Insurance Broker Negligence
Can you sue an insurance broker for negligence? The short answer is yes. In California, if you can show that your insurance broker's negligent, incompetent or dishonest actions caused damages to you or your business, you may have a claim against them.
Of course, the long answer requires more reading, but it's worth it.How is an Insurance Broker Different from an Insurance Agent?
Both insurance agents and brokers provide insurance policies and are often lumped into a single category called "insurance producers." While any insurance agent can sell you coverage, an insurance broker differs fundamentally. An insurance agent works for an insurance company, and it is the agent's job to provide insurance to suit your personal and/or business needs, like auto, home, workers comp, etc. However, their primary allegiance is to a company, not to you. On the other hand, an insurance broker's focus is supposed to be on you, the client.
It should be the broker's mission to get to know you and your circumstances thoroughly, understand your finances, assess your risks, and use their education, training, and experience to explain what types and levels of coverage are available and to procure the most direct and accessible insurance policy or policies to securely cover your risks. While it often comes with a small fee, using an insurance broker with expertise in your personal and/or business risk areas can help ensure that you have the suitable types and levels of coverage, making it a smart choice for many.
A good broker will use their insurer connections and industry savvy to find coverage for your specific risks so you can live your life without concern of a severe, even catastrophic, financial loss. To that end, they must listen to you carefully to understand what you want to protect and provide options accordingly.
In many cases, an insurance broker will act as an intermediary between the insured and the insurance company, collecting and relaying insurance payments and policies and creating a dual agency. This means the broker owes specific legal duties to you, the insured, and the insurer offering the policy.Do I Need an Insurance Broker?
An insurance agent's job is to transact insurance offered by the company for whom they work. A reputable insurance broker, on the other hand, is there to help you. Their job is to sit down with you, review your priorities, assets, and the elements of your life needing protection, and secure an insurance package that will let you sleep comfortably at night. You tell them what you want, and they must shop for the most direct coverage at a competitive price.
Most people and businesses seeking the services of an insurance broker have particular insurance needs that are more varied, extensive, or complicated than the typical policy. Brokers may be ideal for people who own a business, several vehicles, more than one home, rental properties, or a mixture of personal and commercial concerns. Even people and companies with fairly ordinary requirements may use a broker to gain a solid understanding of their coverage needs, policy details, and optimal pricing.
In general, insurance brokers specialize in either retail policies, which cover things like auto, home, health, and travel for individuals and businesses, or commercial policies dedicated to industries whose needs may include coverage for things like equipment, general liability, workers' comp, etc.
Except under exceptional circumstances, neither an agent nor a broker is supposed to recommend how much coverage you need or upsell coverage. However, exceptional circumstances may be involved when you engage a broker who claims to be an expert in the insurance you need. For example, a new small business owner probably doesn't know all the possible risks and available coverage options related to their industry. That's why businesses often seek out brokers' advertising expertise in their sector of commercial insurance coverage and rely on their know-how for guidance and insurance shopping and procurement.
An insurance broker who claims to specialize in small business insurance should understand the gamut of business property and casualty insurance offerings in the marketplace and be able to procure coverage for industry-specific risks, like business interruption, natural disasters, possible legal actions, and so forth. Your broker may specialize in additional types of coverage, such as group health insurance for employees, which can make them invaluable in ensuring you have all your bases covered.How Insurance Brokers are Paid
Brokers are paid via broker fees, which you pay for their services, and/or commissions from insurance companies. A broker who is paid 100% via insurer commissions can be attractive because you won't have to pay out-of-pocket for their services. This can be a good choice for people simply looking for the best insurance price. Because the commission is factored into the cost of the policy, you pay what you'd pay if you compared prices yourself and found the most attractive option without all the hassle.
If, however, you have significant assets to cover or you're seeking coverage for a business or industry, it can make sense to find a broker to whom you pay a reasonable fee for their expertise. While a good broker is not supposed to favor a particular insurer, they may be given incentives to promote one more than others, creating a bias toward that company.
In general, the more coverage insurance producers sell, the more money they make, which may incentivize some to sell more on higher policies. Less reputable insurance producers may misrepresent what's included in a policy to make it more attractive or upsell extras you didn't ask for or unrelated to your needs. While this is hardly the industry standard, greed is sometimes motivation enough for some insurance brokers to manipulate the truth.
Knowing how your broker is paid can help you avoid commission-incentivized provider preference and discourage upselling, particularly for things like annuities and life insurance.
So don't hesitate to ask your broker how they are compensated when shopping around.What are the Duties of an Insurance Broker?
The California Insurance Code generally defines an insurance broker as "a person who, for compensation and on behalf of another person, transacts insurance other than life with, but not on behalf of, an insurer," meaning they are supposed to act as a representative of your interests and not insurance companies. Ethically, they must "use reasonable care, diligence, and judgment in procuring the insurance requested by [a] client." 1
So, your insurance broker must procure what you specifically ask for in the broker-client relationship. Sounds simple, right? Just don't overlook the word "requested" in the statement above.
Why? Because the coverage you ask for and that is pledged to you by your insurance broker may not always be what you get. Even when people pore through the details of their insurance policies, they may not understand how to interpret all the industry jargon, codes, and fine-print legalese. After all, they weren't present when the broker negotiated with the insurance company. They trusted their broker to procure what they asked for and what they assumed their premiums would cover. Then, after a calamity, they discover their policy isn't what they asked for or were led to believe they had purchased, resulting in inadequate coverage.
When the negligent or dishonest actions of the broker create a gap between what an insurance company should have paid and what they actually paid for your claim, you may have an actionable case against them.An Insurance Broker's Standard of Care
The California Court of Appeals held that while an insurance broker owes no fiduciary duty to clients, they owe them a reasonable standard of care. "[A]n insurance [broker] will be liable to his client in tort where his intentional acts or failure to exercise reasonable care about the obtaining or maintenance of insurance results in damage to the client.2
In summary, the court stated that a broker may be considered actionably negligent if:
- a) they misrepresent the nature, extent, or scope of the coverage being offered or provided;
- b) there is a request or inquiry by the insured for a particular type or extent of the coverage; or
- c) the agent assumes an additional duty by either express agreement or by holding himself out as having expertise in a given field of insurance being sought by the insured.3
Included in these foundational principles, the court decided that an insurance producer who claims to have expertise in the insurance being purchased by the insured company or individual "may be liable to the insured for losses resulting from a breach of that special duty." 4
While it is not your broker's responsibility to recommend how much insurance you need (because that onus is on you), they may be legally liable if they misrepresent the terms of your policy, even if it differs from the written policy you signed.5 Let's say you have many policies covering your personal and business needs, and you have, over the years, compensated and relied upon your broker to procure adequate coverage for everything. Then one year, without telling you, your broker elects to reduce your coverage limits without your consent, which results in insufficient coverage after a loss. If it can be shown that you would have been adequately covered if your broker hadn't acted in this negligent fashion, your broker may be held liable, even if the reduction in coverage was written in the new or amended policy and you failed to read it.Proper Broker Licensing
In California, insurance producers must be licensed. Producers who wish to go beyond the norm and offer surplus line policies, which haven't been sanctioned by the Department of Insurance, require special licensure.
When considering a lawsuit against your insurance broker, your attorney should look first at whether your broker is adequately licensed in all the types of insurance they provide. If they sold you a policy they weren't explicitly certified to deliver, they might be considered, per se, negligent. If the unlicensed producer works for an insurance company, the company may also become part of the legal action, as it may be considered a party in the unlawful sale.What is Insurance Broker Negligence?
While insurance agents may sometimes be negligent in their duties, their actions typically fall on the insurance company for which they work. Brokers, however, are considered to work for the insured person or company and are, therefore, more often named as defendants in legal actions claiming negligence, which fall under contract, tort, or equity law.
While broker liability is comparable to an insurance agent's, it isn't exactly the same.
Brokers can commit acts of negligence, incompetence, or outright fraud that can result in severe financial damage to clients when the requested coverage is insufficient or absent or the coverage procured under the broker's "expert" advisement is inappropriate for the situation, business, or industry.
- Negligence, incompetence, and/or fraud may be actionable if a broker or an insurance underwriter:
- Fails to explain policy terms, inc. deductibles, damages & thresholds
- Misrepresents or omits the amount and/or scope of coverage
- Fails to procure and/or write requested available coverage
- Writes inaccurate information on insurance documents
- Fails to submit your signed policy to the insurer
- Sells you inappropriate or unsuitable coverage
- Misrepresents non-property coverage
These bad faith insurance actions by negligent or incompetent brokers can be compounded when there is a personal relationship between you and your broker, where you have, over time or through frequent interaction, developed a steadfast reliance on the broker's actual or proclaimed expertise and specialized advice. Particularly in cases where adequate coverage is complicated, an insured person may need the acumen of an industry professional to fully explain coverage options and details.
After all, if it were always simple to figure out how to find and procure the exact coverage needed for every circumstance, no one would need an insurance broker. Engaging the services of an insurance broker often comes with a need for strong, honest, and educated guidance. So, one would assume brokers have a fiduciary duty to their clients – a legal responsibility or obligation to act solely in their client's best interests. Seems fair, right?
However, the California Court of Appeals recently established that insurance brokers have no fiduciary duty to their clients. So, in this state, you are unlikely to prevail in a suit against your broker for a breach of fiduciary duty for, say, failing to place your interests above those of the tight-fisted insurance company denying or limiting your claim, whose relationship they may value over yours.
But you may very well have a case of insurance broker negligence and/or breach of contract, especially when there are significant damages. To prevail on such a claim, you will want to consult with a California insurance broker negligence attorney, who will assess your damages and determine if there is a solid course of action to compensate you for damages caused by an incompetent, reckless or dishonest insurance broker.What to Do in the Case of Insurance Broker Negligence
Establishing insurance broker negligence or fraud can be challenging, so it is wise to find an attorney experienced in claims against insurance brokers. As the insured, you must be able to prove your insurance broker was negligent in securing the insurance you requested, that their actions constituted a breach of contract and that the resulting harm caused actual damages.
Let's look at some examples of insurance broker negligence:
- Let's say you seek out a broker claiming expertise in your business, a fine art gallery, and you depend on their advice and guidance to be adequately insured. Your broker assures you that they are an expert in this field. You rely on their proficiency to get the right insurance to deal with the unique risks of running a fine art business. The importance of this relationship is magnified if you have been relying on your broker's services for years and the established trust level has created a special relationship. However, your broker fails to procure the right or adequate coverage, something you don't discover until your gallery is robbed or goes up in flames.
In another example, let's summarize a real-world case of insurance producer negligence that resulted in the successful finding of negligence by the court. In Williams v. Hilb, Rogal & Hobbs Insurance Services of California, Inc., an insurance provider presented herself – and had the resume to demonstrate – that she was an expert in the owners' company's particular industry and services. In fact, the insurance producer had years of experience with the company, even visiting a branch, witnessing its services, and engaging in risk analysis with the related insurance company's underwriters. She also spoke publicly at company seminars about the business's insurance needs, even designing brochures bearing her name to pass out to attendees.
The owners of the company placed their trust in the insurance producer's professional experience and acumen related to their business. When the insurance producer sent the business her completed insurance proposal package, one of the owners looked it over, believed it to contain everything needed to safeguard the company, and signed off on it.
Several years later, a fire at the company resulted in severe burns to an employee, who successfully sued the company for more than $11 million. The company was found to be 50% liable for the employee's injuries, which, including interest and costs, came to more than $5.8 million. To their surprise and horror, the company owners discovered that the policy package the provider had submitted did not include workers' compensation coverage.
The company sued the insurance agency that employed the producer. The court found that the producer "failed to use the skill and care that a reasonably careful insurance professional would have used in similar circumstances."
The court rejected the insurance company's position that the owner who signed off on the package had been advised by the producer to get a separate workers' compensation policy and had declined it. The court also rejected the claim that the owner was negligent in not poring through the insurance package he had accepted, noting that most insured aren't aware of every provision in their policies and rely on the skill and service of their insurance producers, particularly those who hold themselves out as experts, to procure and deliver adequate coverage. The judgment resulted in a multimillion-dollar payment to the company, making up for the coverage gap.
- You ask your broker to buy specific flood insurance, and your broker agrees to get it and then doesn't. Of course, the worst time to find out your broker was negligent is after your business, storage unit, or home is damaged or destroyed by a flood. Policies like floods, earthquakes, and other special circumstances often require specific and separate policies. So, if you ask for this special coverage and have reason to believe this request was fulfilled, you may be entitled to sue your broker for subsequent related damages.
As stated, California is one of the jurisdictions in which insurance providers have no fiduciary duty to clients, except in some instances where they accept and hold clients' money to procure or maintain insurance. For example, you request and pay premiums for X amount of earthquake coverage, and your broker accepts payment for it but procures less coverage than you asked for. If they falsely represented that the proper and adequate coverage had been secured, your broker may be liable for the shortfall should you suffer a related loss.
- Underinsurance is a situation where legal action against a broker can be tricky. Let's say you ask for homeowner's insurance. After your home is consumed by a fire, you discover the coverage was for your home's actual cash value, including depreciation, and not its current replacement value, which is the amount necessary to rebuild or restore it to its former glory. You may have a case against your insurance broker if you can show that you asked for replacement cost value coverage, which includes the costs of materials and labor. Your broker failed to comply and got you cash value coverage instead. But, of course, you must also pay attention to the details of your policy once it is signed. Unless the coverage details are highly complex or unclear, and your long-term relationship with your broker endows it with a unique element of trust, proving your broker was negligent may be challenging. If, however, your broker provided sufficient coverage for your previous three homes but not the fourth one that burned to the ground, you may have an action against them.
As another example, let's say you go see a broker who claims to have expertise in commercial insurance. During your transaction, you ask what policies your particular business should consider, and the broker fails to inform you about the need for a critical component like business interruption insurance. Part of that broker's expertise should include essential elements a business owner may not consider, such as how to keep the business going if supply chain troubles, an employee strike, or a natural disaster stall functions. The broker's failure to advise you to include crucial and standard coverage elements or to grossly underestimate how much your business needs to safeguard its operations may represent undue diligence on its part and be grounds for legal action. Again, in California, these claims are dependent on a broker's misrepresentation of the insurance policy's coverage, falsifying or failing to meet what's reasonably expected of someone of their stated expertise, or failing to sufficiently procure a particular type or amount of insurance you asked for, provided it is available in the marketplace.
It should be noted that while brokers can't be sued for failing to recommend adequate coverage in general, property insurance may be the single outlier. If broker negligence or incompetence leads to inadequate property insurance coverage, it may be actionable in some instances.6
A broker may also be liable if they misrepresent or omit material details of a policy, even if they contradict the policy you signed without reading because you relied on their expertise.7 These lapses in duty may also lead to broker liability if they result in the cancellation of your coverage.8
In addition, even when your broker procures specific coverage, they may be found liable to you (but not to a third party) for failing to procure more direct and reliable coverage.9Damages for Insurance Broker Negligence
When a broker's conduct constitutes a breach of duty that results in coverage that is insufficient compared to what you requested and/or reasonably expected, you may be able to recover the resulting shortfall of a covered claim from the broker and/or the insurer.
You may also be entitled to any attorney fees incurred during litigation against your insurance company when the following conditions apply:
- Your broker could secure a policy that explicitly covered the loss;
- Your broker sold you a policy whose terms were unclear;
- You were forced to sue your insurer and were successful in that action.
In California, you have a right to sue your insurance broker or insurance agent when their negligence or incompetence results in your being denied the rightfully-expected coverage of a claim.
An attorney whose practice areas include insurance producer negligence will listen to your accounting of what transpired, ask questions, and determine how to establish and help prove your case.
In addition, your insurance broker's negligence attorney will deeply examine the history of your relationship with your broker. Is your broker someone who simply took and fulfilled an order, or did you and your broker have ongoing communications about your evolving personal or business interests, changes in your coverage needs, frequent consultations, and other communications that might establish a special relationship? Did your broker advertise or expressly state they had expertise in the specific area of insurance you requested or about which you asked for guidance? And, most critically, did your broker commit an act of negligence or make a mistake that went unnoticed until you needed to make a claim?
In best-case scenarios, there are written exchanges – contracts, emails, texts – or other documentation to prove your requests or reasonable care went unsatisfied or ignored, or you were misinformed or misled. However, a successful long-term relationship with an insurance broker may also be sufficient to demonstrate your reliance on their acumen to assess and procure the right type and amount of insurance. Your attorney may also seek out experienced brokers and other insurance professionals to determine whether your broker failed to exercise a reasonable standard of care.
The more your insurance broker claims to be, know, or offer, the greater the likelihood they may be liable for their negligence.Northern California Broker Negligence Lawyers
If your insurance broker's misleading statements, omissions, or incompetence resulted in your inability to cover a valid claim, the Law Offices of Edward A. Smith have California insurance broker negligence attorneys ready to protect your right to coverage and just compensation. We will represent your personal and/or business interests in claims against negligent or incompetent insurance brokers and miserly insurance companies seeking to deny you full coverage of your claim.
Call our law office at (916) 921-6400 or (800) 404-5400 to schedule a free consultation. Our experienced legal team will sit down with you and devote our attention to the details of your case. We will thoughtfully listen to your standpoint, consider your position, explain any available legal options, and give you an honest analysis of your case's strength. When applicable, our years of service to Sacramento County and long-term solid relationships with industry professionals can be utilized to help support your claim.
Insurance brokers provide a valuable and much-needed service to individuals and businesses across California. When shoddy or deceptive practices result in damages to you or your company, we make it our mission to hold insurance producers accountable and set things right.
Photo by Scott Graham on Unsplash
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1HUB Int’l., 224 Cal.App.4th at 584
2Saunders v. Cariss (1990) 224 Cal.App.3d 905, 909.
3Fitzpatrick v. Hayes (1997) 57 Cal.App.4th 916, 927
4Jones, supra, 189 Cal.App.3d at p. 955
5Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Ins. Services West, Inc. (2012) 203 Cal.App.4th 1278, 1283
6Paper Savers, Inc. v. Nacsa (1996) 51 Cal.App.4th 1090, 1098
7Clement v. Smith (1993) 16 Cal.App.4th 39, 45
8Imperial Cas. & Indem. Co. v. Sogomonian (1988) 198 Cal.App.3d 169, 178-179
9Third Eye Blind, Inc. v. Near North Entertainment Ins. Services, LLC (2005) 127 Cal.App.4th 1311, 1322