Agent Liability Limited by Indiana Court, Expanded in New York

Policyholders rely on their insurance agents to acquire insurance coverage. Generally an agent has a duty to obtain the requested coverage with reasonable care and diligence or inform the client of his inability to do so, but the agent has no continuing duty to advise the insured on the adequacy of coverage. In turn, most states say policyholders have a duty to read the policy, although failure to do so may not always bar a claim. When insureds are unable to recover from an insurance company, they will often blame their agent and seek recovery from them. Courts have been careful to balance this relationship, trying to ensure that consumers with limited insurance knowledge are protected while also shielding agents from undue liability when things go awry. Various rules and exceptions across jurisdictions complicate questions of liability.

The highest courts in Indiana and New York recently addressed the relationship between agents and policyholders, with the Indiana court issuing a decision favorable to agents, and the New York court potentially expanding liability for brokers.

In Groce v. Am. Family Mut. Ins. Co., 2014 Ind. LEXIS 262, the Indiana Supreme Court issued a decision sympathetic to insurance agents, finding that an insured’s claim against its agent was barred by a two-year statute of limitations which began to run at the time the policy went into force—when the inadequacy of coverage was readily ascertainable by the policyholders from the face of the policy.

In the case, a fire destroyed a house and the homeowners’ policy covered most of the damage but the policy’s coverage limits capped the amount of recovery below the full replacement cost. The policyholders alleged that they had asked their agent to obtain insurance covering 100 percent of the replacement cost of the home only to find that the policy’s coverage limits were inadequate to cover the full cost to rebuild and repair the home. They argued that the agent failed to procure the requested coverage and that the communication between them should supersede the contractual limitation.

The trial court, appellate court, and supreme court all dismissed the policyholders’ arguments. According to Indiana law, any claim of negligent procurement of insurance must be brought within two years of when the claim accrues. Affirming precedent, the Supreme Court held that the policyholders’ cause of action accrued and the statute of limitations began to run not when the fire damaged the house, but rather when the policyholders first knew or “in the exercise of ordinary diligence, could have discovered that they were underinsured.”

The court of appeals had noted that the agent had in fact procured replacement cost coverage as promised, albeit subject to a policy limit, and that any inadequacy in coverage was “readily ascertainable from the policy itself.” The Supreme Court agreed that by exercising ordinary diligence and simply reading the policy, the policyholders “could have timely discovered that the company’s replacement cost liability was capped at the dwelling loss coverage limit.” The inadequacy of coverage was apparent from the time the policy was first issued and the policyholders’ lack of diligence could not preserve the expired claim.

As the court noted in a previous case on the issue, if the limitations period was not triggered until actual damage to the house, “then the insureds become free riders, paying lower premiums, perhaps for many years, and then retaining the ability to claim the benefit of higher coverage if a loss is incurred.” Filip v. Block, 879 N.E.2d 1076 (Ind. 2008). While insurance law is often slanted in favor of the insured, the rules defining the relationship ultimately control and can only afford so much flexibility for consumers while maintaining an appropriate balance in the agent-insured relationship.

The case not only offers an important reminder to policyholders to read their policy but also affirms an important protection for agents by holding that any action against the agent accrues when the insured could reasonably discover the deficiency. Although dealing specifically with the limitations period for a claim of negligent procurement, the court’s holding emphasizes that policyholders bear some responsibility for approaching their policy with ordinary diligence and that agents should not always be liable as back-up insurers when coverage does not operate as desired, especially when the limitations are clearly articulated and readily ascertainable.

While the Indiana court issued a decision favorable for agents, New York’s highest court made a move that could potentially expand broker liability. In Voss v. The Netherlands Ins. Co., 2014 NY Slip Op 1259, the New York Court of Appeals analyzed when a special relationship arises between a broker and insured expanding the duty of the broker beyond its ordinary obligations.

In the case, a policyholder, with the advice of her broker, first acquired business interruption insurance for $75,000. After a series of losses and some business changes, the policyholder received a proposal for renewal reducing the limits of insurance to $30,000. She initially questioned the broker about the reduction but did not follow up. After the reduced policy took effect, another incident resulted in additional loss to the business. Eventually, the policyholder sued the broker claiming the broker had negligently secured inadequate levels of insurance for the losses and that a special relationship existed between her and the broker heightening the broker’s duties.

The trial court and appellate division both dismissed the complaint, but the state’s highest court reversed, finding that a special relationship could have existed and the case was prematurely dismissed. The court explained that a broker generally must only obtain the requested coverage or inform the client of the inability to do so; and the broker has no duty to advise or direct a client to obtain additional coverage unless a “special relationship” exists. The court noted that special relationships are the exception and are fact sensitive, but identified three situations that may give rise to a special relationship: when the agent receives compensation apart from premiums; when there was some interaction regarding a coverage question with the insured relying on the expertise of the agent; or when a course of dealing over time puts an objectively reasonable agent on notice that their advice is being sought and relied upon.

Here the court suggested that the broker’s initial analysis of data and recommendation of coverage, the extended conversations regarding the coverage, and indications that the broker would continue to review coverage as the business grew, could substantiate a special relationship.

Three dissenting justices disagreed and thought that no special relationship existed. Acknowledging that a special relationship may have initially existed, the dissent argued that the special relationship ceased to exist as the business changed and moved locations, the relationship broke down and the policyholder knew that coverage should be adjusted and sought advice on doing so. While the broker initially indicated that it would continue to provide advice as the business evolved, the dissent did not think the broker’s “expression of willingness to do so in the future could create a continuing duty” to advise the insured. The dissent acknowledged that the broker “should not get a high mark for client service” but concluded that the special relationship ceased to exist and the broker had merely failed to do what agents are not required to do: advise, guide or direct a client.

Encouraging a narrow view of the “special relationship” and its accompanying duties, the dissent cautioned, “If lawsuits by clients against their agents are welcomed by the courts, the consequence may be to make the agent into a kind of back-up insurer, a result neither sensible nor fair.” The dissent worried that the majority’s decision may have taken an “unjustifiable step in that direction.”

The decision emphasizes that the “special relationship” is fact specific and generally a question for the jury. While not explicitly changing the law, the court suggested that the conduct of the broker here was sufficient to establish a special relationship. The decision may have raised more questions than it answered by highlighting the factual sensitivity of these cases and the court’s willingness to entertain broker-liability cases more broadly.

As courts continue to consider the rules governing liability, agents and brokers should tend carefully to their relationships with insureds, understanding the nature and extent of their obligations which may change according to the course of dealing and the specific circumstances of the interactions.