This article has been updated from an article that originally appeared in the June 2014 Professional Liability Committee newsletter.
AS the variety of professional services performed by insurance agents and brokers has expanded over time, so too has their liability exposure. (1) Agents and brokers are subject to a broad assortment of liability claims asserted by their own clients who claim that they were supposed to be insured and by insurers. (2) For instance, it is well settled that an agent or broker who agrees to procure insurance coverage for a client is obligated to exercise reasonable diligence and care in procuring such coverage. But courts have increasingly held agents and brokers liable for claims of third-party non-clients or at least recognized the possibility for such liability in certain circumstances. (3) This article will refer to insurance agents and brokers as insurance intermediaries or simply as intermediaries, unless otherwise specified.
For each claim brought by a third-party non-client seeking to impose liability against an insurance intermediary, the defense lawyer must identify several key facts in order to properly analyze exposure. These facts include:
Who is bringing the claim and in what capacity?
What is the claim?
What relationship, if any, did the intermediary have with the third party?
What was the foreseeability of the third party's injury?
What law applies to the claim?
This article provides lawyers with an overview of insurance intermediary liability to third-party non-clients and considerations in light of recent case law throughout the United States.
Who Is Bringing the Claim and in What Capacity?
Cognizable client claims against insurance intermediaries for failing to procure insurance or placing deficient insurance are nothing new, (5) but the intermediary's potential exposure does not end with the client's malpractice claim. Third-party non-clients claims against insurance intermediaries appear to be increasing. Some third parties assert breach-of-contract claims against intermediaries by arguing that they are third-party beneficiaries of both the insurance policy and the intermediary's agreement with the policyholder to procure coverage. These purported third-party beneficiaries include (1) those allegedly injured by a wrongful act of the intermediary's client, such as a car-accident victim; (2) those who are or claim to be additional insureds under a liability policy issued to the intermediary's client or those holding certificates of insurance describing policies issued to the intermediary's client; (3) those seeking benefits under life, worker's compensation, or group policies; and (4) those seeking benefits under property policies.
In addition to asserting status as a third-party beneficiary, non-clients often assert claims sounding in negligence by arguing that the intermediary directly owed them duties, but breached them. Such claims hinge on whether the court concludes that an intermediary owed a direct duty to the third party. Courts have analyzed whether an intermediary owes a duty to a third party by focusing on the foreseeability of the injury or whether there is privity between the third party and intermediary.
The most successful strategy for third parties to follow in asserting claims against insurance intermediaries is to obtain an assignment of the insured-client's claim against the intermediary. The overwhelming majority of courts allow third-party non-clients to assert such claims.
To defend against third-party non-client claims, defense lawyers must understand who is asserting a claim (e.g., a tort-victim, an additional insured); in what capacity the party is asserting the claim (e.g., as a third-party beneficiary, an assignee); the nature of the claim (e.g., breach of contract, negligence, negligent misrepresentation); the relationship between the intermediary and the third party, if any; and the type and foreseeability of the injury.
Most jurisdictions do not permit third-party non-clients to assert claims against insurance intermediaries. (6) But some jurisdictions that permit third parties to assert claims against insurance intermediaries for breach of contract or negligence do so for the reason that the third party is an intended third-party beneficiary of the agreement or implied agreement between the insurance intermediary and insured to procure insurance of a particular type or amount for the benefit of the third party.
i. Those Harmed by A Wrongful Act of the Insured
Perhaps the most frequent claims asserted by third-party non-clients against insurance intermediaries are those brought by parties who have been harmed by some wrongful act of an insured. These claims arise in situations involving the alleged failure to procure liability insurance, often automobile insurance. Some jurisdictions have adopted an extremely liberal resolution to the issue by reasoning that because a liability insurance policy is for the benefit of the public as a source of money to pay for a third party's injuries, the intermediary has direct exposure to the injured claimant. The Massachusetts Supreme Judicial Court in Flattery v. Gregory held that an injured third party driver was an intended beneficiary of an insurance intermediary contract to obtain optional auto insurance coverage that the client and the intermediary intended would pay any judgments against the insured. (7) Because the injured third-party driver was an intended beneficiary of the contract, the court concluded that the injured third party could proceed against the intermediary for breach of contract for failing to fulfill the promise of obtaining the coverage the insured sought. (8) The Michigan Court of Appeals has adopted similar reasoning and concluded that unspecified claimants are intended beneficiaries of an agreement between an insured or applicant and an insurance intermediary to procure auto insurance in order to benefit those who might be injured through the insured's negligence. (9)
This expansive view of third-party beneficiary status is not limited to auto insurance. In Werrmann v. Aratusa, the New Jersey Superior Court Appellate Division held that an injured restaurant patron could bring a direct claim against the restaurant's insurance intermediary that failed to renew a general liability policy. (10) The court concluded that "[b]ecause of the importance of liability insurance, whether it be mandatory or optional, members of the general public are third-party beneficiaries of an agreement between a business proprietor and its insurance broker to procure insurance.... [I]t is intended to provide a source of recovery for an innocent injured party." (11)
The New Jersey appellate court's decision is twenty years old, and there has not been a movement in other jurisdictions to adopt this expansive reasoning. Insureds and insurers, and even claimants, agree that liability insurance is not for the benefit of claimants but the protection of insureds. But there could be exceptions where the intermediary failed to follow instructions and procure liability insurance for activities where liability insurance is mandatory. Courts in various jurisdictions may be inclined to conclude that the intermediary's failure to procure insurance where insurance is mandatory and later to cause injury will result in the intermediary's liability to the injured person. A limited set of activities for which liability insurance is mandatory would include: operating an automobile (in almost every state), operating a commercial vehicle, practicing dentistry (in Minnesota and some other states), practicing medicine (in at least seven states--Colorado, Connecticut, Kansas, Massachusetts, New Jersey, Rhode Island, and Wisconsin), practicing law (in Oregon and perhaps other states), selling alcoholic drinks, producing special events (e.g., parades, fireworks), conducting ultra-hazardous activities (e.g., demolishing buildings, removing waste, detonating explosives, hauling hazardous materials), crop dusting, employing workers, and entering into construction contracts.
Third-party non-clients argue that the insurance intermediary is liable to them because they are or were supposed to be additional insureds. Some courts consider evidence of additional insured status or intent to make a party an additional insured sufficient to give that party third-party beneficiary status to assert a claim against an insurance intermediary. (12) But most courts hold that an additional insured does not qualify as a third-party beneficiary. To be considered a third-party beneficiary, a party must be more than an additional insured; there must be some evidence that the insured-client and the insurance intermediary intended to confer a benefit on the additional insured. (13)
Life Insurance, Worker's Compensation, and Group Policies
Third-party non-client claimants include beneficiaries of life insurance, worker's compensation, and group policies. Some jurisdictions have permitted such claims, while others have not. In State ex rel. William Ranni Associates, Inc. v. Hartenbach, an employer purchased a group life insurance policy, which insured an employee and officer of the company. (14) The employee died, but the general agent for the insurer delayed in transmitting the policy proceeds for over a year. The agent's duties included transmitting policy proceeds to the beneficiaries. (15) The beneficiaries under the life insurance policy sued the insurance agent based on various grounds, including that the agent failed to timely notify them of the existence of the policy; they argued, in part, that they were owed duties because they were third-party beneficiaries under the insurance policy. (16) The court rejected the argument that they were third-party beneficiaries, because the duties the plaintiffs sought to impose stemmed from the agent's contract with...