by Jesse Shumway
Most insurance policies, whether personal or commercial, are sold through insurance intermediaries—“brokers” or “agents.” In addition to their role in the purchase of insurance, these intermediaries can have varying levels of involvement in insureds’ risk management programs. When a dispute arises out of insurance placed by an intermediary, the intermediary’s actions often come under scrutiny. For example, Law360 recently reported a mounting number of lawsuits in New Jersey blaming insurance brokers for coverage gaps that resulted in denial of claims associated with Superstorm Sandy.
A common procedural and strategic question at the outset of coverage litigation involving potential claims against an intermediary is whether the insurer and the intermediary can or should be joined in the same lawsuit. Setting aside forum considerations, these cases often involve fundamental contradictions between the insured’s claim against the insurer (i.e., the policy provides coverage) and the insured’s claim against the intermediary (i.e., the intermediary failed to procure the right coverage or otherwise voided coverage). Inconsistent claims can be pleaded in the alternative, but they cannot always be litigated together effectively. Similarly, the broker caught in this crossfire can be aligned with, or adverse to, either the insured or the insurer.
Determining whether an insurer and intermediary can or should be joined in the same litigation may also require navigating tension between statutes of limitations, principles of ripeness and damages. In a coverage-denial situation, the intermediary’s potential liability is frequently contingent, at least as a practical matter, on a judicial determination that the insured’s loss was not covered by the policy at issue. But the claim against the intermediary may be barred by limitations if the insured waits until the conclusion of coverage litigation to sue the intermediary. Options here include entering a tolling agreement, arguing an equitable tolling theory, or filing suit and then seeking abatement as to the intermediary claims.
On the merits, a threshold question in litigation involving an insurance intermediary is: who did the intermediary represent? The answer is important in determining the existence and scope of legal duties owed by the intermediary. Texas law no longer categorizes intermediaries into distinct classes like “local recording agent,” with their corresponding statutory agency rules. While it remains easy to identify certain intermediaries as the representative of one party or the other for most purposes—an Allstate or State Farm agent, for example—some insurance intermediaries, especially commercial insurance brokers, have more nuanced relationships with insureds and insurers.
A number of Texas cases recognize that these relationships may involve “dual agency,” in which the broker represents the insurer for some purposes and the insured for others. The Texas Insurance Code adds another layer of complexity by identifying certain acts that render an intermediary the agent of the insurer for certain purposes. Commercial brokers also often have contracts with insurers and insureds that may create and define agency relationships. The conduct of the parties will also come into play in a fact-intensive analysis of who represented whom for what purpose.
If an intermediary is found to owe the insured a duty, what is the scope of that duty? Texas generally does not recognize a fiduciary relationship between an insurance broker and its client. When a broker undertakes to procure insurance for a client, the broker’s duties include using reasonable diligence to place the requested insurance, and informing the client promptly if unable to do so. Texas courts have generally rejected claims against intermediaries for failing to read or explain insurance policies to insureds after the policies were issued. Broader duties, however, can be established by a contract or course of dealing.
An important question that remains unsettled in Texas is whether insurance intermediaries qualify as “professionals,” like lawyers and accountants, for purposes of various litigation doctrines. Insurance intermediaries are licensed by the state and, especially at large commercial brokerage firms, may be highly trained and specialized in complex technical matters. Whether they are considered professionals may determine the types of claims that can properly be asserted against them under the claim-fracturing doctrine, as well as the nature of the proof required to establish the standard of care. For now, litigants on both sides of the question would be well-advised to develop facts demonstrating professional or non-professional characteristics as appropriate to the circumstances, and in any event, engaging experts to address the standard of care.
Jesse Shumway is an attorney at Carrington Coleman. He can be reached at firstname.lastname@example.org.