or for insured depends upon the intention of the parties, which is to be determined from the facts and circumstances of the case.²⁵⁴

Additionally, the broker's role as an agent can change in the course of a transaction such that he represents the insured for some stages and the insurer for other stages. Of course, if the broker has entered into an agency agreement with the insured, that contract may govern the parties' relationship (and the broker's obligations).

[3] Broker Liability

It is settled law that an insurance broker has a common-law duty to negotiate and procure requested coverage within a reasonable time after the insured's request or timely inform the client of an inability to do so.²⁵⁵ The New York Court of Appeals explained when an insurance broker may face possible liability:

[When the broker] undertakes to procure a policy of insurance for another, the law imposes upon him the duty to perform the

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