Liability of professionals to non-clients: an expanding and tangling web.

• Author: Fagerberg, Richard E.

Suits by third-party non-clients are increasing and many courts are finding liability where no duty is apparent

IMAGINE you're the attorney for an insurance agent, who calls to tell you that she has been sued. She explains that months ago a new customer had asked her to procure personal automobile insurance. She obtained all of the necessary information and had the customer sign the completed application. But instead of immediately mailing the application to the carrier, she took a phone call and forget to submit the application when it became buried underneath other papers on her desk.

The agent tells you she did not think about the application again until receiving a call from the customer, who had been involved in an auto accident. The customer ran a stop sign and struck another vehicle. When the customer asked the agent what needed to be done to file a claim for property damage, the agent reviewed the customer's file and realized that no coverage was in place because the application was never submitted.

The agent tells you that she informed the customer of the mistake and that the customer's property damage claim was resolved through the agent's errors and omissions carrier. She explains that the suit against her has been filed not by the agent's customer but by the other driver involved in the accident.

The other driver alleges that he has sustained damages because of the agent's negligence in failing to submit the application and obtain the coverage requested by the customer. The other driver alternatively alleges that the agent breached a contractual obligation to obtain the coverage requested by the customer and claims he is entitled to recover as a third-party beneficiary of the contract between the agent and customer.

Your immediate response is to tell the agent that the other driver's suit likely has no merit. You explain that the other driver cannot prevail on the third-party beneficiary claim because the agent had no contractual relation with the other driver, a third party who was not an agency customer. Likewise, you explain that the agent owed no duty in tort to anyone other than her customer.

GOOD ADVICE?

In the majority of jurisdictions, your advice would be correct. Many jurisdictions refuse to recognize that the agent has any liability to the third party non-client. In a growing number of jurisdictions, however, the third-party non-client might be able to recover directly from the agent. Liberal courts that view liability insurance as being intended to provide a fund to compensate injured members of the public are increasingly holding insurance agents liable to the third-party non-client. Other courts, while taking a less liberal view of liability insurance, will hold the agent liable to a third-party non-client when the agency customer clearly intended to benefit the non-client.

In addition, courts are increasingly permitting third-party non-clients to maintain suits against a variety of other professionals, including real estate agents and property appraisers. As the law concerning the liability of these types of professionals to third-party non-clients continues to evolve, it seems highly possible that other professionals, such as life and health insurance agents and independent insurance adjusters, also might ultimately be found to owe similar duties.

For counsel representing these professionals, recognizing how to plead, argue and defend the suit appropriately will be vital. Unfortunately, there are no absolutes, and the decision about how the case should be postured will depend on a variety of factors, including the nature of the claim against the professional, the existence of any relationship between the professional and the third party, the extent that the third party relied on the professional, the likelihood that the professional could have foreseen the possible injury suffered by the third party, and the causal link between the professional's conduct and the alleged injuries sustained by the third-party non-client.

What is the current state of the law concerning these claims? What are some suggestions and recommendations for counsel involved in defending professionals in these liability suits? This article relates only to insurance, real estate and property appraisal professionals. A significant body of case law and critical commentary exists with respect to the third-party liability of other professionals.

LIABILITY TO NON-CLIENTS

At the outset, it should be noted that traditionally most jurisdictions have not recognized a claim by a third-party non-client against a professional under either a breach of contract or negligence theory. Outside the context of fraud and misrepresentation claims, there is only limited case law concerning a real estate professional's liability to a third-party non-client. However, there is some amount of case law concerning the liability of property and ,casualty insurance agents to third parties, and a surprising number of the cases reported in the last 10 years have recognized a cause of action by the third party.

In view of this increasing expansion of liability for property and casualty insurance professionals, as well as the recognized liability of real estate professionals in some circumstances, it seems highly likely that creative plaintiffs' lawyers will argue for expanded liability of life and health insurance agents, property appraisers and other related professionals.

This article is not a comprehensive examination of all of the reported case law concerning the liability of insurance, real estate or property appraisal professionals to third parties, but rather focuses on key cases and reported opinions that offer unique issues or methods of analysis. An examination of the theories in these cases will provide insight and suggestions for representing these types of professionals.

1. Insurance Agents

   The typical third-party claim against a property and casualty insurance agent is of either negligence or breach of contract. Under a contract theory, the plaintiff will claim to be an intended third-party beneficiary entitled to recover for the agent's breach of the contractual agreement with the agent's customer. Under a negligence theory, the plaintiff generally will allege damage from the agent's negligence in failing to procure the requested insurance or in misrepresenting to the customer the coverage provided.

   1. Contract theories

      Analysis of cases dealing with the third-party non-client as an intended beneficiary discloses generally two types of claims. In the first, the third party's claim arises when the agency customer is uninsured because of an error by the agent, and the third party has sustained damage because of some wrongful act by the agency customer. In the second type, the third party will claim some type of loss resulting from the agent's alleged failure to obtain coverage for the third party as an additional insured or loss payee.

      1. Wrongful Act of Customer

         In this of case, some courts will reject the claim because the third party cannot establish either that there was a contractual agreement by the agent to procure insurance or that the third party was an "intended" beneficiary of any such contractual agreement.

         For example, in Oathout v. Johnson,(1) a New York court ruled that a third party non-client could not maintain an action against the agent for failure to procure liability insurance on behalf of the agency customer. The court reasoned that even if a contract to procure insurance existed and even if it was foreseeable that the plaintiff might be damaged by the agent's failure to obtain insurance. The plaintiff was only a member of the general public, not an intended beneficiary of the agent's promise to procure insurance, but rather a member of an indeterminate class.

         Similarly, in Rihon v. Wilson,(2) a Florida appellate court recognized that absent some allegation that the agent entered into a written or implied contract with the agency customer to procure insurance, a third-party non-client could not prevail on a direct action against the agent, Without the existence of some contractual agreement between agent and customer, the plaintiff could not be a "legally recognized beneficiary."

         However, a surprising number of recent cases have recognized a third-party beneficiary claim by a non-client against the agent. California, New Jersey, Florida, Massachusetts, North Carolina, Wisconsin and Illinois all recognize that in some circumstances the non-client qualifies as an intended beneficiary of the agent's contractual agreement to obtain insurance for the agency customer.(3) Primarily, these courts tend to view insurance either as a "fund" designed to make the public whole, or they reason that the customer purchases a liability policy to protect third parties who may be injured by the customer. Using these underlying assumptions, these courts generally have little trouble in concluding that the agency customer intended to benefit the third party in some way so that the third party should be entitled to recover from the agent.

         Illustrative of this type of reasoning is the New Jersey Superior Court's opinion in Werrmann v. Aratusa,(4) in which the plaintiff fell from a stool in Aratusa's restaurant. The plaintiff sued Aratusa, and when she learned that Aratusa's liability policy had lapsed prior to her accident, she amended her complaint to include a claim against Hill, Aratusa's insurance broker. Specifically, the plaintiff alleged that she was a third-party beneficiary of Hill's agreement with Aratusa to procure insurance.

         In considering whether the plaintiff could maintain a direct claim against the agent, the Werrmann court looked to another New Jersey case, Eschel v. Eastern Freight Ways Inc.,(5) in which the court recognized a direct cause of action by a member of the general public against a tortfeasor's insurance agent for the agent's failure to obtain minimum, mandatory liability limits for the...